Accessibility Skip to Top Navigation Skip to Main Content Home  |  Change Text Size  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 4. Examining Process

Chapter 19. Liability Determination

Section 15. Discretionary Programs

4.19.15  Discretionary Programs

4.19.15.1  (01-01-2007)
Personal Exemptions and Dependents

  1. See IRM 4.19.14.4.7. Personal Exemptions and Dependents.

4.19.15.2  (01-01-2007)
Filing Status

  1. See IRM 4.19.14.4.8. Filing Status.

4.19.15.3  (01-01-2007)
Child Tax Credit

  1. See IRM 4.19.14.4.9. Child Tax Credit.

4.19.15.4  (12-12-2008)
Child and Dependent Care Credit

  1. Following are guidelines to determine if the taxpayer qualifies for the Child and Dependent Care Credit. The limit on the amount of the qualifying expense is $3,000 for one individual and $6,000 for two or more. The credit can be as much as 35% of the qualified expenses. Refer to Form 2441 for computation).

  2. The Discretionary Examination cases will come into exam after flowing through exam filters, ordinarily Discretionary Examination Business Rules (DEBR). A standard exam letter will be issued requesting verification of items claimed on the return. Cases will be assigned the following Project Codes (PC): PC 0393 Child Care Credit and the taxpayer is filing Married Filing Separate; PC 0394 Child turned age 13 during the first half of the year; PC 0400 Child Care Credit/Dependent age greater than 12 years, and PC 0431 Child Care Credit.

  3. The chart below will be helpful in determining what can be accepted to verify amounts claimed for the Child and Dependent Care Credit.

    A Qualifying Person is: Verifying Information:
    The taxpayer's dependent who was under age 13 when the care was provided and for whom the taxpayer can claim as a dependency exemption. Birth certificate, school records, or baptismal certificate
    The taxpayer's spouse who was physically or mentally not able to care for him/herself and who lived with the taxpayer for more than half of the year. Marriage certificate (proof of spouse). Proof of disability: doctor's statement or State certification
    The taxpayer's dependent who was physically or mentally not able to care for him/herself, and for whom the taxpayer can claim an exemption (or for whom the taxpayer could claim an exemption except the person had gross income of $3,300 or more for 2006 or $3,400 or more for 2007, or filed a joint return, or if the taxpayer was a dependent of another taxpayer.

    1. Proof of keeping up a home: rent receipts, mortgage statements, property tax bill, or utility bills. The taxpayer does not have to submit all of the above, just enough to verify keeping up a home.

    2. Proof of the person's residence: school records, official mail, or local library card.

    3. If disabled, doctor's statement or state certification verify person's disability.
    The Filing Status of the taxpayer must be Single, Head of Household, Qualifying Widow(er) With Dependent Child, or Married Filing Jointly. If married, a joint return must be filed. Information is on the return and IMFOL.

    Eligibility Requirements Test: Verifying Information:
    The taxpayer and spouse, if married must have earned income during the year. However, there are exceptions for a student-spouse or a spouse unable to care for him/herself. Form W-2 or Form 1099. Schedule C, E, or F, if no Form 1099 income.
    The taxpayer must pay child and dependent care expenses so that he/she (and spouse if married) can work or look for work.

    1. Proof of payment includes receipts, or cancelled checks. If the expenses claimed were incurred while looking for work, examine interview sheets, job placement letters/statements, calendar/log/statement showing interview appointments and dates, or place applied to for work.

    2. If the expenses claimed were for a full-time student spouse, examine letter/ transcript from school showing full time course load and courses enrolled in, including the number of months the taxpayer was in school. The credit can be claimed for any month or part of a month in which the taxpayer was a full-time student.

    Payments Verifying Information
    The identity of the care provider must be reported in the tax return. The return must include the name, address, and Tax Identifying Number (TIN). If the care provider is an individual, the return must include a Social Security Number or an Individual Tax Identifying Number. If the care provider is an organization/corporation, then the return must include an Employer Identification Number.
    The taxpayer must pay child and dependent care expenses to someone he/she or spouse cannot claim as a dependent. If payments are made to a child of the taxpayer, the child cannot be the taxpayer's dependent and must be age 19 years or older by the end of the year. Name on the receipts or cancelled checks. If the same surname, determine if the taxpayer claimed the care provider as a dependent. If not claimed, verify the age using INOLE.
    Adjustment must be made for any dependent care assistance payments benefits provided by the employers. Form W-2 , letter from employer.

  4. If the above conditions are met, compute the allowable credit.

  5. If expenses are for kindergarten or a higher grade, then they are deemed educational expenses and do not qualify for the Child and Dependent Care Credit. Accept the expenses if they are paid for a before or after school program.

  6. Cases will be worked using:

    1. Letter 566-B (combo letter) with Form 4549 or Form 4549-EZ if during initial research (DUPOL, DDBKD), it appears that a duplicate dependent was used to obtain a dependent care expense, or

    2. Issue Letter 566-B if initial research indicates the credit is for a child who is over 12 years, or

    3. The Filing Status is Married Filing Separate, or

    4. If neither of the two conditions mentioned in (a) or (b) above are met, issue Letter 566.

    5. Request applicable documentation.

    6. Follow normal procedures to work the case.

    7. If taxpayer is allowed the credit and a duplicate dependent exists, you must open the other duplicate dependent case and disallow the credit.

  7. Additional information regarding the Child and Dependent Care Credit is found in Publication 503, Publication 17 and the Instructions for Form 2441.

4.19.15.5  (12-12-2008)
Education Tax Credits — Hope and Lifetime Learning Credits

  1. Returns which have the Education Tax Credits selected will flow through exam filters, be selected and classified, and a standard exam letter, either Letter 566or Letter 566-B will be sent to the taxpayer with a Report Generation Software (RGS) report and explanation of items.

  2. Following are guidelines to determine if the taxpayer qualifies for the Hope or Lifetime Learning Education Tax Credits. The two credits cannot be taken together in the same year for the same dependent. The credits are subtracted from the tax, but they are nonrefundable. Available for qualified tuition and/or related expenses of the taxpayer include expenses for the taxpayer, taxpayer’s spouse or dependent of the taxpayer.

    Qualified expenses for both credits include: Accepted proof:
    Tuition and fees required for enrollment or attendance at an eligible educational institution. Tuition receipts and transcripts to verify enrollment; proof of payment of expenditures via cancelled check, credit card statement, or paid receipt from institution.
    Fees for course-related books, supplies, and equipment — only if the fees must be paid to the institution as a condition of enrollment or attendance. Receipts and documentation to support the condition of enrollment. For instance: class outline, school program guide, and/or letter from institution.
    Prepaid expenses paid in the prior year for an academic period that begins in the first three months of the next year are calculated as a part of the prior year’s credit. Tuition receipts and receipts for qualifying expenses as listed above.
    Payments made with borrowed funds are counted in the year that the expenses are paid, not in the year the loan is repaid. Receipts and transcripts to determine the year applied.

    Expenses which do not qualify for the credit include: Accepted proof:
    Cost of insurance, medical expenses (including student health fees), room and board, transportation or similar personal, living or family expenses, even if the fee or expenses must be paid to the institution as a condition of enrollment or attendance. N/A
    Expenses related to any course of instruction on other education that involves sports, games or hobbies, or any noncredit course. However, if the source of the instruction or other education is part of the student’s degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. School transcripts and curriculum or catalog demonstrating courses required for the degree program.
    Textbooks and supplies, even though purchased at the school bookstore, are generally not allowable, unless they are paid to the institution for enrollment or attendance. Course requirements indicating student cannot enroll in or attend the course without purchasing required books or supplies.

  3. Qualifications for the Hope Credit include the following:

    Qualifications and conditions for Hope Credit: Accepted proof:
    The taxpayer did not have expenses that were used to figure a Hope Credit for more than one other earlier year for this dependent. Prior two years’ returns.
    The dependent has not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years’ of college). School academic transcripts.
    The person the credit is claimed for was enrolled at least half time in a program that leads to a degree, certificate, or other recognized educational credential, for at least one academic period that begins during the taxable year. School transcripts.
    The person the credit is claimed for was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year in which the credit is claimed. If any documentation indicates that this has occurred, the credit is not allowable.

  4. Qualifications and conditions for Lifetime Learning Credit:
    The Lifetime Learning Credit is computed at 20% (40% if the taxpayer is in a Gulf Opportunity Zone) of the qualifying expenses to a maximum of $2,000 per return.

    • TY 2001 and TY 2002 – up to $1,000 Credit (20% of $5,000).

    • TY 2003 through TY 2007 – generally up to $2,000 ($4,000 Credit if in a Gulf Opportunity Zone for TY 2005 or 2006).

  5. The Lifetime Learning Credit differs from the Hope Credit in the following ways:

    Lifetime Learning Credit Hope Credit

    • The Lifetime Learning Credit is not based on the student’s workload. It is allowed for one or more courses.

    • The Lifetime Learning Credit is not limited to the students in the first 2 years of postsecondary education.

    • Expenses for graduate-level degree work are eligible.

    • Expenses related to a course of instruction or other education that involves sports, games, hobbies, or other noncredit courses are eligible if they are part of a course of instruction to acquire or improve job skills.

    • There is no limit on the number of years for which the Lifetime Learning Credit can be claimed for each student.

    • The amount that can be claimed as a Lifetime Learning Credit does not vary (increase) based on the number of students for whom the taxpayer pays qualified expenses. The $2,000 credit ($4,000 credit if the taxpayer is in a Gulf Opportunity Zone for TY 2005 and 2006) is a per-return maximum.

    • The Hope Credit can be claimed for the student’s first 2 years of a postsecondary education and the taxpayer can claim the Lifetime Learning Credit for that same student in later tax years.

    • Hope Credit has a maximum of $1,500 per student. It is computed at 100% of the first $1,000 tuition and expenses and 50% of additional tuition and expenses up to the $1,500 credit, for taxable years 2003 through 2005.

    • Hope Credit is limited to $1,650 for TY 2006 and 2007 (100% of expenses up to $1,100 and 50% of expenses greater than $1,100 (not to exceed $1,650)). Allowable credit has been increased to $1,800 for TY 2008.

    Note:

    Specials Rule for Gulf Opportunity Zone (GOZ) Students:

    • For GOZ students – TY 2005 the maximum is $3,000 (100% of the first $2,000 and 50% of the amount over $2,000 (not to exceed $3,000)).

    • For GOZ students – TY 2006 the maximum is $3,300 (100% of the first $2,200 and 50% of the amount over $2,200 (not to exceed $3,300)).

    Note:

    Both Hope and Lifetime Learning Credits are phased out (gradually reduced) if the modified adjusted gross income (MAGI – refer to Publication 17 for additional information) is as follows:

    Tax Year MAGI
    2004 between $42,000 and $52,000 (joint return: $85,000 and $105,000)
    2005 between $43,000 and $53,000 (joint return: $87,000 and $107,000)
    2006 between $45,000 and $55,000 (joint return: $90,000 and $110,000)
    2007 between $47,000 and $57,000 (joint return: $94,000 and $114,000)

4.19.15.5.1  (01-01-2007)
Tuition and Fees Deduction

  1. Taxpayers may claim a Tuition and Fees Deduction on Line 26 of the Form 1040 (TY 2003). The Tuition and Fees Deduction can reduce income by up to $3,000 in TY 2003 and $4,000 beginning in TY 2004.

  2. Generally, taxpayers can claim a deduction if all three of the following requirements are met:

    1. Payments were for qualified education expenses for higher education.

    2. Education expenses are for an eligible student.

    3. The eligible student is either the taxpayer, the taxpayer’s spouse, or a dependent for whom the taxpayer may claim the exemption.

  3. An eligible educational institution is any college, university, vocational or other post secondary educational institution.

  4. Generally qualifying expenses are limited to tuition and fees.

  5. The taxpayer may not file married filing separately.

  6. The deduction is phased out between $65,000 and $80,000 ($130,000 - $160,000 for joint returns).

  7. No Double Benefit is Allowed:

    • The taxpayer can not claim a Tuition and Fee expense for a student if he or anyone else claimed the Hope or Lifetime Learning Credit for that same student in the same tax year.

    • Taxpayer can not use the following expenses to claim the Tuition and Fee expense and business credits: expenses paid by tax-free portion of distribution from a Coverdell Educational Savings Account or a qualified tuition program, or expenses paid with tax-free interest on U.S. Savings Bonds, or expenses which have been paid by a tax-free scholarship, grant, or employer-provided educational assistance.

    For additional information, refer to Publication 970, "Tax Benefits for Education" .

  8. Acceptable Documentation:

    • Transcripts showing name and identifying information of student and period of enrollment.

    • Proof of payment for tuition and fees, i.e. cancelled check and invoices from education institution.

      Note:

      Form 1098-T is not proof of payment, only the amount billed.


    Rule which may be used in the selection of cases includes:

    • Rule 913 – Duplication of Tuition and Fees Deduction and Education Credit.


    Additional resources include:

    • Publication 970"Tax Benefits for Education" .

    • Form 8863"Education Credits" .

    • Probe and Response Guide 37-A "Education Credits (Hope and Lifetime Learning Credits)" .

    • Probe and Response Guide A-1 "Tuition and Fees Deduction" .

    • IRM 21.6.3.4.1.5.

    • Training Course 6735 – Chapter 19.

  9. Evaluating Taxpayer Responses:

    • Review the name and SSN on transcripts and payment vouchers to ensure they are the same as those on the tax return.

    • Ensure payments were made by taxpayer.

    • Ensure fees are for undergraduate and graduate courses.

    • Review return to ensure the same expenses for the same student are not used to claim additional educational benefits such as the Hope or Lifetime Learning Credit; with managerial approval expand audit to apparent duplicated expenses if needed.

    • Disallow all other expenses other than tuition and fees.

4.19.15.6  (01-01-2008)
Mortgage Interest Credit

  1. Returns which have the Mortgage Interest Credit will flow through the exam filters, be classified and selected if they meet specific criteria.

  2. The Mortgage Interest Credit was established to help lower-income taxpayers purchase a primary residence. Before the taxpayer obtains a mortgage on a home he must obtain a certificate from a local or state government agency (Mortgage Credit Certificate).

    • Certificates issued by the Federal Housing Administration, Department of Veterans Affairs, Farmers Home Administration. Homestead Staff Exemption Certificates do not qualify for the credit.

4.19.15.6.1  (01-01-2008)
Initial Contact

  1. For the initial contact, send Letter 566 or Letter 566-B with the audit report ( Form 4549/ Form 4549-EZ) and Explanation of Items ( Form 886-A) to the taxpayer.

  2. The Form 886-A, Explanation of Items should contain the following language:
    We are questioning the Mortgage Interest Credit you claimed on Line 54 of your Form 1040 for TY 20XX and Line 10 and/or Line 11, of Schedule A. To help us complete the examination of your Mortgage Interest Credit and ensure your Mortgage Interest Deduction was reduced appropriately, please furnish copies of the following information:

    • Receipts or statements from creditors showing the amount of interest paid, i.e. Form 1098, etc.

    • If paid to an individual, provide cancelled checks or receipts showing who paid the interest expense, name and address of the person to whom you paid the interest.

    • Purchase Contracts – For Mortgage Interest, please submit the Mortgage Agreement that shows you had an obligation to pay the interest expense and the Purchasing agreement for your home.

    • Copy of the Mortgage Credit Certificate issued by your state or local government showing applicable interest rate.

    • Completed Form 8396 (if not attached to the return).

4.19.15.6.2  (10-01-2005)
Conducting the Examination

  1. If the taxpayer qualifies, he may claim the credit each year for part of the home mortgage interest paid. Form 8396 is used to compute the amount of the credit. If the mortgage is equal to or smaller than the certified indebtedness amount (loan) shown on the Mortgage Credit Certificate (MCC), the credit is figured on only the part of the interest paid.

  2. The credit is an amount equal to the product of:

    1. The certificate credit rate (which may not be less than 10% or more than 50%), and

    2. The interest paid or accrued by the taxpayer for the year on the remaining principal of the certified indebtedness (plus a limited carry forward, if any).


    If the credit rate exceeds 20%, the tax credit for any year may not exceed $2,000 ( IRC 25(a)(2)(A)).

  3. A three-year carry forward is provided for the unused portion of such credit caused by the limitation imposed by IRC 26 and IRC 25(a)(2)(A) as amended by Economic Growth and Tax Relief Reconciliation of 2001 (P.L.107-16). In essence, the credit and carryover are limited to the tax less the following credits: Foreign Tax Credit, Credit for Child and Dependent Care, Credit for the Elderly or Disabled, Education Credits, Retirement Savings Contributions Credit, Child Tax Credit and the Adoption Credit. Form 8396 should be used to assist in the calculation of the allowable credit amount.

  4. If the taxpayer itemized on Schedule A, he must reduce his home mortgage interest deduction by the amount of the Mortgage Interest Credit shown on Line 3 of Form 8396. He must do this even if part of that amount must be carried forward.

  5. If the taxpayer sells the home during the first 9 years after the closing date, he may be required to recapture all or part of the benefit received from the program. See Publication 523, "Selling Your Home" for more information.

4.19.15.6.3  (01-01-2006)
Evaluating Taxpayer Responses

  1. Use the following to evaluate taxpayer responses:

    1. Determine the taxpayer owns the home and is making the payments by reviewing the Mortgage Interest Statement from the lender on Form 1098 obtained from the taxpayer or through IRPTRL.

    2. Review addresses, etc. to ensure the credit is taken on the taxpayer’s primary residence.

    3. Request and review the Mortgage Credit Certificate to ensure it was issued by the state or local government.

    4. Review the interest rate on the Mortgage Credit Certificate to ensure this is the interest rate applied in the computation and not the rate of interest listed on the mortgage statement from the lender.

    5. Review the Schedule A and/or C to ensure the taxpayer has not duplicated the interest and that he has properly reduced the interest claimed there by the amount of interest used to compute the credit.

    6. Review originating year information if the credit is a carryover.

    7. Review carryover amounts in subsequent years to ensure accuracy and requisition those returns if errors exist which are significant.

    8. Review the computation to ensure the taxpayer is taking the correct amount of credit each year and that applicable credits are not carried over for more than 3 years.

    9. If the taxpayer has actually claimed the District of Columbia First-Time Home buyer Credit as a Mortgage Interest Credit, see Form 8859 for proper application of that credit and disallow the Mortgage Interest Credit.

4.19.15.6.4  (01-01-2007)
Form 886-A Explanations and Tax Resources

  1. RGS Standard Paragraphs 6306 — 6309 should be used as applicable on Form 886-A, Explanations of Items.

  2. Tax Resources:

    Reference items (Pubs, Regs, existing training materials, existing IRM references, etc.)

    • IRC 25

    • Publication 530, "Tax Information for First-Time Homeowners"

    • Publication 936, "Home Mortgage Interest Deduction"

    • Publication 17, "Your Federal Income Tax" Instructions to the Form 8396, "Mortgage Interest Credit"

    • Publication 523, "Selling Your Home"

    • 2004 Master Tax Guide Paragraph 1308

4.19.15.7  (12-12-2008)
Qualified Adoption Expenses

  1. Following are guidelines to determine if the taxpayer qualifies for Adoption Expenses:

    Allowable expenses: Accepted proof of expense:
    Reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child. Checks and receipts.
    Non-qualifying expenses: Expenses meeting the following criteria are not allowable and should be denied:

    • Expenses that violate state or federal law;

    • Expenses for the purpose of carrying out any surrogate parenting arrangement;

    • Expenses for the adoption of a spouse’s child;

    • Expenses paid using funds received from any federal, state, or local program;

    • Expenses allowed as a credit or deduction under any other federal income tax rule; or

    • Expenses paid or reimbursed by an employer, or otherwise (except that amounts paid or reimbursed under an adoption assistance program may be qualifying expenses for the exclusion).

    Was adoption final during or before the end of the current tax year?
    Eligibility Requirement Accepted proof
    The credit for expenses paid or incurred prior to the year the adoption becomes final is taken in the year following the year in which the expenses are paid or incurred. However, the credit for expenses paid or incurred during or after the year the adoption becomes final is taken in the year paid or incurred. Check, receipts, or copy of adoption paper (if adoption is finalized).
    A foreign adoption must be finalized prior to the expenses being allowed as a credit. Copy of adoption papers dated prior to December 31.
    An eligible child is an individual who is under 18 years old or physically or mentally incapable of caring for him or herself. Proof of age: Birth certificate, baptismal certificate, school records. Proof of disability: Doctor’s note or State certification. Baptismal certificate does not have date of birth.
    A child with special needs is a child who is a citizen or resident of the United States. Documentation shows that the state has determined the child cannot or should not be returned to his or her parents’ home and that child cannot be placed for adoption without adoption assistance.
    Factors used by states to determine special needs may include

    • The child’s ethnic background,

    • The child’s age,

    • Whether the child has a medical condition or physical, mental, or emotional handicap.

    		 Proof of special needs: State documentation attesting to the child’s special needs.

  2. If the above conditions are met, allow the deduction as stated below.

    Does deduction exceed the income limitations:
    IF the modified AGI is THEN the income limit

    • $155,860 or less (TY 2004)

    • $159,450 of less (TY 2005)

    • $164,410 or less (TY 2006)

    • $170,820 or less (TY 2007)

    		 Will not affect the credit or exclusion.

    • $155,861 to $195,859 (TY 2004)

    • $159,451 to $195,449 (TY 2005)

    • $164,411 to $204,409 (TY 2006)

    • $170,821 to $210,819 (TY 2007)

    		 Will reduce the credit or exclusion.

    • $195,860 or more (TY 2004)

    • $195,550 or more (TY 2005)

    • $204,410 or more (TY 2006)

    • $210,820 or more (TY 2007)

    		 Will eliminate the credit or exclusion.
    See Form 8839 for calculations  
    If the above conditions are met, allow the deduction up to:

    • $10,390 (TY 2004)

    • $10,630 (TY 2005)

    • $10,960 (TY 2006)

    • $11,390 (TY 2007)

    		 For an eligible child.
    The maximum applies to each effort to adopt an eligible child taken into account for all taxable years. A 5-year carryover is allowed. If the carryover originated in a prior year you may request verification to support the current year deduction without opening the prior year. If a carryover is disallowed and has been carried to the subsequent year and the amount is significant, obtain permission from your manager to open the subsequent year.

  3. In the case of a child with special needs, the credit is generally taken in the year the adoption is final, whether or not qualified adoption expenses have been paid. Actual qualified adoption expenses paid before the year the adoption is final are included in the next year, under the 1-year lag rule. A child must be a United States citizen or resident when the adoption process begins to be a child with special needs.

  4. In the case of a foreign adoption, no credit is allowable until the adoption becomes final. In most cases, the adoption is final in the year in which the adoptive parent is granted a visa to bring the child from the foreign-sending country to the United States. However, the adopting parent generally may elect to treat the adoption as final in the year the parent re-adopts the child under State law. In general, the re-adoption may occur and the credit may be claimed in either of the 2 taxable years after the visa is issued. See Rev. Proc. 2005-31, 2005-26 Internal Revenue Bulletin (I.R.B.).

4.19.15.8  (01-01-2007)
Tax Benefits for Kidnapped Children

  1. Following are guidelines to determine the allowance of tax benefits for kidnapped children for tax years ending after 12–21–2000.

    If And Then
    The child is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of the taxpayer or the child

    1. The child was the taxpayer’s qualifying relative for the part of the year before the kidnapping or

    2. The child had the same principal place of abode as the taxpayer for more than half the part of the year before the date of kidnapping

    1. Treat the child as the taxpayer's qualifying relative or

    2. Treat the child as meeting the residency test in the definition of qualifying child for purposes of the (1) Dependency Exemption, (2) Child Tax Credit, (3) Head of Household, (4) Earned Income Tax Credit.


4.19.15.9  (10-01-2004)
Questionable Refund Cases

  1. See IRM 4.19.14.5.3 — for program procedures on Questionable Refund cases.

4.19.15.10  (01-01-2008)
Alternative Minimum Tax

  1. The Alternative Minimum Tax (AMT) program cases are identified by Submission Processing as taxpayers who are liable for the AMT but have not completed or/attached Form 6251.

  2. Submission Processing will notify the taxpayers that they appear to be liable for the AMT by issuing CP Notice 12C. The case is suspended for a response. If the taxpayer does not respond timely, the return is coded as an Audit Code P, generating the AIMS opening in Source Code 26.

  3. AIMS will open in the Andover Campus (W&I) or Philadelphia Campus (SB/SE) based on the Master File Business Operating Division (BOD) Code for the return.

  4. For W&I, the AMT cases are worked under Project Code 0631.

4.19.15.10.1  (12-12-2008)
Alternative Minimum Tax Procedures

  1. Prepare Letter 2194 (Alternative Minimum Tax Proposal Letter) and Form 4549/ Form 4549-EZ (Examination Report), and issue to the taxpayer for the initial contact.

  2. Based on the information reported on the return, the Examination Report ( Form 4549/ Form 4549-EZ) should include the largest determinable amount(s) as adjustments and tax preference items when computing the AMT on Form 6251.

    Note:

    Be aware of the rules that apply to children under age 14 who have investment income of more than $1,600 for TY 2004 or 2005 (children under age 18 who have investment income of more than $1,700 for TY 2006 or 2007): The parent(s) can file Form 8814 electing to have the child’s investment income reported on their return, or the child can file their own return with Form 8615.

    If Then
    Taxpayer responds agreeing to the AMT by signing exam report Process assessment and close case agreed.
    Taxpayer responds with tax preference items within 30 days from the issuance of Letter 2194 See LEM 4.19.1 – 4.19.15.10.1.
    No response

    • 30 day letter — after the suspense time has expired, issue Letter 3219, Notice of Deficiency.

    • 90 day letter — after the suspense time has expired, process assessment and close case as a default.

    See IRM 4.19.10.1.6.1 for suspension periods for the various letters and timeframes to issue letters/notices.

4.19.15.11  (10-01-2001)
Estate and Gift Tax

  1. Refer to IRM 4.25, Estate and Gift Tax Handbook, for information on estate and gift tax audits and procedures.

4.19.15.12  (01-01-2007)
Math/Clerical Error

  1. See explanation and procedures in IRM 4.19.14.5.5 , Math/Clerical Error Program.

4.19.15.13  (01-01-2008)
Non-EITC Dup Tin

  1. The Non-EITC DUP TIN (Duplicate Taxpayer Identification Number) Program includes a population of taxpayers who have claimed a dependent that has been claimed on another taxpayer’s tax return for the same tax year. These cases involve dependents who have been duplicated between 2 to 4 times. There are two types of the Non-EITC DUP TIN cases, the Dependent/Dependent and Dependent/Primary. For the Dependent/Dependent cases the same individual is claimed as a dependent by two or more taxpayers. Dependent/ Primary cases involve individuals who claimed a personal exemption for himself or herself and another person also claimed a dependency exemption for that same individual.

  2. Definitions for the Duplicate TIN Program are as follow:

    1. Non-entitled taxpayer — the taxpayer who is not entitled to claim the duplicate dependent exemption.

    2. Entitled taxpayer — the taxpayer who is entitled to claim the duplicate dependent exemption.

    3. Abused SSN — the SSN that has been claimed as a dependent by more than one taxpayer in the same tax year.

  3. The Dependent/Dependent cases are assigned Project Code 0097 and the Dependent/Primary cases are assigned Project Code 0098 on AIMS.

4.19.15.13.1  (12-12-2008)
Initial Contact

  1. The cases are systemically processed using RGS/ Batch processing. For the initial contact, Letter 566-B , Form 4549/ Form 4549-EZ (Examination Report) and 886-H-DEP are issued to the taxpayers. The adjustments per the Examination Report include the disallowance of all dependents claimed on the returns and any other tax benefits claimed attributable to the dependency exemption such as Child Care Credit, Child Tax Credit, Education Credit or Filing Status. EITC (if claimed) is not disallowed on audit report issued with the initial contact letter. However, if the taxpayer provides documentation showing that he or she is not entitled to the EITC claimed, the EITC should be disallowed on the next Examination Report, provided the taxpayer has not been issued a Notice of Deficiency.

  2. Refer to IRM 4.19.13.9 for procedures for working replies from the taxpayer.

  3. Refer to IRM 4.19.14.4.7 for tests for qualifying dependent and recommended supporting documentation.

  4. For divorced and separated parents, a non-custodial parent claiming a dependent is required to file a Form 8332 or similar statement with his or her return in most instances. Form 8332 is a written declaration signed by the custodial parent that he or she will not claim the child for the tax year(s) specified on the form, and release the dependency exemption to the non-custodial parent. If the taxpayer is the non-custodial parent and the divorce decree or separation statement does not give the taxpayer the right to claim the child as a dependent, or divorce decree or separation statement gives the taxpayer the right to claim the child contingent upon certain conditions, a Form 8332 or similar statement is required to be filed by the taxpayer. A copy of the Form 8332 or similar statement should be requested during the audit since original returns are not requested for examinations.

  5. Audits are opened on taxpayers who appear not to be entitled to the dependency deduction. However, if there is no information indicating which taxpayer is entitled to the dependency exemption, the audit is randomly opened for one of the taxpayers who claimed the duplicate dependent. If first taxpayer’s audit results in a no-change, the other taxpayer(s) (related taxpayer) who claimed the same dependent must be considered for audit. The audit consideration of the related taxpayer must be documented in the workpapers, indicating if the audit was or was not expanded to the related taxpayer with an explanation. If it is determined that the audit will be expanded to the related return, the audit should be opened within 30 days from close of the first return.

4.19.15.14  (01-01-2007)
Self-Employment Tax (SET)

  1. IRC 1402 established the legal authority for assessing Self-Employment Tax (SET).
    Refer to IRM 4.4.29, Social Security Administration (SSA) Adjustments in AIMS/Processing Handbook. Also see IRM 25.6.15, Statute of Limitations – Self-Employment Tax, for special case situations.

  2. The Self-Employment Tax program identifies income that may be subject to self-employment tax. The income may be reported on Schedules C or F, or Line 21 of Form 1040. Compliance Services Examination Operations (CSEO) will have self-employment inventory identified by Midwest Automated Compliance System (MACS) filters, referrals from CAS, or Audit Code N cases.

    Note:

    Procedures for ordering N coded SET returns can be found in IRM 4.1.3, Area Office Planning and Special Programs Handbook.

  3. Self-employment tax is required when

    1. net earning from self-employment (excluding church employee income) is $400 or more, or

    2. church employee income is $108.28 more.

  4. The self-employment tax rate on net earnings is 15.3% (12.4% Social Security Tax plus 2.9% Medicare Tax).

  5. Taxpayers may deduct half of the self-employment tax amount from income.

4.19.15.14.1  (12-12-2008)
Self-Employment Tax Procedures

  1. Order IRPTR if available.

  2. For income not identifiable as self-employment income, solicit additional information from taxpayer regarding source of income with Letter 718 (SC).

  3. For other income, send a query letter or a report letter such as Letter 525 (SC).

  4. Prepare Form 3198, Special Handling Notice, for case file along with examination report. Show applicable Reference Codes to adjust the self-employment income and tax.

    Reminder:

    This information is required for closing so that SSA records are updated accordingly.

  5. Process responses as follows:

    1. If the income is identifiable as Self-Employment Income, issue Letter 525 (SC) and attach the examination report:

      If Then
      No response received to Letter 525 (SC) Prepare Notice of Deficiency from information available.
      Taxpayer responds with agreement Follow normal closing procedure.
      Taxpayer substantiates the income is not self-employment income Close the case no change and issue Letter 590 (SC).
      Taxpayer wants to deduct self-employment business expenses and submits verification Allow the verified expenses as a deduction from self-employment income.

    2. If the income is not identifiable as self-employment income, issue Letter 718 (SC)

    If Then
    No response received in 45 days to Letter 718 (SC) Prepare examination report and propose self-employment tax.
    Taxpayer responds to initial contact and income is determined to be self-employment income Prepare Exam report and propose correct self employment tax.
    Taxpayer responds to initial contact and Examiner determines the income is not subject to self-employment tax or the employee share of FICA tax Send no change letter.
    Taxpayer claims an employee-employer relationship existed, but employer did not withhold FICA tax Request further information to show employee status. Consider referral to SB/SE compliance Area Office if warranted. See IRM 4.19.15.15, SS-8 Determination of Employee Work Status.
    Taxpayer claims to be exempt from self-employment tax due to a previous filing of Form 4361, or Form 4029 Request approved copy of Form 4361, or Form 4029 from taxpayer.
    Taxpayer has not retained approved copy of Form 4361 or Form 4029 Determine tax year form was filed. Research Master File entity information to verify indicator is on file.
    No indicator on Master File Pull return from files to see if exemption form is attached.
    No verification of approval is available Assess self-employment tax.
    Reply is on approved Form 4361 or Form 4029 Route form through Special Processing Unit for entry on IDRS.
    No response to Notice of Deficiency. After the suspension period has expired, process the assessment and close case as a default.

4.19.15.15  (10-01-2001)
SS-8 Determination of Employee Work Status

  1. The Form SS-8, Determination of Employee Work Status, is used to request a determination or ruling letter regarding a worker’s federal employment tax status. If a letter is received requesting a determination, a Form SS-8 is sent to the applicant advising them to resubmit their request for determination to the appropriate office.

  2. The SS-8 Program has been centralized in two locations specified in IRM 4.23.2, Employment Tax Examination Objectives in the Employment Tax Handbook.

  3. Procedures for issuing rulings, determination letters, and information letters are found in the first revenue procedure of the calendar year. The procedure is updated each year.

  4. If a determination is made that the worker involved is an employee, correct returns may be solicited from the business. If the business does not respond, an employment tax examination may be initiated depending on the criteria of the applicable Area Office where the business is located.

  5. Any information related to other areas of employment tax noncompliance can be provided by Area Office management.

4.19.15.16  (10-01-2001)
Tax Exempt/Government Entities

  1. Associate Form 5666, Employees Plans Referrals, with the case file in Examination, if a return for the taxpayer and class of tax is open. Forward the Form 5666 to that office by use of Form 3210, Document Transmittal. If Form 5666 is for multiple years and one return is open in an Area Office, forward all returns for that taxpayer to that office.

  2. The Form 5666 is not to be accepted and should be returned to Returns Program Manager (RPM), TE/GE Division, if there are less than 180 days remaining on the statute of limitations of the individual participant's Form 1040 and/or the employers return ( Form 1120, Form 1120-S, Form 1065 or Form 1040) at the time the form is received in the Examination function.

  3. If Form 5666 is for multiple years returns, and any of those returns has less than 180 days remaining on the statute of limitations, do not correct that return. In such an instance, photocopy the Form 5666 and attach to the photocopy a Form 41, Routing and Transmittal Slip, with the explanation: The tax return for the period ending (Fill in) will not be corrected by Examination because there are less than 180 days remaining on the statute on limitations. Forward the photocopy of Form 5666 and Form 41 to the Returns Program Manager (RPM), TE/GE Division. Retain a copy of Form 41 in the case file.

  4. In cases where there is no open case file in Examination, determine whether the information report or other issues indicate that the return warrants examination. If so, associate the return with the Form 5666 and forward to an examiner, or place in priority files. The requisition should reflect the appropriate Source Code and Project Code (if applicable). Analyze data from CC RTVUE to determine if it is necessary to requisition the original return. If the examination can be completed without the return, annotate CC RTVUE to use a copy of the return.

  5. Screen TE/GE referrals within 30 days of receipt. After screening, return a copy of the Form 5666 to TE/GE advising of the selection or rejection of the referral.

  6. For selected referrals, state on the returned copy whether the referral has been assigned to an examiner or placed in a priority file.

  7. The Classification Section follows the procedures in the IRM section of Identification and Selection of Returns, for the screening of Form 1040 for other examination issues.

  8. If an individual participant's return ( Form 1040) has previously been examined, reopening criteria or procedures do not apply for this issue only.

  9. Contacts with an employer to adjust a deduction claimed on the employers return resulting from the examination of the employer, with respect to a Form 5500 series return (as reflected on Form 5666), is a continuation of the examination and reopening procedures do not apply.

  10. A separate Form 5666, reflecting the adjustments for each Form 1120-S or Form 1065 and the distributive amount for each respective shareholder or partner, is received from the TE/GE Division by the Campus Classification Section servicing the mailing address of each shareholder or partner.

4.19.15.17  (10-01-2001)
TEFRA

  1. Refer to IRM 4.29, Partnership Control System (PCS), and 4.31, Flow-Through Entity, Multifunctional Handbook for additional information.

4.19.15.17.1  (10-01-2001)
Form 8082, Notice of Inconsistent Filers

  1. Partners, under TEFRA, and shareholders, under IRC 6037(c), are generally required to file their returns consistently with the partnership/S Corporation return. However, there may be reasons why a member wishes to report items differently. Form 8082 is used for this purpose. (Note that a partner in an electing large partnership must report all partnership items in a manner consistent with the partnership.)

    Note:

    The TEFRA rules do not apply to any S Corporation tax year beginning after 12/31/96. The Small Business Job Protection Act of 1996, Pub. L. No. 104–188, repealed the unified audit procedures for S Corporations, IRC §§ 6241–6245, effective for S Corporation taxable years beginning after December 31, 1996.

  2. Refer to IRM 4.29, Partnership Control System (PCS), and 4.31, Flow-Through Entity, Multifunctional Handbook for additional information.

4.19.15.18  (01-01-2008)
Unallowables Code (UA) Program

  1. The Unallowable Code (UA) Program is a compliance initiative used to identify potential audit inventory during initial tax return pipeline processing (pre-refund). It is one of the Compliance processes used during initial return processing to prevent erroneous tax refunds on both IMF and BMF tax returns along with the DIF and Audit Code programs. The program requires coordination between W&I, SBSE (both Campus Reporting Compliance and Examination), and LMSB Headquarters who must then coordinate with Submission Processing Headquarters to ensure the correct types of tax return filings are being identified and to provide guidance to employees who are impacted.

  2. During initial return processing, when certain conditions on tax returns appear unallowable by law, they may be identified systemically (by ETA and during document specific processing after manual Error Resolution processing on Paper-file) or visually during Code & Edit/Error Correction processing. When identified, they are coded with Unallowable Codes and/or Action Codes (AC) to apprise Exam that further processing is required.

  3. Both WI and SBSE Campus Examination Operations review paper returns at the campuses where they are originally processed and ELF returns at designated campuses. Returns selected for UA processing are then sent to the appropriate campus based upon back-end state mapping.

4.19.15.18.1  (01-01-2008)
Unallowable and Action Codes

  1. Although HQ Submission Processing analysts are the Primary Owners of the Work Requests that maintain Unallowable and Action Codes, HQ Compliance analysts direct which work is identified through the programming of these codes.

  2. Unallowable coding also results in Freeze Code –Q, Unallowable tax hold or partial refund hold (TC 576). This freezes the tax module from refund and offset out.

    Note:

    Unallowable coding is programmed to create Audit Codes which then cause AIMS creation and generation of CP notices. Audit Code programmers must be consulted when changing these processes.

  3. Unallowable coding:

    1. causes the return to have the portion of any refund associated with the unallowable condition frozen while the return then continues processing.

    2. causes a computer notice (CP) to be generated to Exam.

    3. creates AIMS with Source Code 03, PBC based on back-end mapping, Status Code 06, EGC 5000 and Project Code 0000.

  4. Action coding causes returns to be suspended from processing and made available on-site for Exam classification. If selected, returns are Unallowable-coded.

  5. If the UA issue is visually identified, Code & Edit and Error Correction employees edit the return using Form 3471, Edit Sheet, with either the UA and/or AC. Action coded returns that are reviewed by Exam for potential Unallowable coding are:

    • UA 85, Fuel Tax Credits – Action Code 300,

    • UA 91, Frivolous Filing – Action Code (Set for January, 2008).

  6. For specific processing information used by Submission Processing to code Unallowable and Action Codes, see:

    • IRM 3.11.3.3.9, Unallowable Code, and Exhibit 3.11.3-6.

    • IRM 3.11.3.15.1, Schedule A, General Editing Procedures.

    • IRM 3.12.3.5.3, Unallowables, and Exhibit 3.12.3-7.

    • IRM 3.21.3 and IRM 3.22.3 International Returns.

    • IRMs for specific BMF forms.

  7. For a complete list of current UA Codes used by Exam, see LEM 4.19.1 – 4.19.15.18, Unallowables.

4.19.15.18.2  (01-01-2008)
New Starts Processing Information

  1. See LEM 4.19.1 – 4.19.15.18, Unallowables, for tolerances.

  2. CP notices are sent to Exam when Unallowable filings are identified; however, they should not be relied upon as notification that a new case is received.

    Note:

    CP notices may be printed at any site and routed to the appropriate campus for back-end processing.

  3. Correspondence Exam workload inventory procedures such as SSIVL reports should be used to identify and start new UA inventory.

  4. UA cases will open on AIMS under Source Code 03, PBC based on back-end mapping, Status Code 06, EGC 5000 and Project Code 0000.

  5. CP 19/20 reports may be accessed via Control D by report name NRP66 Notice List or by Job Name NRP6610I.

  6. Most UA accounts have frozen refunds and should be worked expeditiously.

  7. Ensure CEAS is set up as appropriate and workpapers are annotated detailing the actions on the case.

4.19.15.18.3  (01-01-2008)
Classifying Unallowable and Action Coded Returns

  1. When new Unallowable inventory is received, ensure BOD and PBC are correct for your campus.

  2. Exam classifiers should review the entire return via Command Codes RTVUE, BRTVU, or TRDBV for UA and the actual return for AC to determine all audit issues. Keep in mind that Submission Processing employees and computer programs identifying unallowable conditions are not trained on all tax law issues. They may suspend processing when the first unallowable condition is identified.

  3. {Referrals should be made to the appropriate area when potentially-abusive preparers and/or fraud are identified.}

  4. The last page of RTVUE will show the unallowable amount and may show if it is a change to adjusted gross income, itemized deductions, or a tax adjustment. If RTVUE shows that the per return side and per computer side are different, a math error notice should have been sent. If the math error resolved the unallowable issue, close the case per local procedures.

  5. Process cases as follow:

    If Then
    Unable to determine audit issues via Command Codes, Secure the original return and suspend case for 30 days. If unable to secure return, survey the case with Disposal Code 20 and release the refund.
    Additional issues are identified for the filing, Use Form 6754, Examination Classification Checksheet, to classify and set up as Source Code 20, Project Code 0000. Note this information in the upper right-hand corner of the Form 5546, Chargeout.
    Review indicates inappropriate unallowable coding or amount is below tolerance, Survey case with Disposal Code 20 and release refund.

4.19.15.18.4  (02-12-2008)
Notifying Taxpayer of Unallowable Issue

  1. Issue Initial Contact Letter (ICL) to notify taxpayer of unallowable issue(s) as follows:

    1. CP 19/ CP 20 may be used as ICL if all issues are included and amounts and dates are correct.

    2. If you determine that a computational error was made on the CP, you can recompute the tax and retype the notice.

    3. If unable to use CP 19/ CP 20 as ICL, issue Letter 525, 30 Day Letter, with completed Form 4549/ Form 4549-EZ, Income Tax Examination Changes, and Form 886-A, Explanation of Items, with appropriate explanation paragraphs. Include Form 2297, Waiver of Statutory Notification of Claim Disallowance, if account has a frozen refund. The Form 2297 does not have to be sent to the taxpayer if the following statutory language is added to the Form 4549:
      Waiver of Statutory Notice of Claim Disallowance – My original return shows an overpayment, however, based on the adjustments listed above, the IRS has reduced or eliminated the overpayment and is disallowing part or all of my claim for credit or refund. I waive the requirements that a notice of claim disallowance be sent to me (by certified mail) for the disallowance of part or all of any claim made on my original return. I will still receive notice for any claim filed on an amended return or otherwise filed apart from the original return that is disallowed.

  2. Release any refund frozen in error using local manual refund procedures.

  3. Update AIMS to appropriate EGC and Status 22.

  4. Suspend case for 45 days.

4.19.15.18.5  (01-01-2008)
Response/No Response to Unallowable Notices/Letters

  1. Process responses/no responses to Unallowable notices or letters as follows:

    If Then
    Taxpayer agrees with the proposed tax adjustment and signs the CP 19/ CP 20 or Form 4549/ Form 4549-EZ, Close as "Agreed" .
    Taxpayer agrees but does not sign the Form 2297 or Form 4549, Issue Letter 105-C, Claim Disallowed.
    Taxpayer submits an explanation that partially resolves the unallowable issue, Prepare a revised report if deficiency is above tolerance. Close as "No Change" if the deficiency is below tolerance.
    Taxpayer does not submit sufficient documentation to determine case, Attempt to contact taxpayer by phone if available. Allow 15 days if taxpayer states they will send additional information. If unable to contact or no response is received, send Letter 692, Revised Report/Additional Information Letter, with Form 4549 and Form 886-A.
    The taxpayer requests a transfer to an Area Office, Release the frozen refund prior to the transfer.
    No response is received after the suspense period has expired, Prepare case for the issuance of a SNOD. Include Form 2297 or a copy of the Form 4549 containing the statutory language shown above in 4.19.15.18.4 (3).
    No response is received to the SNOD and the 105 (165 days if the letter was mailed out of the country) days has expired, Close as "Default" . If the case has a frozen refund, issue a Letter 105-C.

4.19.15.18.6  (01-01-2008)
Transcripts

  1. Transcripts titled, –QFRZALERT, will be sent to the associated campus when an unreversed TC 576 remains on a module longer than six months. Freezes should be resolved within five days of receipts.

4.19.15.18.7  (01-01-2008)
Additional Information

  1. Additional Unallowable Program information may be found in the following:

    • ELMS Course 18665-101, Lesson 8, Unallowables.

    • LEM 4.19.1 – 4.19.15.18, Unallowables.

    • SBSE Annual Campus Exam Operating Guidelines.

4.19.15.19  (01-01-2008)
Form 4136, Credit for Federal Tax Paid on Fuels

  1. Individual returns claiming Fuel Tax Credits on Form 4136, Credit for Federal Tax Paid on Fuels, above a designated tolerance will be screened in the Rejects Unit, Submission Processing, for selection under Unallowable Code 85. For tolerances, see LEM 4.19.1 – 4.19.15.19.

  2. There are eight basic issues to evaluate when examining all Fuel Tax Credit cases:

    1. The fuel must have been purchased for farming purposes, off-highway use and other non-taxable uses, sold by a registered ultimate vendor for certain purposes, or used to produce certain mixtures, or alternative fuel used as a fuel.

    2. Did the taxpayer file a previous claim for the credit?

    3. Did the taxpayer include the amount of the excise tax in any business expense deduction taken; or claim an amount for the production of the mixture; if so, did the taxpayer include the amount of the credit in income?

    4. Was tax imposed on the fuel?

    5. If the credit is being claimed by the ultimate purchaser, was the fuel used in an allowable nontaxable use?

    6. If the claim is by the registered ultimate vendor, was the undyed diesel fuel or kerosene sold to farmers or state and local governments or in the case of kerosene, from a blocked pump?

    7. If the claim is for an alternative fuel, was the taxpayer the user of the fuel or seller at retail or bulk sale?

    8. If the claim is for a mixture, did the taxpayer produce the mixture?

  3. Code as unallowable if one or more of the following criteria exists:

    • Taxpayer claims credit as an Ultimate Vendor of undyed Diesel Fuel or Kerosene and does not provide the required documentation.

    • Taxpayer claims credit for undyed diesel fuel or kerosene used in farming prior to September 30, 2005.

    • Taxpayer claims credit as a gasoline wholesale distributor.

    • Taxpayer claims a credit for an alternative fuel mixture or alternative fuel that is not registered.

  4. Processing amended returns with Form 4136. Refer to IRM 4.4.4 (AIMS Processing Handbook) for guidance on processing claims with Form 4136 issues.

  5. The following situations are highly questionable and should be considered:

    • Taxpayer claims credit for nontaxable use when there is no obvious reason for such use by the taxpayer; such as use in a train or bus.

    • The amount for the credit appears to be inflated or excessive. The amount of the credit is large for heating oil or liquefied petroleum gas.

  6. Further information on Fuel Tax Credits can be obtained in Publication 510, Excise Taxes for 2007, Publication 225, Farmer’s Tax Guide, IRM 21.6.3.4.2.6, Form 4136 Credit for Federal Tax Paid on Fuels, and IRM 21.7.8.4, Excise Tax.

4.19.15.20  (01-01-2008)
Erroneous Refunds

  1. The Erroneous Refund Program in Correspondence Examination involves cases that had incorrect refunds issued to taxpayers due to variety of reasons. The potential for erroneous refunds may occur in the following situations: misapplied payments, incorrect tax adjustments/assessments, incorrect credit refunds, taxpayers filing fraudulent returns, or taxpayers using incorrect Taxpayer Identification Numbers (TINS). For more information on Erroneous Refunds and causes refer to IRM 21.4.5, Erroneous Refunds, and IRM 5.19.7.6.5, Erroneous Refunds.

  2. Erroneous refunds are processed according to categories based on characteristics on the tax module. Erroneous refunds are generally classified as either:

    • Assessable – Requires a recalculation of tax liability.

    • Non-assessable – No Requirement for a recalculation of tax liability.

  3. The Correspondence Examination program involves assessable erroneous refunds. These errors arise when the Service made a downward recomputation of the taxpayer’s tax liability based on a substantive determination and later discovers that the determination was incorrect. The adjustment to the tax liability or recapture of a refundable credit will require Statutory Notice of Deficiency processing.

  4. The assessable erroneous refunds generally are referred to Examination as Category A1 or A2 referrals. There are situations that an erroneous refund is created by Examination, if the case is closed incorrectly. If the case was closed with an erroneous refund, the criteria in Rev. Proc. 2005-32, IRM 1.2.1.4.1 P-4-3, and IRM 1.2.43.22 Delegation Order 57 must be followed.

  5. Before examination contact with the taxpayer and initiation of the Statutory Notice of Deficiency processing, each case will be screened to determine if the erroneous refund was correctly classified as assessable or non-assessable. Refer to IRM 21.4.5.4 for more information on the categorizing of erroneous refunds.

  6. Examination will determine if the statutory period for assessment has expired. Since Examination accepts only assessable erroneous refunds with tax liability changes, the ASED becomes the statute of limitations for the erroneous refund and is used in the selection criteria. For informational purposes, the following are the statute of limitations issues involved with erroneous refunds:

    • ASED – Assessment Statute Expiration Date

    • CSED – Collection Statute Expiration Date

    • ERSED – Erroneous Refund Statute Expiration Date

  7. If the taxpayer did not cause the erroneous refund, and the amount of the erroneous refund is $50,000 or less, the Service must abate interest (accruing before the date of notice and demand) under IRC 6404(e)(2). If the amount of the erroneous refund is more than $50,000, the Service may abate the interest (accruing before the date of notice and demand) in its discretion.

  8. The following procedures should be used in erroneous refunds.

    If Then
    Non-assessable erroneous refund or statute period has expired

    • Return transcripts back to initiator.

    • Non-assessable erroneous refunds are not worked by Examination.
    Assessable and statute period of assessment has not expired

    • Classification will submit Form 5345, Examination Request Master File, to obtain the examination assembly.

    • The cases should be opened with the following AIMS information:


    Source Code: 20
    Status Code: 08
    Project Code: 0044 for Non-EITC Related or0045 for EITC Related (EITC is the subject of the erroneous refund)
    Employee Group Code: 5000
    Assessable Erroneous Refunds on Individual Income Tax Returns

    1. Send Letter 525 (SC) with the following explanation typed into the space opposite the blank ballot box
      " The refund check we mailed to you for your (tax year) overpayment was incorrect."

    2. Prepare Form 4549 / Form 4549-EZ using suggested explanation
      "We are sorry but the refund we sent you is incorrect because we overpaid you by the amount shown in the attached report. We regret the error and thank you for helping us correct it. Since the erroneous overpayment was due to IRS error, no interest will be charged if you pay the amount refunded in error promptly. If the amount due is not received within 30 days, interest will be assessed from the date of the refund."

    3. Include in the explanation to the taxpayer, on what line of the tax return or on what schedule the error occurred.

    4. Update case to Status 22 and continue general examination procedures.

    Assessable Erroneous Refunds on other Federal Tax Returns

    • Business Master File (BMF) or Residual Master File (RMF) for deficiency procedures may be sent to recover an assessable erroneous refund.

    • General examination procedures will be followed

    • Refer to IRM 4.10 Examination of Returns and IRM 4.2 General Examining Procedures.

    Reminder:

    Complete Form 3198, Special Handling Notice identifying Erroneous Refund. Special handling is required to abate all interest charges, if erroneous refund is repaid within 30 days of the request for repayment.

4.19.15.21  (05-15-2006)
Alimony

  1. Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Refer to Publication 504 for more comprehensive information regarding alimony.

  2. The correspondence examiner should resolve discrepancies between the amount deducted as alimony by one taxpayer and the amount reported as income by the recipient. The Payer is the taxpayer who claimed the alimony deduction. The recipient is the spouse or ex-spouse who the payer states received the alimony. The term taxpayer(s) refers to the recipient, the payer or both. The term alimony refers to all spousal support that meets the requirements of IRC 71. The term instrument refers to a decree of divorce or separate maintenance, a written separation agreement, a temporary decree, an interlocutory decree, or a decree of alimony pendente lite.

  3. There are currently two alimony programs.

    1. Inventory for the Alimony SSN Program involves cases where the recipient of the Alimony apparently has an invalid SSN, as identified by the payer’s return. The Project Code for the payer is 0141; the Project Code for the recipient is 0142.

    2. Inventory for the Alimony Matching Program involves cases where there is a substantial difference between the Alimony deduction claimed by the payer and Alimony income reported by the payee. The Project Code for the payer is 0231; and the Project Code for the recipient is 0232.

4.19.15.21.1  (02-12-2008)
Initial Contact and General Processing

  1. The "payer" has been established on AIMS in Status 06.

    1. Using RTVUE, pursue the alimony issue on the payer’s case. Annotate the payer’s case with the X-reference spouse’s information for future reference. If necessary, the original return may be requested.

    2. If the payer indicates that alimony was paid to more than one recipient, the additional recipients will need to be annotated in the case file workpapers for future reference.

  2. The payer’s case will be opened and worked prior to opening up the recipient(s). Issue Letter 3541and Form 4549/ Form 4549-EZ to the payer. Update the case to Status 22.

  3. Required Actions:

    PC 0141 PC 0231

    • Disallow the alimony deduction;

    • Describe the business rule that was broken;

    • Request a complete copy of the divorce/separation instrument(s) with any addendum;

    • Request proof of payments, and

    • Solicit the SSN and the current name and address of the recipients(s).

    • Disallow the alimony deduction;

    • Request a complete copy of the divorce/separation instrument(s) with any addendum;

    • Request proof of payments; and,

    • Solicit the SSN and current name and address of the recipient(s).

  4. Suspend the initial contact letters for 45 days.

  5. Related return entries on Form 5344 default to the taxpayer's information. In related case examinations, the information in Fields 405 through 408 of the recipient's should reflect the payer's information. Overwrite the entries on Form 5344 as shown in the table below.

    Form 5344 field: Recipient Form 5344 entry should be:
    405 Payer’s SSN
    406 Payer’s MFT
    407 Payer’s tax period
    408 S

4.19.15.21.2  (05-15-2006)
No Reply

  1. If the taxpayer does not respond to the Initial Contact Letter, prepare the case for issuance of the statutory notice.

4.19.15.21.3  (12-12-2008)
Processing Taxpayer Replies to Initial Contact Letters

  1. Issue Letter 692 to the taxpayers when it is necessary to prepare a revised report or if the initial report is not changing and additional information is needed from the taxpayer. This is likely to occur if it is determined that the income is an allocated share of a pension distribution or if divorce agreements with conflicting dates are received. Include an appropriate explanation and copies of pertinent information so that the taxpayer will be able to understand the reason for the adjustment and take the correct action.

  2. If the taxpayer responds, evaluate the information provided. If the taxpayer substantiates the alimony deduction and a final determination can be made, close the case with the appropriate Closing Codes.

  3. Research RTVUE for the recipient indicated on the payer's return to determine if adding the potential unreported alimony income to the recipient's return would generate a tax increase. See LEM 4.19.1 – 4.19.15.21 for specific tolerances.

  4. If the recipient's return is selected for examination, include a copy of the relevant documents used to support your determination in the recipient's case file when establishing the recipient's case.

    1. Establish the recipient’s case on AIMS within 30 days of the closure of the payer’s return. Use the appropriate Project Code for the recipient based on the code used for the payer’s case. PC 0232 for the alimony matching program or PC 0142 for the alimony SSN program

    2. Issue ICL Letter 3540 and Form 4549.

    3. Annotate the recipient's case file workpapers with the Payer's SSN for future reference. If alimony payments are received from multiple payers, annotate all payers’ SSN and the amount paid in the workpapers.

  5. If the taxpayer does not respond to the initial contact letter, prepare the case for issuance of the Statutory Notice.

  6. Issue Letter 692 when a response is received and it is necessary to prepare a revised report or if additional information is needed from the taxpayer.

  7. If the payer or the recipient agrees before the suspense period of the latest letter sent has expired, process the closing. Do not wait for the suspense period to expire.

  8. Follow normal contact guidelines and suspense time frames for both the payer and the recipient cases.

  9. Consider the Negligence Penalty IRC 6662(c).

4.19.15.21.4  (05-15-2006)
Case Processing After Issuance of the Statutory Notice

  1. If it becomes necessary to issue a revised report after the Statutory Notice is issued, send the report with Letter 555. Do not increase the deficiency as shown on the Statutory Notice.

  2. Signed agreements received after the Statutory Notice is issued should be processed immediately. Enter the recomputed statute date per IRM 4.14.1 on the Form 5344 and make the necessary notations in related case file. Continue processing the related case per normal procedures for this program.

4.19.15.21.5  (05-15-2006)
Documentation

  1. Documentation must include the instrument that orders the payment of alimony with all amendments and proof of payment in the form of:

    • Copies of cancelled checks, money orders, or proof of direct deposit; or

    • Court receipts or statements from state or county agencies to which payments were made.

  2. The instrument may require payments to third parties that could qualify as alimony. Documentation can include, but is not limited to:

    • Copy of a deed to verify home ownership for mortgage, real estate taxes and home insurance payments;

    • Receipts, utility statements, lease agreement, etc. for living expenses;

    • Registration and receipts for education expenses;

    • Proof of ownership for life insurance premiums;

    • Bills and receipts for medical and dental expenses; and,

    • Statements for health insurance premiums.

4.19.15.21.6  (05-15-2006)
Legal Terminology

  1. Instruments of divorce or separation often contain legal terminology. Some frequently used terms relevant to alimony include:

    • Decree nisi — a provisional decree that will become final unless cause is shown why it should not.

      Note:

      Some states grant divorces using decrees nisi. The decree nisi creates a time period (as of 3 months) allowing for possible reconciliation or for completion of various arrangements (such as custody).

    • Separation a mensa et thoro — a separation of spouses which does not involve a dissolution of the marriage but in which certain arrangements (such as for maintenance and custody) are ordered by the court (also called legal separation, judicial separation).

    • Divorce a vinculo matrimonii — a divorce that completely and permanently dissolves the marital relationship and terminates marital rights (such as property rights) and obligations (such as fidelity); absolute divorce.

    • Ex parte — on behalf of or involving only one party to a legal matter and in the absence of and usually without notice to the other party.

      Example:

      an ex parte motion;

      Example:

      relief granted ex parte (used in citations to indicate the party seeking judicial relief in a case).

    • Nunc pro tunc — now for then (used in reference to a judicial or procedural act that corrects an omission in the record, has effect as of an earlier date, or takes place after a deadline has expired).

      Example:

      a nunc pro tunc order;

      Example:

      permitted to file the petition nunc pro tunc.

    • Pendente lite — during the suit: while litigation continues.

      Example:

      awarded joint legal custody of the child pendente lite;

      Example:

      pendente lite child support.

    • Interlocutory — not final or definitive.

      Example:

      an interlocutory order.

    • Joint tenancy — a tenancy in which two or more parties hold equal and simultaneously created interests in the same property and in which title to the entire property is to remain to the survivors upon the death of one of them (such as a spouse) and so on to the last survivor.

      Example:

      a right to sever the joint tenancy.

    • Tenants in common — a tenancy in which two or more parties share ownership of property but have no right to each other's interest (such as upon the death of another tenant).

    • Tenants in the entirety — a tenancy that is shared by spouses who are considered one person in law and have the rights of survivorship inherent in joint tenancy and that become a tenancy in common in the event of divorce.

      Example:

      property subject to a tenancy by the entirety cannot be encumbered by one tenant acting alone.

4.19.15.21.7  (12-12-2008)
Death Contingency

  1. Tax law states that for payments to be considered alimony, they must cease on the death of the recipient spouse. This "death contingency" can be stated in the instrument itself, codified in state law, or applied by operation of state common law. The tax examiner must research state laws to reach a correct determination. The use of the word alimony in an instrument does not necessarily mean that the payments in question meet the requirements to be considered alimony under IRC 71.

4.19.15.21.8  (05-15-2006)
Pension Income

  1. QDRO — Although pension income is not alimony, it is frequently deducted as such. Instruments can provide for the division of a pension between the plan participant and a non-participant spouse. This can be executed with a qualified domestic relations order (QDRO) that transfers the applicable percentage of distribution through the plan to a non-participant spouse. However, the participant may be ordered to pay the required percentage directly to a non-participant spouse after distribution. Unlike other property settlements, pension distributions are taxable to the recipients because those amounts were previously contributed on a tax-deferred basis under a QDRO, Form 1099-R should be issued showing the applicable amount distributed to each individual – participant and each non-participant spouse. Otherwise, only one Form 1099-R is issued to the participant showing the entire distribution.

  2. OPM — Problems may arise in connection with Form 1099-R issued from Office of Personnel Management (OPM). Prior to the year 2000, OPM reported the gross pension distribution on Form 1099-R to the participant spouse. The participant spouse then reported the gross amount of distribution as pension income and deducted the amount apportioned to the non-participant spouse as alimony. In the year 2000, OPM started issuing separate Form 1099-R to the participant spouse and each non-participant spouse showing their respective distributions. The plan participant spouse was not notified of the change. Consequently, the participant spouse continued to deduct the court ordered apportionment, thereby creating a double deduction.

  3. DFAS Reporting — Military retirees frequently under report pension income due to Defense Finance and Accounting Services (DFAS) practices. In some instances DFAS issues a Form 1099-R to the participant spouse for the full amount of the distribution paid to the participant spouse and the non-participant spouse. In other instances, a separate Form 1099-R is issued to the participant spouse and each non-participant spouse showing only the amount of their respective distributions. When the non-participant spouse receives a Form 1099-R from DFAS, the participant spouse should not exclude the pension amount reported on the Form 1099-R that is issued to the non-participant spouse from taxable income.

  4. Disability Pensions — The (non-taxable) nature of a disability pension does not transfer to the non-participant spouse. The disabled participant spouse cannot take a deduction for non-taxable distributions transferred to a non-participant spouse unless it is reported in taxable income. The non-participant spouse is required to report the income on his/her tax return.

    Note:

    Do not use alimony language when adjusting pension income.

4.19.15.22  (12-12-2008)
What is DIF CORR (Source Codes 02 and 06)

  1. DIF examines non-complex credits, deductions and/or expenses on non-business returns. Some examples are:

    • Interest

    • Taxes

    • Contributions

    • Medical Expenses

    • Simple miscellaneous expenses such as union dues, work clothes, and small tools

  2. DIF order could be utilized to select high income taxpayers with high DIF score for audit.

  3. DIF returns require classification.

4.19.15.22.1  (12-12-2008)
Procedures for DIF CORR (Source Codes 02 and 06)

  1. Use Initial Contact Letter 566 (SC) to notify taxpayer of review.

  2. Check off the issues on the back of Letter 566 (SC) using classification check sheet.

  3. Put a copy of the letter in the case file.

    If Then
    Adjustment is required after information is submitted by the taxpayer Send Letter 525 (SC), Form 4549 / Form 4549-EZ, and appropriate attachments, and retain copy of letter and report in the case file.
    Case is a single issue information return Send Letter 525 (SC) and Form 4549 / Form 4549-EZ, and with adjustment and standard explanation(s).
    Evaluating Taxpayer Replies/No Replies/Closing Procedures etc., Refer to IRM 4.19.13 for guidelines. See IRM 4.19.15.23. for Schedule A issues.

4.19.15.23  (01-01-2007)
Schedule A

  1. For all examined Schedule A items, the examiner should check for:

    • Altered photocopies of paid bills.

    • Bank coding of the cancelled check coinciding with the amount claimed as paid.

      Reminder:

      An altered document is evidence of fraud and a fraud referral or civil fraud penalty should be considered.

  2. Medical and Dental Expenses: The examiner should have the taxpayer send in the following documentation ( See Exhibit 4.19.15-6., Form 886-A):

    • Copies of cancelled checks, receipts, or statements for all medical savings accounts, medical and dental expenses (including medical insurance) showing the person for whom each expense was incurred,

    • Any insurance or employer reimbursement records, and

    • A copy of the medical insurance handbook or policy describing the benefits and reimbursement policy.

      Note:

      The Archer Medical Savings Account program is extended through December 31, 2005.

  3. When the requested documentation is received, the examiner should:

    • Ensure that insurance reimbursements are excluded from deductions. Ensure the expenses are for the taxpayer, spouse, dependent, adopted child, child of divorced or separated parents, or a decedent who, when living, was the taxpayer, spouse, dependent, adopted child, or child of divorced or separated parents.

    • Ensure that the medical expenses are not for a non-person.

      Note:

      Costs of a guide dog or other animal to be used by a visually impaired or hearing impaired person are allowable. Also allowable are expenses to care for an animal trained to assist persons with any other physical disabilities.

    • If there is a multiple support agreement, the taxpayer may be able to claim medical expenses even if the taxpayer cannot claim that person as a dependent ( IRC 152 and IRC 213).

4.19.15.23.1  (10-01-2002)
Nondeductible Medical Expenses

  1. This list of is not all inclusive.

    Nondeductible Reason
    Baby-sitting, child care, and nursing services for a normal, healthy baby Not allowed, even if the expenses enable the taxpayer to get medical treatment.
    Controlled substances Any substance in violation of federal law is not deductible, e.g., marijuana, laetrile, etc.
    Cosmetic surgery, Electrolysis or hair removal, Hair transplant Medical expenses paid for cosmetic surgery are deductible only if they are necessary to improve a deformity arising from, or directly related to, a congenital abnormality, or a personal injury resulting from an accident, trauma, or a disfiguring disease
    Dancing lessons or swimming lessons Not allowed, even if recommended by a doctor for the improvement of general health. These are deductible only if prescribed for a specific medical condition.
    Diaper service Allowed only if they are needed to relieve the effects of a particular disease.
    Health club dues Allowed only if the expenses are related to a particular medical condition.
    Household help Allowed only if paid for nursing-type services. Certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses.
    Illegal operations and treatments Not allowed, even if medically prescribed.
    Insurance Premiums Not deductible if for the following insurance benefits:

    • Payments for loss of life, limb, sight, etc.

    • Payments for loss of earnings. Guaranteed payment for each day of hospitalization.
    Maternity clothes Not allowable.
    Medical Savings Accounts (MSA) Not allowed.

    • Any expense paid from a medical savings account is not deductible.

    • The period for opening a new Archer MSA has been extended until December 31, 2005. The taxpayer cannot deduct medical expenses as itemized deductions that are included in the tax-free amount of a distribution from a Health Savings Account (HAS). If taxpayer has deducted medical expenses or insurance premiums elsewhere on the return, these expenses cannot be used again as a deduction on Schedule A.

    Nonprescription drugs and medicines Not allowed.
    Nutritional supplements Allowed only if obtained legally with a physician’s prescription.
    Personal use items Allowed only when an item is purchased in a special form primarily to relieve a physical defect. The excess of the cost of the special form over the cost of the normal form is a medical expense.
    Weight-loss program Allowed only if the program is undertaken to treat an existing disease (such as obesity) diagnosed by a physician.

4.19.15.23.2  (12-12-2008)
Taxes Paid

  1. For taxes paid, the examiner should consider having the taxpayer send in the following documentation:

    Category Documentation
    For State and Local Income Tax deductions:

    • Copies of state or local returns for the years involved.

    • Copies of cancelled checks and receipts for taxes paid during the year.

    • Form W-2 or other statement showing state and local income tax withheld during the year.
    For State Sales Tax Deduction:

    • Copies of sales receipts for the year involved, if actual state and local general sales taxes are claimed.

    • Statements from the payer for non-taxable income which includes: exempt interest, Veterans’ benefits, non-taxable combat pay, Workers’ Compensation, non-taxable part of Social Security and Railroad Retirement Benefits if the taxpayer used the Optional State Sales Tax Table, and indicates he/she had non-taxable income and the non-taxable income was not shown on the return. The General Sales Tax Tables are in the Form 1040 Instructions.

    • Sales receipts for motor vehicles, mobile and prefabricated homes, or home building materials. The actual sales tax paid on these items can be added to the amount in the Optional State Sales Tax Tables, but only include the amount of tax paid at the general sales tax rate.

    For State and Local General Sales Tax Deduction:

    • Documentation to support state and local sales taxes paid on a motor vehicle, aircraft, boat, home, or home building materials if claimed in addition to table amount. This includes purchase contracts, and bills of sale. If the taxpayer claimed actual sales taxes then the taxpayer needs to provide actual sales receipts, and support for purchase of large items.

    • If the receipts are too numerous to photocopy, the taxpayer may provide an itemized list. The list should identify the item purchased, date, total cost, and the amount of sales tax paid.

    For Real Estate and Personal Property Taxes deduction (list is not all inclusive):

    • Verification of legal ownership of the property.

    • Copies of cancelled checks, mortgage statements or receipts for taxes paid.

    • Copy of property tax bill and documentation of any property tax rebates or refunds.

    • Copy of the settlement statement if real property was sold or purchased during the year.

    • Verification of any special assessments deducted as taxes and an explanation for their purpose.

    Note:

    See Exhibit 4.19.15-19, Form 886-A – State Income/Sales Tax Deduction.

  2. The following is a list of nondeductible taxes (not all inclusive):

    • Sales Tax (Tax Year 2003 and prior).

    • Federal Income and Excise taxes.

    • Social Security Taxes (FICA).

    • Medicare.

    • Federal Unemployment Tax (FUTA).

    • Railroad Retirement Taxes (RRTA).

    • Customs duties.

    • Tax on gasoline.

    • Car inspection fees.

    • Assessments for sidewalks or other improvements to property.

    • Tax paid for another taxpayer.

    • License fees (marriage, driver’s, dog, etc.).

    • Penalties or interest.

    • Homestead Exemption – this is not a tax, but is used to reduce state or local real property taxes for qualified homeowners.

  3. Taxpayers should not reduce their deduction by:

    • Any refund of, or credit for, prior year state and local income taxes received in the tax year of the return.

    • Tax refunds from prior year State returns, (when the taxpayer has state and local taxes on the prior year Schedule A) should be reported on the appropriate line of Form 1040.

    • Refunds of real estate taxes deducted in prior years should be reported on the "Other Income" line of the Form 1040.

  4. Evaluating Taxpayer Responses:

    • For 2004 and subsequent tax years, taxpayers can elect to deduct state and local general sales taxes, or the state and local income taxes. The taxpayer cannot deduct both.

    • Ensure the taxpayer has not duplicated the deductions elsewhere on the return such as on Schedule E or C.

    • If taxpayer has a Schedule E, ensure taxes and interest related to that property have not been placed erroneously on Schedule A in an effort to increase the allowable loss beyond $25,000.

    • State and Local Sales Tax Deduction:

    If Then
    The state or locality imposes a general sales tax on the sale of a home, The "closing statement" from the sale of the home shows the amount of sales tax due from the seller.
    The state or locality imposes sales tax due to a major/substantial renovation, The taxpayer should provide a statement from the state or locality for the sales tax paid.
    A contractor was authorized by contract to act in the taxpayer’s behalf to build or substantially improve the taxpayer’s home, A copy of the contract designating the contractor, a statement from the contractor indicating the items purchased and amount of sales tax paid.
    The receipts are too numerous to photocopy, and the taxpayer provided a list/spreadsheet, See LEM 4.19.1 — 4.19.15.23.2.

4.19.15.23.3  (01-01-2006)
Home Mortgage Interest Deductions

  1. The examiner should have the taxpayer send copies of mortgage interest statements, equity credit lines/loans, land and mortgage contracts, and amortization schedules for loans outstanding. Online research may be available for some payer documents. The taxpayer should also send copies of cancelled checks, receipts or other evidence of payments made for the year under examination.

    Reminder:

    Personal interest is not deductible.

  2. Qualified home — to take a home mortgage interest deduction, the taxpayer’s debt must be secured by a main home or a second home. A home includes a house, condominium, cooperative, mobile home, house trailer, and boat, or similar property that has sleeping, cooking, and toilet facilities.

  3. Secured debt — generally, secured debt is one in which an instrument is signed (such as a mortgage, deed of trust, or land contract). The home is collateral for the interests of the lender. If the loan is not repaid, the lender can foreclose on the mortgage and the home can then serve as payment for the debt.

  4. Refinancing — generally, points paid to refinance debt are deductible over the life of the loan. If the loan is used to improve the taxpayer’s main home, the points are deductible in the year paid.

    IF Then
    Taxpayer is legally liable for the loan and
    The mortgage was taken out on or before October 13, 1987     		Home mortgage interest is fully deductible.
    Taxpayer is legally liable for the loan (home acquisition debt)
    and
    All of the home mortgages taken out by the taxpayer after October 13, 1987 were used to buy, build, or improve the main home secured by that main home mortgage or used to buy, build, or improve the second home secured by that second home mortgage, or both and
    the mortgage balances are $1,000,000 or less ($500,000 or less if married filing separately)     		Home mortgage interest is fully deductible.
    Taxpayer is legally liable for the loan (home equity debt)
    and
    Home equity balances were $100,000 or less ($50,000 or less if married filing separately)     		Home equity debt interest is deductible on the smaller of:
    The debt of $100,000 or less ($50,000 if married filing separately) or
    The extent the fair market value of the home exceeds the total amount of the home acquisition debt and grand-fathered debt.

  5. If a mortgage is secured by a qualified home and was incurred to make improvements, it is termed a home acquisition debt with restrictions as detailed in Publication 936, Home Mortgage Interest Deductions.

  6. If the taxpayer took out a loan for reasons other than to buy build or improve his home, he may still qualify to claim the interest if the loan is secured by the qualified home and meets other limitations. This is termed a home equity debt. See computations in Publication 936 for deductible amount.

  7. If the taxpayer claimed a Mortgage Interest Credit, the allowable Schedule A interest amount must be reduced by the amount of interest used to compute the credit, i.e., can not obtain a double benefit.

4.19.15.24  (01-01-2006)
Charitable Contributions

  1. Taxpayers may claim an itemized deduction for donations or gifts made to qualified charitable organizations. Payments to qualified organizations are considered contributions if they are made without getting, or expecting to get, anything of equal value.

  2. A law enacted on January 7, 2005 permits taxpayers to claim charitable contributions in tax year 2004 for donations made during January 2005 to assist victims of the tsunami disaster. The deduction is limited to cash gifts made specifically for the tsunami disaster relief, made after 12/31/2004 but before 02/01/2005, and must meet all charitable contribution requirements. Taxpayers may choose to claim the deduction for either tax year 2004 or tax year 2005.


More Internal Revenue Manual