Source: http://www.irs.gov/irm/part21/irm_21-006-004r-cont01.html
Timestamp: 2014-10-01 04:10:30
Document Index: 88304713

Matched Legal Cases: ['§ 263', '§ 1', '§ 1', '§ 1', '§ 6013', '§ 6013']

Internal Revenue Manual - 21.6.4 Tax Computation / Accounting Period Changes (Cont. 1)
Section 4. Tax Computation / Accounting Period Changes (Cont. 1)
21.6.4 Tax Computation / Accounting Period Changes (Cont. 1)
21.6.4.4 Working Tax Computation/Accounting Period Changes
21.6.4.4.9 (10-01-2014)Schedule J, Income Averaging for Farmers and Fishermen
Farmers and fisherman may use Schedule J, Income Averaging for Farmers and Fishermen, to elect to average all or part of taxable income over the previous 3 years. Farmers may benefit from this election in a
year when farm income is high and income in one or more of the previous three years was low.
The American Jobs Creation Act of 2004 (PL 108-357), allows fishermen to use income averaging on Schedule J to reduce their
tax for tax years beginning after 2003. Taxpayers enter income amounts on Schedule J from the appropriate line of the prior year(s) income tax return(s). If the taxpayer filed a Schedule J for the previous year, then the taxpayer enters income amounts from the previous year's
Schedule J on his or her current year Schedule J.
If the taxpayer did not file a Schedule J for the previous year, then the taxpayer enters income amounts on its current year
Schedule J from the appropriate line of the prior year(s) income tax return(s).
If deductions exceed gross income for any year that is a base year, there may be negative taxable income for that base year.
However, any amount that may provide a benefit in another taxable year is added back in to determine the base year taxable
income. See the worksheet in the instructions for Schedule J.
The base years are determined as follows: If Tax Year is...
Then Base Years are... 2014
If a farmer or fisherman did not file a return for any of the three previous years, the amount entered on Schedule J for that
year(s) is the amount that would have been reported if the taxpayer had filed a return.
The Taxpayer Notice Code explanation for Schedule J is: "Your Schedule J tax was figured incorrectly. We adjusted your account
A farmer's or fisherman's regular tax liability for purposes of computing Alternative Minimum Tax (AMT) is determined without
reduction for income averaging. Those taxpayers receive the full benefit of income averaging because it reduces the regular
tax while the AMT (if any) remains unchanged. With respect to base years, minor children who had unearned income and were taxed based on their parents' rates in those earlier
years do not recompute their tax liability when a parent makes an election to average income in a later year. With respect
to an election year, if minor children have unearned income and are taxed based on their parents' rates, the applicable tax
rate is the rate determined after the parent makes an income averaging election.
21.6.4.4.9.1 (10-01-2009)Taxable Income from Farming or Fishing and Elected Farm Income
Taxable income from a farming business, as defined in IRC § 263A(e)(4), or fishing includes all of the items listed below
that are attributable to any farming or fishing business: Income
A landlord's crop share income reported on Form 4835, Farm Rental Income and Expenses, is eligible for income averaging under certain circumstances. Taxable income from farming does not include gains or losses from the sale or other disposition of land.
Elected farm income is the amount of taxable income attributable to a farming or fishing business that the taxpayer elects
to include on line 2 of the Schedule J.
21.6.4.4.9.2 (10-01-2009)Adjusting Schedule J
Input the adjustment to tax with a TC 290 / TC 291. Use Reason Code 046 and appropriate Source Code and Blocking Series.
21.6.4.4.9.3 (01-10-2014)USDA Discrimination Settlement Payments
The United States Department of Agriculture (USDA) paid cash settlements and granted loan cancellations to various groups
of farmers pursuant to settlements approved throughout the years. The settlements resulted from discrimination suits brought
against the USDA by the farmers.
Taxpayers may use terms other than "USDA"
when communicating about these claims. Some of the other terms frequently used are: Pigford vs. Glickman
These are NOT Group or Class-Based Reparation Claims. See IRM 21.6.6.3.1, Group or Class-Based Reparation Claims, for more information. For 99% of the Pigford claimants, the settlement amounts fell into three categories: $50,000 cash payment
A payment toward tax equal to 25% of the total of the $50,000 payment and the forgiveness of the debt principal (but not the
interest). Note:
For Keepseagle/Native American and Pigford II claims, see (6) and (7).
Most taxpayers received these payments over a period of two years, the cash payment and the debt forgiveness occurred in one
year, and the tax payment was remitted to IRS in the following year. The cash payment and the tax payment (the 25% amount)
are taxable income. The forgiveness of debt is generally taxable income, but may be excludable under certain circumstances.
If the taxpayer uses the cash method of accounting, the taxpayer must report the tax payment (the 25% payment) as taxable
income for the year when the payment was applied to the taxpayer's account.
The payment of tax (25% payment): Must be claimed as an estimated tax payment for the tax year the settlement/debt forgiveness was received.
Identify the payment by the unique Document Locator Number (DLN) of 52217 or 43217 (013/014) 9XX. If the farmer does not claim the estimated tax payment, the tax module will show a J - Freeze. See IRM 21.5.6.4.19, J - Freeze.
Keepseagle and Pigford II settlements were divided into two categories:
Both Track A and Track B claimants were issued a Form 1099-MISC, Miscellaneous Income, along with an instructional notice prepared by a third party (not the IRS) advising the farmer how to correctly report the
settlement. Farmers who had debt forgiveness received a Form 1099–C, Cancellation of Debt.
Refer to the table below to work settlement cases: If ...
This is a USDA Cash Settlement payment.
The taxpayer reports only the settlement income (no expenses) on Schedule F, "Other Income"
line, or on Form 1040, line 21. Note:
This amount is not subject to Self- Employment Tax. The farmer is engaged in the business of farming. This amount is subject to Self- Employment Tax. Farmers receiving this payment may benefit from filing Schedule J, Income Averaging for Farmers and Fishermen.
This is a loan cancellation of: debt principal for cash or accrual taxpayers, or
This cancellation of debt is considered farm income. Report the amount on the "Other Income"
line of Schedule F and identify as "USDA Settlement."
Farmers receiving this payment may benefit from filing Schedule J (Form 1040).
The taxpayer reports only the loan cancellation on Schedule F, "Other Income"
line (no expenses).
This amount is not subject to Self-Employment Tax. The farmer was engaged in the business of farming. This amount is subject to Self-Employment Tax.
The farmer was insolvent at the time the loan was cancelled or if the loan was qualified farm debt.
Loan cancellation amounts may qualify for exclusion. Refer to Publication 908, Bankruptcy Tax Guide, and Publication 225, Farmer's Tax Guide, for exclusion criteria. File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with the Form 1040, U.S. Individual Income Tax Return, to claim the exclusion.
All claimsThe taxpayer's account was not properly credited with the estimated tax payment or withholding
The payment or withholding cannot be verified
Complete Form 4442, Inquiry Referral, and refer the case to Kansas City. Include a day and evening phone number for the taxpayer. Fax to Kansas City P&A, Teresa
Olsen, at 816–292–6276.
21.6.4.4.10 (01-10-2014)Form 8615, Tax for Certain Children Who Have Unearned Income For Form 8615, Tax for Certain Children Who Have Unearned Income, unearned income includes all income except earned income. Earned income includes:
The child's tax is the greater of: The tax at the child's tax rate on the child's taxable income, or
The total obtained by adding the tax computed in the bullet above (an amount equal to the child's taxable income minus the
child's net investment income), plus the child's share of (4) below.
Unearned income is the (adjusted gross income minus earned income) minus the larger of: $2,000 for 2013 and 2014 ($1,900 for
2009, 2010, 2011, and 2012) or, if the child itemizes deductions, $1000 ($950 for 2009, 2010, 2011, and 2012) plus the amount
of itemized deductions directly connected with the production of the child's unearned income). The allocable parental tax is the tax that would be imposed if the parents' taxable income included the net investment income
of all the parents' children meeting the age requirements shown below at the end of the tax year, minus the tax that would
otherwise be imposed on the parent. A child is considered under age 18 at the close of the taxable year. Note:
The parents' tax rate is higher than the child's
the parent does not elect to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends
The child's investment income is taxed at the parents' rate, Form 8615, Tax for Certain Children Who Have Unearned Income, ($2,000 for 2013 and 2014, $1,900 for 2009, 2010, 2011, and 2012) must be used to figure the child's tax. The parent elects to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends. IRM 21.6.4.4.11, Form 8814, Parents' Election to Report Child's Interest and Dividends.
Refigure the child's tax if, after filing the return, the parents' taxable income, filing status, or the net investment income
of the parents' other child(ren) changes. Form 1040X, Amended U. S. Individual Income Tax Return, must be filed if the child's tax changes.
For tax years beginning after 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income
Tax. See IRM 21.6.4.4.20, Net Investment Income Tax.
21.6.4.4.10.1 (01-10-2014)Form 8615, Tax for Certain Children Who Have Unearned Income, Tax Adjustments
Follow the procedures in IRM 21.5.3, General Claims Procedures, if Form 8615, Tax for Certain Children Who Have Unearned Income, is missing or incomplete. Address any correspondence, regarding this return, to the taxpayer (child), in care of the parent(s).
Adjustment action required: Math verify the Form 8615.
Update the entity to add "MINOR"
to the taxpayer's (child) name if the child is still a minor.
Add the parent's name(s), if available, as a second name line.
Use reason code 099, the appropriate blocking series and source code. 21.6.4.4.10.2 (01-10-2014)Parents' Tax Information Requested
A taxpayer (child) or a legal representative may request the parents' tax return information to complete Form 8615, Tax for Certain Children Who Have Unearned Income. The Service will supply the information upon request. The request must be: Signed by taxpayer, or a legal representative. A valid Power of Attorney or proof of legal guardianship must accompany the
The request must contain: A statement of intent to comply with IRC § 1(g).
Proof the child is under age 18 (e.g., birth certificate). Evidence of unearned income over $2,000 for 2013 and 2014($1,900 for 2009, 2010, 2011, and 2012) (e.g., copies of current
Forms 1099, or prior year return accompanied by an explanation of why Forms 1099 are not available).
The parents' return information (name, address, TIN, and filing status, if available). Sufficient information must be provided
to identify the parents' account.
These requests are worked in the paper Adjustment function. Verify all information is present upon receipt of the request.
21.6.4.4.10.3 (01-10-2014)Rejecting Form 8615, Tax for Certain Children Who Have Unearned Income
Reject incomplete requests using Letter 1275C, Photocopy Request Response, or Letter 135C, Power of Attorney Needed to Furnish Information. Advise the taxpayer: The request is not processable
Reject the request if the requester did not make a sufficient attempt to obtain the parents' information. Contact the Disclosure
Function for assistance at 866–591–0860, if unable to determine if the requester's attempt was sufficient.
Do not honor the request if the requester does not meet the requirements of IRC § 1(g). Close the case.
State the following in the letter: "We are unable to process your request since you did not establish you need the requested
information for filing your return. IRC § 1(g) applies if you are under age 18 and you have unearned income of more than ."
($2,000 for 2013 and 2014, $1,900 for 2009, 2010, 2011, and 2012)
21.6.4.4.10.4 (01-10-2014)Processable Forms 8615, Tax for Certain Children Who Have Unearned Income
Upon receipt of a processable request, take the following actions: Advise the requester to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Is processable
Is received prior to the return due date or there is a posted extension
The return is NOT posted
Input TC 930. Notify the requester of the reason for the delay and the approximate date we can supply the information.
Is received after the return due date
The return is NOT posted and there is no posted extension
Notify the requester we cannot satisfy the request and why.
Upon receipt of the parents' return, prepare a response to the taxpayer. The response must include the: Parents' name, Social Security number, and filing status
21.6.4.4.11 (01-10-2012)Form 8814, Parents' Election to Report Child's Interest and Dividends The parent of a child may elect to include the gross income of the child in the parents' gross income. The child is not required
to file a return if the parents make the election. The following conditions apply: The gross income must be from interest and dividends only (including Alaskan Fund Dividends)
For 2013 and 2014, the gross income must be more than $1,000 and less than $10,000 (for 2011 and 2012, the gross income must
be more than $950 and less than $9,500) No estimated tax payments were made in the name or TIN of the child
The parents' tax is the total of: The income tax determined after adding the child's income in excess of $2,000 to the parent's income, plus
The lesser of $100 or 10% of the child's income over $1,000.
21.6.4.4.11.1 (12-09-2005)Form 8814, Parents' Election to Report Child's Interest and Dividends, Adjustments
A separate Form 8814, Parents' Election to Report Child's Interest and Dividends, must be prepared for each child whose income is reported on the parents' return. If the return is missing or incomplete,
refer to IRM 21.5.2, Adjustment Guidelines. Take the following action on complete forms: Math verify the Form 8814, Parents' Election to Report Child's Interest and Dividends, line by line.
Use reason code 033, the appropriate blocking series and source code. 21.6.4.4.12 (10-01-2014)Alternative Minimum Tax (AMT) Changes
Married filing joint / Qualified widow(er)
Taxpayers can offset the entire regular tax liability and AMT liability by personal nonrefundable credits. 21.6.4.4.13 (02-08-2013)Alternative Minimum Tax (AMT), child Under Age 18
See table below for details: If ...
The alternative minimum tax exemption is earned income plus $7,150 for a child under 18 years of age, or a child age 18 or
a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
The alternative minimum tax exemption is earned income plus $6,950 for a child under 18 years of age, or a child age 18 or
The alternative minimum tax exemption is earned income plus $6,800 for a child under 18 years of age, or a child age 18 or
a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support. Tax Year 2010
The alternative minimum tax exemption is earned income plus $6,700 for a child under 18 years of age, or a child age 18 or
a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support. Note:
Follow normal adjustment procedures if an amended return is received changing the AMT computation. See Publication 929, Tax Rules for Children and Dependents, for additional AMT information.
21.6.4.4.14 (10-01-2012)Who is Subject to Self-Employment Tax
Taxpayers that maintain a trade or business must pay Self Employment (SE) tax on net earnings of $400 or more. The SE Tax
does not apply to amounts earned by: Nonresident aliens, unless an international social security agreement applies
Members of the clergy who filed and had approved Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science
Public officials, except for public officials compensated solely on a fee basis whose services are not covered by a Section
The SE tax generally applies to the net earnings of self-employed persons (such as sole proprietors or partners), and not
to earnings received by employees.
Income items included in computing SE tax are reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), Schedule C–EZ, Net Profit or Loss from Business (Sole Proprietorship), Schedule E, Supplemental Income and Loss, Part II, and Schedule F, Profit or Loss From Farming, or sometimes as "other income"
on Form 1040, U.S. Individual Income Tax Return. Note:
Form 1040 Instructions specifically provide that income from self-employment should not be reported as "other income"
or reported on Schedule E, Part I.
21.6.4.4.14.1 (10-01-2013)Self-Employment Tax
The Social Security Administration (SSA) determines social security benefits based, in part, on the tax reported on Schedule
SE, Self-Employment Tax. Usually taxpayers must pay self employment (SE) tax on all net earnings if over $399.99, regardless of age, even if receiving
social security or Medicare benefits (See Publication 17, Your Federal Income Tax, for exceptions).
The Medicare portion of the SE tax (2.9%) applies to all earnings from self-employment, even if the maximum amount to which
social security tax applies is reached.
SE tax is entered on the appropriate line of Form 1040, U.S. Individual Income Tax Return. Taxpayers subject to SE tax complete either the Short Schedule SE (Section A) or the Long Schedule SE (Section B). It may be beneficial for the taxpayer to use the optional method for computing SE tax to obtain social security credit (Part
II, Schedule SE, Section B).
Taxpayers filing jointly must file separate Schedules SE if they both have self-employment income. However, if one spouse
qualifies to use Short Schedule SE and the other must use Long Schedule SE, then both taxpayers can use the same form.
For tax year 2013 and subsequent, taxpayers may be subject to an additional .9% Medicare tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.
21.6.4.4.14.2 (01-03-2013)Self-Employment Tax Adjustments
Taxpayers may file an amended return to correct self employment (SE) income and SE tax originally reported. Verify the changes
against the tax account information. Research the returns and records of accounts as needed. Correct the SE income and SE
tax by the following input: TC 29X for the adjustment, which includes the SE tax change. Caution:
Item reference number 889 to increase or decrease the SE tax (line 5, Short Schedule SE, and line 12, Long Schedule SE). Item reference number 888 to increase or decrease the AGI, when applicable.
Item reference number 878 to increase or decrease the primary SE income (PRIM–SE–INCM) (line 4, Short Schedule SE, and the
smaller of line 6 or 9, Long Schedule SE).
Item reference number 879 to increase or decrease the secondary SE income (SECND–SE–INCM) (line 4, Short Schedule SE, and
the smaller of line 6 or 9, Long Schedule SE).
Item reference number 895 to increase or decrease the primary Medicare income (PRIM–MEDICARE–INC) (line 4, Short Schedule
SE, and line 6, Long Schedule SE).
Item reference number 896 to increase or decrease the secondary Medicare income (SECND–MEDICARE–INC) (line 4, Short Schedule
Use RC 044 when adjusting SE tax. Note:
Combined wages, tips and net earnings, up to the amount shown in the table below, are subject to any combination of the 12.4%
social security part of SE tax, social security tax or railroad retirement (tier 1) tax. Combined wages, tips and net earnings are subject to any combination of the 2.9% Medicare part of SE tax, social security
tax or railroad retirement (tier 1) tax. There is no income limit when computing Medicare tax.
When self-employment income exceeds the yearly limitation, or when Medicare is less than the self-employment income, the adjustment
will result in an unpostable condition 189, reason code 8.
Item reference number 878 or 879 cannot exceed $117,000.
Item reference number 878 or 879 cannot exceed $113,700.
Item reference number 878 or 879 cannot exceed $110,100.
Tax Year 2009, 2010 and 2011
Item reference number 878 or 879 cannot exceed $106,800.
PL 111-312, Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, created a payroll / self-employment
tax holiday period during 2011 which reduces the social security tax from 12.4% to 10.4%.
PL 112–96, Middle Class Tax Relief Act of 2012, extended the reduced social security tax from 12.4% to 10.4% to Dec. 31, 2012.
21.6.4.4.14.3 (10-02-2009)Self-Employment Tax Not Reported
DO NOT assess self-employment tax unless a taxpayer reports it on an amended, superseding or supplemental return or a late reply
to a Submission Processing Error Resolution request is received, such as a Schedule SE. Math error authority is not applicable to unreported SE tax.
Self-employment tax may ONLY be assessed by Examination through statutory notice of deficiency procedures. Exception:
Self-employment tax may be assessed up to the amount of EITC claimed on original returns. For more information see IRM 21.6.3.4.2.7.7,
EITC and SE Tax.
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The Examination function will determine if the income is subject to SE Tax and take the following action:
The case will be returned to you.
subject to SE tax
The case is selected by examination and not returned to originator.
21.6.4.4.14.4 (12-29-2009)Self-Employment Tax Adjustment Records Sent to Social Security Administration Data from adjustments to self employment (SE) tax is sent to Social Security Administration (SSA) electronically. SSA notifies
the Internal Revenue Service if there are discrepancies in adjustment data. Examples of possible discrepancies are: SE tax incorrectly computed on SE tax earnings limit, less the taxpayer's net profit, rather than on the net profit.
If a taxpayer contacts the IRS about SSA not having record of self employment income, the taxpayer must be able to provide
proof of the income and proof of timely filing to SSA. A transcript of the year in question will provide the required information.
The taxpayer must take the transcript to their local SSA office for the records to be updated.
21.6.4.4.14.5 (10-01-2014)Form 4137, Social Security and Medicare Tax on Unreported Tip Income Taxpayers earning $20 or more in tips in a calendar month: Are required to report the income to their employer. Must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, if the tips are not reported to their employer or they have tips allocated to them by the employer.
Taxpayer files an amended return reporting tip income and tax, without a Form 4137 : If
Sufficient information is provided
Prepare Form 4137, Social Security and Medicare Tax on Unreported Tip Income.
Follow procedures in IRM 21.5.3, General Claims Procedures.
If a loose Form 4137 is received and it cannot be determined if the tips and tax were included on the original return: Research Command Code (CC) RTVUE.
21.6.4.4.14.6 (03-22-2013)Form 4137, Social Security and Medicare Tax on Unreported Tip Income, Adjustments
Input the following to adjust the account: TC 29X to adjust the tax.
Item reference number 891 to increase or decrease primary unreported tip income (PRIM–UNRPRTD–TIP–INC). Item reference number 892 to increase or decrease secondary unreported tip income (SECND–UNREPRTED–TIP–INC). Note:
Line 6, on Form 4137, is the item reference number 898 or 899 amount. When tip income exceeds the yearly limitation, or when Medicare is less than the tip income, the adjustment will result in
an unpostable condition 189, reason code 8.
Item reference number 891 or 892 cannot exceed $117,000.
Item reference number 891 or 892 cannot exceed $113,700.
Item reference number 891 or 892 cannot exceed $110,100.
Item reference number 891 or 892 cannot exceed $106,800.
21.6.4.4.15 (10-01-2010)Workers Whose Employers Qualify Under the Revenue Act of 1978, Section 530
Certain employers who qualify under the Revenue Act of 1978, Section 530, are allowed to treat their workers as other than
employees (such as independent contractors). Note:
A taxpayer's qualification for Section 530 treatment is determined irrespective of whether the workers are employees under
An employer that must issue any required information forms (such as Form 1099–MISC) must issue this form instead of a Form
W-2 for the employer to continue to qualify.
The workers could be employees under the common law rules. If the workers are employees, the workers are not liable for self
employment (SE) tax on their earnings from the employer but are liable for the employee's portion of social security and Medicare
Workers may apply to determine their status as employees or independent contractors under the common law by filing Form SS-8,
21.6.4.4.15.1 (10-01-2013)Misclassified Workers to File Form 8919, Uncollected Social Security and Medicare Tax on Wages
Generally, a worker who receives a Form 1099-MISC for services provided as an independent contractor must report the income
on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly
treated as an independent contractor when he or she is actually an employee. When this happens, Form 8919, Uncollected Social Security and Medicare Tax on Wages, will be used beginning tax year 2007 where the employer did not withhold the worker's share of social security and Medicare
In addition, the worker must indicate which one of several reasons they were an employee while performing the services that
applies to them. The reasons include: The worker has filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating they are an employee of the firm.
The worker received a Form W-2 and a Form 1099-MISC from his employer. The amount on Form 1099-MISC should have been included
as wages on the Form W-2.
By using Form 8919, the worker's social security and Medicare taxes will be credited to their social security record. To facilitate
this process, the IRS will electronically share Form 8919 data with the Social Security Administration.
In the past, mis-classified workers often used Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report their share of social security and Medicare taxes. Mis-classified workers should no longer use this form for 2007
and subsequent years. Instead, Form 4137 should now only be used by tipped employees to report social security and Medicare
taxes on allocated tips and tips not reported to their employers.
21.6.4.4.15.2 (05-21-2008)Processing Claims for Refund of Self-Employment Tax by Individual Claiming to Be an Employee
Claims for refund of Self-Employment (SE) Tax by an individual claiming to be an employee who was treated as an independent
contractor must include either: A determination letter from the Internal Revenue Service holding that the taxpayer is an employee, or
Forward the form to the appropriate function (follow local procedures). Advise taxpayer the Form SS-8 was forwarded for consideration and to resubmit the claim if a favorable determination is received.
An incomplete claim is received without substantiation
The claim indicates taxpayer received a favorable determination or a corrected Form W-2.
Correspond for the missing information.
The claim does not indicate taxpayer received a favorable determination or corrected Form W-2.
See IRM 21.7.2.5.3, Employee-Employer Status Determinations, for additional information.
21.6.4.4.15.3 (10-01-2004)Adjustment Considerations
Compensation paid by the payer shown in the determination letter, or by the payer shown in the corrected Form W-2 and was
previously reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), must be included as wages.
The deduction for the self employment (SE) tax must be added back to the adjusted gross income. Social security and Medicare tax must be computed on the compensation.
Refer the case to Exam as Category A if the Schedule C deductions included any of the following: Cost of goods
21.6.4.4.15.4 (01-29-2009)Processing Complete Claims — Revenue Act of 1978, Section 530
For 2007 and subsequent, process complete claims (with the necessary substantiation) as follows: If
Self employment (SE) tax was previously assessed
Math verify Form 8919, Uncollected Social Security and Medicare Tax On Wages. Prepare a dummy Form 8919, if not attached to the claim. Use the SE tax to offset the employee share of FICA now due (unless withheld by the employer via an adjustment and shown on
corrected Form W-2) and input TC 29X to net the difference. Decrease the SE income (SE–INC and MEDICARE–INC to zero) and use item reference numbers 873 / 874, 878 / 879, 893 / 894 and
895 / 896. Note: Do not input item reference number 891 / 892 or 898 / 899. Use item reference number 889 to decrease SE tax to zero.
Follow procedures 1 and 2 above. Adjust taxpayer's account with TC 29X. Use item reference numbers 873 / 874 and 893 / 894 as appropriate.
Use Reason Code 024.CAUTION: Do not input item reference numbers 889, 878 / 879 or 895 / 896.
21.6.4.4.15.5 (03-22-2013)Form 8919, Uncollected Social Security and Medicare Tax on Wages - Adjustments
Credit reference number 873 to increase or decrease Primary Social Security Wages.
Credit reference number 874 to increase or decrease Secondary Social Security Wages. Note:
Credit reference number 893 to increase or decrease the Primary Total Wages Amount (Medicare).
Credit reference number 894 to increase or decrease the Secondary Total Wages Amount (Medicare). Note:
When social security income exceeds the yearly limitation, or when Medicare is less than the social security income, the adjustment
Item reference number 873 or 874 cannot exceed $117,000.
Item reference number 873 or 874 cannot exceed $113,700.
Item reference number 873 or 874 cannot exceed $110,100.
Item reference number 873 or 874 cannot exceed $106,800.
21.6.4.4.16 (10-01-2002)Accounting Period Change
Individual income tax returns cover an accounting period of either a: Calendar year — January 1 through December 31
Fiscal year — 12 month period ending on the last day of any month except December or a period of 52 or 53 weeks (always ending on the
same day of the week)
A taxpayer chooses an accounting period when filing the first tax return. It may never be longer than 12 months
Taxpayer must file Form 1128, Application to Adopt, Change, or Retain a Tax Year, to request a change
Forward original Form 1128, Application to Adopt, Change, or Retain a Tax Year, requests to the Entity function. The Entity function will determine whether a referral to Headquarters is required (e.g.,
fiscal year changes). The taxpayer's return may post to an incorrect period because of a processing error, such as: A calendar year return posting as a fiscal year return
A deceased taxpayers short year return posting as a calendar year return The tax year ending for a final short year return is the month and year of death. Enter computer condition code "Y"
on the return to prevent unpostable condition 162.
21.6.4.4.16.1 (10-01-2006)Resolving Accounting Period Changes
Take the following action: Request IMFOL/BMFOL to determine taxpayer's correct filing period.
If TC 17X is present on the module, input TC 171 to reduce to zero or, if applicable, adjust to the amount reported by the
taxpayer on the return. Transfer payments to the correct period, if necessary.
DO NOT zero out the tax on Statute years. Refer claims to the Statute function for clearance, if they involve adjusting accounts
and reprocessing return on Statute years. See IRM 21.5.2.4.23.4, Statute Imminent Documents.
Input an entity transaction to change the Fiscal Year Month (FYM) when taxpayer includes a copy of a previously approved Form
1128, Application to Adopt, Change, or Retain a Tax Year.
21.6.4.4.17 (10-01-2010)COBRA Premium Assistance
The American Recovery and Reinvestment Act of 2009 (PL 111-5), provides certain individuals who have been involuntarily terminated
a 65% reduction in the premium otherwise payable for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage
for themselves and their families for up to fifteen months (as extended by PL 111-118). Eligible workers have to pay 35% of
the coverage premium.
The premium assistance is not included in gross income. However, the eligibility for premium assistance phases out and is
recaptured as an increase in the individual's income tax liability. The phase-out impacts individuals whose modified adjusted
gross income exceeds $125,000, or $250,000 for those filing joint returns. The premium assistance is totally phased out for
taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for joint filers, and the full amount must be
repaid as an additional tax.
For more information on the COBRA premium subsidy and recapture, see Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit).
21.6.4.4.17.1 (10-01-2010)Repayment / Recapture of COBRA Premium Assistance
The American Recovery and Reinvestment Act (ARRA) of 2009 (PL 111-5) provides for the repayment / recapture of COBRA premium
assistance for high income taxpayers whose modified adjusted gross income exceeds $125,000, or $250,000 for joint filers.
Tax liability is increased, to achieve repayment of a portion of the premium assistance, for those taxpayers whose modified
adjusted gross income is between $125,000 and $145,000, or $250,000 and $290,000 for those filing joint returns. If the modified
adjusted gross income is $145,000 or more, or $290,000 or more for joint filers, the full amount of the premium assistance
(the 65% reduction of the COBRA premium the employer paid under ARRA) must be repaid as an additional tax. See Publication
502, Medical and Dental Expenses, for information on how modified adjusted gross income is determined for purposes of the recapture.
To determine the amount of additional tax, divide the amount of modified adjusted gross income over $125,000 by $20,000, or
the amount over $250,000 by $40,000 for joint filers. The percentage calculated, multiplied by the amount of premium assistance,
is the amount required to be repaid. Worksheet F in Pub 502 can also be used.
single taxpayer with a modified adjusted gross income of $135,000: $135,000 minus $125,000 equals $10,000. $10,000 divided by $20,000 equals 50%. If the employer provided the taxpayer with
premium assistance of $1500 under ARRA, the taxpayer must repay $750 (50% of the $1500).
joint filer with a modified adjusted gross income of $275,000:$275,000 minus $250,000 equals $25,000. $25,000 divided by $40,000 equals 62.5%. If the employer paid $1200 of the taxpayer’s
premiums as a subsidy under ARRA, the taxpayer must repay $750 (62.5% of the $1200).
To report the increase in tax from the recapture of the COBRA premium assistance, the taxpayer must write "COBRA"
on Form 1040, U.S. Individual Income Tax Return, line 60, and include the repayment in the total tax amount. To adjust an account for COBRA premium assistance, input Transaction Code 29X with reason code 107.
21.6.4.4.18 (07-14-2010)First-Time Homebuyer Credit
The Housing and Economic Recovery Act of 2008 (PL 110-289), enacted on July 30, 2008, allows a taxpayer who is a first time
homebuyer a refundable tax credit of the lesser of $7,500 ($3,750 for Married Filing Separate) or 10% of the purchase price.
The law is effective for qualifying homes purchased on or after April 9, 2008, and on or before December 31, 2008.
tax credit of the lesser of $8,000 ($4,000 for Married Filing Separate) or 10% of the purchase price. The credit is available
for first time homebuyers who purchased a home after December 31, 2008, and before December 1, 2009. The Worker, Homeownership and Business Assistance Act of 2009 (PL 111-92), enacted on Nov. 6, 2009, extends the eligibility
period to purchases before May 1, 2010. Taxpayers who have entered into a written binding contract before May 1, 2010, must
close on the home before October 1, 2010 to qualify. This bill also establishes a credit for long-time residents who purchase
a new home and sets out special rules for members of the Armed Services, Foreign Service officers and the intelligence community.
For homes purchased in 2008, the credit is treated as a no-interest loan. The credit is recaptured over fifteen years beginning
the second year after the home is purchased.
For homes purchased in 2009 and 2010, the taxpayer must repay the credit only if the home ceases to be the taxpayer’s main
For more information about claiming the First-Time Homebuyer Credit, see IRM 21.6.3.4.2.11, First-Time Homebuyer Credit.
21.6.4.4.18.1 (04-20-2012)Recapture of First-Time Homebuyer Credit
For homes purchased in 2008, the First-Time Homebuyer Credit is recaptured over a period of 15 years. The tax imposed is 6
2/3% of the credit taken. The additional tax is reported on Line 59b of Form 1040, U.S. Individual Income Tax Return. The recapture begins with the 2010 tax return. Example:
John purchased a home in 2008 and received a $7500 First-Time Homebuyer Credit (FTHBC). John must report his first repayment
of $500 on his 2010 return. If a taxpayer does not report the required 6 2/3% recapture amount ($500 when a $7500 credit is taken) on Form 1040, additional
tax will be assessed using math error procedures. If the home is disposed of or ceases to be the taxpayer's main home at any
time during the 15 years, see IRM 21.6.4.4.18.2, Acceleration of Recapture.
For homes purchased in 2009, 2010 or 2011, the credit does not have to be paid back unless the home is disposed of or ceases
to be the taxpayer’s main home within 36 months of the purchase date. See IRM 21.6.4.4.18.2, Acceleration of Recapture. Command Code (CC) ENMOD and CC IMFOL with definer code F will display the amount of credit taken and the amount of credit
recaptured. The recapture amount field starts at zero and increases to the amount of credit taken. Note:
When a joint Form 5405, Repayment of First-Time Homebuyer Credit, is filed, the credit and recapture amount will be split between the primary and secondary taxpayer. Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, with Part IV completed when repaying the credit on their 2010 return.
Form 5405 is not required to be filed with the 2011 and subsequent returns unless the taxpayer reports a disposition.
21.6.4.4.18.2 (03-22-2013)Acceleration of Recapture
For homes purchased in 2008, if the home is disposed of or ceases to be the taxpayer's main home before the end of the recapture
period, taxpayers generally must report all remaining annual installments in the year the event occurred. If the home is sold
to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the
gain, reduce the adjusted basis of the home by the amount of credit.
A taxpayer purchased a home in June 2008, and received a $7,500 credit. The home was sold in 2012 for a $10,000 gain. Since
$500 was recaptured on each of the 2010 and 2011 returns, $6,500 would have to be reported on the 2012 return.
Fred purchased a home in September 2008 for $100,000 and received a $7500 FTHBC. He sold the home to an unrelated person in
October 2009 for $95,000. The adjusted basis for the home is $92,500 ($100,000 - $7,500). Fred is required to repay $2,500
($95,000 - $92,500). The remaining $5000 is not required to be repaid.
A taxpayer purchased a home in 2008 and received a $7500 credit. The taxpayer moved in 2010 and continued to own the home
until 2011 when it was sold for a loss. Since the intent was to sell the home rather than convert the home to a rental property
or some other use, the sale of the home is the disposition. The taxpayer must repay $500 in 2010. In 2011, the taxpayer is
subject to accelerated recapture. Since the home was sold for a loss, the remaining $7000 is not required to be repaid.
For homes purchased in 2009, 2010 or 2011, if the home is disposed of or ceases to be the taxpayer's main home within 36
months of the purchase date, taxpayers generally must repay the credit in the year the event occurred. If the home is sold
Sarah purchased a home in 2009 and received a FTHBC of $8,000. She sold the home in 2011 for a gain of $8,500. Sarah must
report the entire $8,000 repayment on her 2011 tax return.
David purchased a home in 2009 and received a $6,000 FTHBC. He converted the home to a rental property in 2010. David is required
to report the entire $6,000 repayment on his 2010 return.
A gift of a home to a relative or non-relative, including a part-sale / part-gift, triggers full repayment of the credit.
The gain limitation does not apply to the taxpayer's repayment liability.
Year of conversion - installment payment of 1/15 of the lesser of the gain or allowed credit1st year after conversion - installment payments (1/15 of the lesser of the gain or allowed credit) continue2nd year after conversion -
2009, 2010 or 2011 purchase
Year of conversion and 1st year after - no repayment requirement2nd year after conversion - Replacement home - no repayment required at this time (must still meet the remainder of the 36 month own and use period)
Transfers between spouses / divorce - the spouse recieving the home is responsible for any repayment
Qualified official extended duty for members of the Armed Services, members of the Foreign Service of the United States, or
members of the intelligence community (dispositions or cessations after December 31, 2008 only)
Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, with the appropriate box checked in Part I with their Form 1040, U.S. Individual Income Tax Return. 21.6.4.4.18.3 (06-02-2011)Systemic Adjustments to the Recapture Amount
When a Form 5405, Repayment of First-Time Homebuyer Credit, is filed with a Form 1040, U.S. Individual Income Tax Return, the taxpayer's account is adjusted during processing. Transaction Code (TC) 971 Action Codes (AC) are systemically generated
when the First-Time Homebuyer Credit (FTHBC) and total recapture amounts are moved or eliminated.
The TC 971 action codes generate with indicators, shown on CC TXMOD as "XREF MFT"
, which provide descriptions of the systemic actions taken. See the table below.
00 - used to transfer the FTHBC and total recapture amount from an account to the primary SSN of another account.
01 - used to transfer the FTHBC and total recapture amount from the primary SSN to the spouse's SSN in the same amount and make
the spouse responsible for the entire credit.
02 - used to transfer the FTHBC and total recapture amount from the spouse's SSN to the primary SSN in the same account. 02
will also be used to zero out the spouse FTHBC and total recapture amount and make the primary responsible for the entire
05 - used to indicate the recapture amount was credited to the original account and should generate and post in the same cycle
00 - used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.
When the FTHBC is systemically moved from one spouse to another, a TC 290 will be generated containing all 8s in the blocking
series and serial number of the Document Locator Number (DLN).
Brian and Pam, both single taxpayers, purchased a home together in 2009 and split the $8000 FTHBC 50/50 on their individual
returns. In 2010, they marry and file a joint return with Brian as the primary taxpayer. The FTHBC entity under Pam's SSN
will be systemically moved to Brian's SSN. A TC 290 with all 8s in the blocking series and serial number will be found on
Pam's SSN.
When taxpayers claim the FTHBC on a joint return and then file separate returns in later years, the FTHBC entity will not be moved to the spouse. The appropriate tax will be captured on the spouse's account but the update to the FTHBC entity will
be reflected on the xref account.
When a Form 5405 with box 13e checked (transferred the home to my spouse or ex-spouse as part of a divorce settlement) is
filed, the entity is moved to the receiving spouse.
21.6.4.4.18.4 (10-01-2014)Manually Adjusting the Recapture Amount
When manually adjusting the FTHBC recapture amount, specific reference numbers must be used with each adjustment. The table
below lists the reference numbers associated with the recapture and the reason codes associated with them.
Adjusts the primary credit amount field. Indicates the primary FTHBC in the entity field was transferred to the spouse or
used to correct the primary credit amount. Input for the unpaid recapture amount. You must use one credit RC (109, 110, 125
or 126). The system will allow the input of one additional disposition RC (112 - 118 and 127).
Adjusts the primary total recapture amount field in the entity. RC 112 - 118 and 127. Use this when a disposition has occurred
and all or part of the recapture amount is not required.
Adjusts the repayment amount in the posted return section (TXMOD) and the total repayment field in the entity (IMFOLF). Used to update the recapture amount when a repayment has been made. RC 119, 120, 123, 132 and 133
RC 132 can be input with reference number 877 but does not update the recapture amount field on CC IMFOLF. RC 133 requires
the input of RC 119, 120 or 123.
Adjusts the year indicator in the entity. Input as .08, .09, .10 or .11 to indicate the year the home was purchased. RC 121
Adjusts the secondary credit amount field. Indicates the secondary's FTHBC in the entity field was transferred to the primary
or used to correct the secondary credit amount. Input for the unpaid recapture amount. You must use one credit RC (109, 110,
125 or 126). The system will allow the input of one additional disposition RC (112 - 118 and 127).
Adjusts the spouse's total recapture amount field in the entity. RC 112 - 118, 120 and 127. Use this when a disposition has
occurred and all or part of the recapture amount is being waived.
Since the FTHBC entity can move from one account to another depending on how taxpayers file, always check CC IMFOLF before
adjusting any account. If IMFOLF is blank, the FTHBC entity has been moved to the spouse's SSN. If separate returns are later
filed to repay the credit, or the joint return was filed under the spouse's SSN, multiple adjustments may need to be input.
Failure to use the above reference numbers when adjusting the account will result in IMFOLF being incorrect and could cause
possible harm to the taxpayer in the future.
When considering a recapture issue, in addition to reviewing the entity on IMFOLF, ensure the recapture field on TXMOD is
Jack and Jill file a joint return in 2008 claiming a $7500 FTHBC. In 2010, they file as Married Filing Separate. Since the
FTHBC entity is under Jack's SSN, if a recapture needs to be input on Jill's account, two adjustments will be required. A
TC 29X with reference number 877 and RC 132 would be used on Jill's account. A TC 290 .00 with reference number 877 and RC
120 will be input on Jack's account.
The above example should be followed any time tax is being adjusted on an account where IMFOLF is blank. RC 132 does not update
IMFOLF. Be sure to adjust the xref account to update the IMFOLF data.
The entity referred to in this table is CC ENMOD and IMFOLF.
First-Time Homebuyer Credit (2008)
First-Time Homebuyer Credit (2009 / 2010)
Requirement to repay the FTHBC not required. This is forgiveness for taxpayers who had a loss when the house was sold, foreclosed,
repossessed or abandoned, or who are only required to pay back part of the credit.
In situations where the primary recapture amount field needs to be updated but no other reason code will work, use RC 112
(example: transferring the secondary's entity from the primary account to the secondary account, the secondary taxpayer has
paid the required installment and the entity field on TXMOD already reflects repayment.
Requirement to repay the FTHBC not required. This is forgiveness for taxpayers whose home was destroyed, condemned, or disposed
of under threat of condemnation, and had a loss.
Repayment of FTHBC. Systemic use only. This is for taxpayers who converted their home to rental or business use.
FTHBC transferred to spouse. Transfer to spouse requested on Form 5405, Repayment of First-Time Homebuyer Credit.
Repayment of the FTHBC not required. This is forgiveness if the primary taxpayer is deceased.
Repayment of the FTHBC not required. This is forgiveness if the secondary taxpayer is deceased.
Requirement to repay the FTHBC not required. This is forgiveness when both taxpayers are deceased.
Repayment of FTHBC. Used when updating the primary entity section. 120
Repayment of FTHBC. Used when updating the spouse's entity section. Note:
When updating CC IMFOLF, if the current return is other than married filing jointly, use reference number 976 to update the
spouse's recapture amount.
Internal use only. Used to adjust the primary FTHBC year. Note:
Internal use only. Used to adjust the spouse's FTHBC year. See the note in RC 121 above.
Repayment of FTHBC. This updates the joint entity section.
First-Time Homebuyer Credit - This is for the repeat home owners.
First-Time Homebuyer Credit - This is for the military / foreign service / intelligence community.
Requirement to repay the FTHBC not required. This is for members of the military, foreign service or intelligence community.
Updates the FTHBC Recapture field on TXMOD when:
John and Mary file joint in 2008 and claim the FTHBC. In 2010, they file separate. CC IMFOLF is under John's SSN. To assess
Mary a $250 recapture, input RC 132 to adjust Mary's 2010 account. A second adjustment is required under Jonh's SSN to update
CC IMFOLF (IRN 976 RC 120).
Repayment of the FTHBC. This is for taxpayers whose home was destroyed, condemned, or disposed of under threat of condemnation,
and had a gain. See IRM 21.6.4.4.18.2(4), Acceleration of Recapture.
If the reason code used on the adjustment will not provide the taxpayer with a clear understanding of the action taken on
their account, suppress the adjustment notice and send a correspondex letter.
When adjusting the recapture amount, the adjustment is generally input on the year the recapture or disposition should have
been reported, not the year the credit was claimed. The recapture amount starts at zero and builds up to the amount of credit
taken. Annual installments and dispositions are captured in the recapture amount field.
Noah, a single taxpayer, purchased a home in 2008 and received a $7500 FTHBC. He sold the home in 2009 to an unrelated person
for a $4000 gain. Noah files an amended return in 2010 to report the sale. CC IMFOLF shows $7500 in the primary credit amount
field. When processing the amended return, the adjustment is input on the 2009 tax year using a TC 290 for $4000, RC 112 and
119, reference numbers 877 for $4000 and 876 for $3500.
Joe and Marie purchased a home in 2008 and received a $7500 FTHBC. They sold the home to an unrelated person for a $6000 gain
in 2009. CC IMFOLF shows $3750 in the primary credit amount and secondary credit amount fields. When adjusting the account,
input the adjustment on 2009 as follows: TC 290 $6000, RC 112 and 123, 877 $6000, 876 $750 and 976 $750.
Jennifer purchased a home in 2008 and received a $7500 FTHBC. She was unable to pay her mortgage and her home was foreclosed
on in September, 2009. Jennifer files an amended return in 2010 to report the loss due to foreclosure. When adjusting the
account, input the adjustment on 2009 as follows: TC 290 .00, RC 112 and 876 $7500.
David purchased a home in 2009 and received a $6,000 FTHBC. He converted the home to a rental property in 2010. David did
not report the disposition on his 2010 return. He later files an amended return to report the disposition. To adjust the account,
input a TC 290 $6000, RC 119 and reference number 877 $6,000 on the 2010 tax year.
When reporting a disposition, taxpayers are instructed to file Form 5405 with their original Form 1040 or Form 1040X, no other
documentation is required. Amended returns impacting multiple years do not require an amended return for each tax year. Example:
Taxpayer reports a $500 repayment on 2011, 2012 and 2013. He later files an amended 2011 return reporting he converted his
home to a rental and assesses the full repayment. The $500 repayment on 2012 and 2013 can be refunded without an amended return
being filed for those years.
If an amended return is received and the Form 5405 is not attached, see IRM 21.5.1.5.6, Incomplete CIS Claims. If a return was not filed for the period in which the disposition occurred, see IRM 21.5.1.4.4 , Processing of Loose Forms or Schedules. A Form 5405 received without a Form 1040X can be processed if it does not result in a change to tax, or if the form is received
in response to a math error notice. Responses to math error notices may impact multiple years, be sure to address all tax
years regardless if a math error was issued on the other years or not.
A taxpayer was assessed a math error for not reporting the $500 repayment on their 2013 return. The taxpayer responds with
a Form 5405 showing the home was sold for a loss in 2011. Based on the information provided, tax years 2011, 2012 and 2013
≡ ≡ ≡ ≡ ≡ ≡ When transferring the FTHBC from one account to another, the primary account must be zeroed out before the entity field can
be established on the cross reference (xref) account. When creating the xref entity field, use the appropriate reason code
and reference number 880 to indicate the year the home was purchased. When creating the FTHBC entity, if the recapture amount
field needs to be updated, the entity must post first. Use a posting delay code (PDC) 1 with the reference number 877 adjustment.When a disposition E (divorce) is reported, transfer the entire credit and repayment amount shown on CC IMFOLF to the gaining
John and Mary file Married Filing Jointly in 2008 and claim a $7500 First-Time Homebuyer Credit. The couple gets divorced
in 2016 and Mary gets the house as part of the divorce settlement. Neither John nor Mary reported the transfer or the recapture
on their 2016 return. Mary is now filing an amended return reporting a tax increase of $500. The recapture started with the
2010 tax return so John and Mary have made six payments totaling $3000. The entity field currently reflects a primary and
secondary credit amount of $3750 and primary and secondary total recapture amount of $1500. To remove the credit from John’s
account, input a TC 290 .00 with reference number 875 and 975 for $3750-, reference number 876 and 976 for $1500-, RC 115.
To create the entity on Mary’s account, input a TC 290 $.00, reference numbers 875 (since she is now the primary) for $7500,
and 880 for .08 (to show the home was purchased in 2008), RCs 109 and 121. Input a second adjustment consisting of a TC 290
$500, 876 for $3000 (the total amount repaid from the joint account), 877 for $500 (to show a $500 payment has been reported),
RC 115 and 119, PDC 1. When a taxpayer files an amended return reporting a divorce (Form 5405, line 3, box e) on Form 5405 which conflicts with the
cross-referenced spouse's reported divorce (disposition e), disallow the claim. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. If the taxpayer responds to the disallowance with divorce papers, see the table below. Math error authority can be used
to update the accounts.
For divorces, the disposition does not occur until the divorce is finalized. Until that time, each spouse is liable for their
share of the 1/15 repayment.
One individual was awarded sole ownership
Each individual is liable for 1/2 of the 1/15 repayment until the divorce was finalized. At that point, the individual awarded
ownership is liable for any remaining repayment.
Both individuals continue to have joint ownership after the divorce
Each individual is liable for 1/2 of the 1/15 repayment until the divorce was finalized. At that point:
If the original credit was $7500 and the divorce was finalized in 2012, the taxpayer would be liable for $250 in 2010 and
2011. In 2012, the taxpayer would be liable for $3,250.
One individual was awarded sole ownership but the divorce decree states the other individual must repay X amount
Follow procedures in the 1st If / Then. The dollar amount stated in the divorce decree is a civil matter.
For amended returns claiming the original First-Time Homebuyer Credit after the first installment was due, follow procedures
in IRM 21.6.3.4.2.11, First-Time Homebuyer Credit, to allow the credit. After allowing the credit, math error procedures must be used to assess a recapture on any return the
taxpayer would have been liable for had the credit been claimed on a timely filed return, unless amended returns were filed
When the FTHBC entity has been moved to a cross reference account and needs to be updated but no returns have been filed since
at least 2008, a TC 290 with the above reference numbers cannot be input. To update these accounts, the entity has to be systemically
updated. To trigger the systemic update:
Input "971"
in the "TC"
Input "512"
in the "TC971/151-CD"
Input the spouse's SSN in the "XREF-TIN"
Input the appropriate 2 digit MFT indicator in the "MISC"
field. See IRM 21.6.4.4.18.3, Systemic Adjustments to the Recapture Amount. Use MFT 00, 01 or 02 only.
Once the TC 971 is input, manually move the entity back to the originating SSN and post it as the secondary's entity. When
the cross reference taxpayer does file a return, the entity will again be systemically moved.
John and Mary have filed joint since 2008. In 2011 John died so Mary's portion of the entity was transferred to her SSN. Unfortunately
the recapture amount on Mary's account is incorrect. To correct her account, input the TC 971 action 512 on Mary's SSN, then
update the entity on John's SSN to show the correct amount in the secondary entity field.
Taxpayers can elect to pay the entire recapture amount all at once rather than pay it over the 15 year period. Taxpayers should
report this on the Form 5405, Repayment of First-Time Homebuyer Credit, filed with their Form 1040, U.S. Individual Income Tax Return. However, taxpayers may send in a payment rather than reporting the recapture on a return. If this happens, taxpayers must
file an amended return for the last return filed. When the amended return is received, assess tax for the amount of repayment
using a TC 298, reference number 877 for the same amount and RC 119, 120 or 123. Use the received date as the interest computation
Jim filed his 2008 tax return and received a $7,500 FTHBC. He reported $500 recapture on his 2010 and 2011 tax returns. In
Oct. 2012, Jim decides to repay the remainder of his credit. He needs to file an amended 2011 tax return, with Form 5405,
First-Time Homebuyer Credit and Repayment of the Credit, to report an additional $6,500 in tax.
Taxpayers have the right to have pre-paid installments refunded to them. In the example above, if Jim later decides he wants
the $6,500 he pre-paid refunded, he can file an amended return to do so. Any required installment that may have been skipped
because of the pre-payment, will have to be assessed using math error authority.
Dispositions reported after the statute expired for the tax year are allowable. Follow normal statute procedures when considering
tax adjustments and refunds.
A disposition reported in July 2014 showing the home was sold for a loss in 2010 - the taxpayer is not liable for any annual
installments beginning in 2010. Tax year 2010 can be updated to reflect the disposition, however, since the statute for 2010
is expired, no tax adjustment or refund is allowed on 2010. Repayments on tax years 2011, 2012 and 2013 can be refunded.
Ensure CC IMFOLF is updated to reflect the total credit amount as recaptured. However, if the taxpayer has unfiled returns,
the recapture amount required to be reported on those returns should not be reflected in the disposition amount.
21.6.4.4.18.4.1 (03-24-2014)First-Time Homebuyer Credit Recapture Math Errors
When a taxpayer fails to report a recapture, or reports an incorrect amount, a math error notice will be issued during original
processing. One of the following taxpayer notice codes will be assigned:
648 - According to our records a repayment installment for the First-Time Homebuyer Credit received when filling your 2008
tax return is due. This repayment installment should have been claimed as an addition to tax and claimed on the Individual
Federal Tax Return, Form 1040. We have calculated the repayment installment due and adjusted your total tax on page 2 of your
tax return. 649 - We changed the amount of First-Time Homebuyer Credit Repayment included in the total for total tax on page 2 of your
tax return. The error was in: 1. the computation of First-Time Homebuyer Credit Repayment line 16, Form 5405, and/or 2. the
addition of the amount from line 16, Form 5405 onto Line 60 of your Form 1040.
The Service has math error authority to assess or abate the 1/15 recapture amount, see IRM 21.5.4.4, Math Error Procedures Processing, for the appropriate actions. If the taxpayer's reported recapture amount is systemically refunded in error, assess up to
the amount that was required to be reported. Erroneous refund procedures should not be followed.
When a 1/15 recapture amount is assessed as a math error due to the taxpayer not attaching Form 5405 reporting a disposition,
the math error can be corrected upon receipt of the Form 5405. An amended return is not required.
The Service also has math error authority to assess or abate a repayment when a disposition has occurred. Example:
A taxpayer reported the home was sold for a $5000 gain but during processing only $1000 was assessed. Math error authority
can be used to assess the additional $4000.
If a taxpayer reports a repayment and the original FTHBC claimed on their previous return is later disallowed or reversed,
the same math error procedures can be used to correct the repayment.
Math errors may impact more than one tax year. Be sure to perform thorough account research and if needed, address all account
issues, not just the taxpayer's issue.
A taxpayer reported a military disposition on his 2011 return. A $500 math error was assessed on his 2012 return. CC IMFOLF
currently reflects a $7,500 credit and $1,000 recaptured. To correctly update this account, the recapture math error on 2012
should be reversed and then the disposition on 2011 should be recorded. To illustrate, on tax year 2012, input a TC 291 $500-, 877 $500- RC 119. On tax year 2011, input a TC 290 .00, 876 $7,000,
RC 127, PDC 1.
Taxpayers may submit divorce papers in response to a math error notice. If so, follow procedures in IRM 21.6.4.4.18.4 (6), Manually Adjusting the Recapture Amount, to determine liability.
21.6.4.4.18.5 (10-01-2013)Original Returns Claiming the First-Time Homebuyer Credit Filed After the RSED Expired
When processing an STEX transcript, review the module to determine if the taxpayer claimed the First-Time Homebuyer Credit
(FTHBC). Since the FTHBC is subject to repayment or recapture, depending on when the home was purchased, the account must be reviewed
in order to determine if the taxpayer benefited from the credit, and if so, how much. Any portion of the credit that did not
benefit the taxpayer must be disallowed.
Review CC TXMOD or CC IMFOLT to see how much credit the taxpayer was allowed. The credit can be identified by a TC 766, reference
Subtract any refundable credit from the total tax. Note:
Refundable credits are applied in the order shown on the Form 1040. Example:
For tax year 2008, the order of credits is withholding, ES payments / credit elect, EIC, excess social security, ACTC, extension
payment, credits from Form 2439 / 4136 / 8801 / 8885, FTHBC and RRC.
If the tax is not paid prior to applying the FTHBC, the taxpayer did benefit from the credit and a portion of the credit may
The total tax on the module is $5000, withholding $2000 and FTHBC $7500. After subtracting the withholding from the tax, $3000
of the FTHBC is applied to the tax. The taxpayer has a $3000 benefit. $4500 would be disallowed.
Partial disallowance- Since $2,500 of the $7,500 First-Time Homebuyer Credit claimed was applied to the tax reported on your return, we have disallowed
the $5,000 that could not be refunded you. Your annual repayment is 1/15 of the $2,500.
21.6.4.4.18.6 (10-01-2013)First-Time Homebuyer Credit Soft Notices and Web Tool
Soft notices were developed to educate taxpayers about their FTHBC repayment responsibilities. The notices were sent August
- December of 2010, just in time for the upcoming filing season. The soft notices were:
CP 03A, Repaying your First-Time Homebuyer Credit, sent to taxpayers who purchased a home in 2008. The notice explains the credit is like an interest free loan and has to
be repaid over 15 years.
CP 03B, Important information for your records, sent to taxpayers who purchased a home in 2009 or 2010. The notice informs taxpayers their credit does not have to be repaid
as long as the home is not disposed of or does not cease to be the taxpayer's main home for at least 3 years from the purchase
CP 03C, Important message about your First-Time Homebuyer Credit, sent to taxpayers when our records indicate a change to their property (converted to a rental or business use, sold, destroyed
or condemned).
CP 03A and CP 03B were made obsolete in 2011.
For inquiries about these notices:
Taxpayer's contact is in regards to CP 03C
Needs clarification of tax law
Refer to Form 5405 Instructions, Publication 523 or Publication 17, as appropriate.
Agrees with the notice
Advise the taxpayer to report the disposition on his / her 2010 Form 1040
Tell the taxpayer how to complete Form 5405, First-Time Homebuyer Credit and Repayment of the Credit
Disagrees with the notice
Advise the taxpayer no action is required on their part at this time but the IRS may contact them at a later date and they
can provide additional information at that time.
If a notice is returned as undelivered:
research IDRS for a better address or use the yellow address change sticker provided by the U.S. Postal Service
compare the yellow label entity to the name on Command Code ENMOD or IMFOLE to verify it is the same taxpayer
remail the notice if you have a more current address
include a Form 8822, Change of Address, with the mailing
destroy as classified waste if a better address is not found
Effective January, 2012, a new web tool called the First-Time Homebuyer Credit Account Look-up is available on the IRS web
site. The tool replaces the need to issue the CP 03A and CP 03B.
The web application provides account information that will assist taxpayers to accurately self report their FTHBC repayment
obligations on their tax returns. Taxpayers are required to self authenticate to access their account information. Self authentication consists of inputting
their SSN, date of birth and complete address.
The account information screen will display the last 4 digits of the taxpayer's SSN, original credit amount, annual repayment
amount, total amount paid and the total balance left to be paid. Taxpayers are directed to contact the Service by calling 800-919-0352 if the following occurs:
Research the account(s) and provide the requested data.
No Data / Duplicate Record
Research the primary and secondary SSN and provide the requested data. If a duplicate condition exists on CC IMFOLF, correct
the duplicate condition. See IRM 21.6.4.4.18.4, Manually Adjusting the Recapture Amount, for the appropriate RC and reference numbers to use.
The FTHBC was originally claimed on a joint return. The primary taxpayer is deceased. CC IMFOLF on the primary SSN shows the
a $7500 credit split 50/50 between the husband and wife. The primary recapture amount is $3750, the secondary recapture amount
is $250. On the wife's SSN, CC IMFOLF shows a primary credit of $3750 and a $250 recapture. The secondary credit and recapture
amount on the primary account (the deceased taxpayer's SSN) should be zeroed out to correct the duplicate condition.
Technical Difficulties / System Unavailable
21.6.4.4.19 (04-07-2014)Additional Medicare Tax
The Affordable Care Act added an Additional Medicare Tax (AdMT) for tax years 2013 and subsequent. The 0.9% tax applies to
income subject to the Federal Insurance Contributions Act (FICA), the Railroad Retirement Tax Act (RRTA) and/or the Self-Employment
Contributions Act (SECA).
The 0.9% tax applies to individuals' wages (which includes Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and Form 8919, Uncollected Social Security and Medicare Tax on Wages), RRTA compensation and self-employment income above a threshold based on their filing status. Unlike traditional Medicare
tax, AdMT is only imposed on earnings that exceed a certain threshold and employers only withhold AdMT on wages that exceed
AdMT is calculated on Form 8959, Additional Medicare Tax, and is carried over to the "Other Taxes"
Although AdMT is figured separately for each type of income, the threshold amount for self-employment income in Part II is
reduced by the total wages in Part I (but not below zero), which results in the total wages and self-employment income being
subject to the 0.9% AdMT. However, the threshold for railroad retirement compensation is not reduced by other income, which
can result in a taxpayer with total earnings that are over the threshold but not subject to the 0.9% tax.
J and K are married and file jointly. J has $190,000 in wages subject to Medicare tax and K has $150,000 in compensation subject
to RRTA taxes. J and K do not combine their wages and RRTA compensation to determine whether they are in excess of the $250,000
threshold for a joint return. J and K are not liable to pay AdMT because J's wages are not in excess of the $250,000 threshold
and K's RRTA compensation is not in excess of the $250,000 threshold.
Additional Medicare Tax withheld from wages will be reported on Form W-2, box 6. Additional Medicare Tax withheld from RRTA
compensation will be reported in box 14. These amounts will be carried to Form 8959 and included with the federal income tax
withholding on Form 1040.
Before adjusting AdMT, verify the Additional Medicare Tax posted in the "SSA AdMT"
and "RRB AdMT"
fields on Command Code (CC) TXMOD or IMFOLR.
The "SSA AdMT"
field combines lines 7 and 13 of Form 8959, the "RRB AdMT"
field is line 17 only.
Input Item Reference Number 863 to update the SSA AdMT amount field
Input Reason Code 136.
Programming does not allow IRN 863 / 864 or RC 136 to be input with any other IRN or RC. Until the programming can be updated
Apr. 1, 2015, AdMT adjustments have to be input separately.
21.6.4.4.20 (09-02-2014)Net Investment Income Tax
The Health Care and Education Reconciliation Act of 2010 (PL 111-152) added a Net Investment Income Tax (NIIT) under section
1411 of the Internal Revenue Code for tax years 2013 and subsequent. The NIIT applies at a rate of 3.8% to certain net investment
income of individuals, estates and trusts. Although section 1411 falls within Chapter 2A of the Code, entitled "Unearned Income
Medicare Contribution"
, the tax is not a payroll tax.
In general, net investment income includes interest, dividends, capital gains, rental and royalty income, certain annuities
and income from businesses in which the taxpayer is not an active participant. Investment expenses, such as brokerage fees
and rental property expenses, related to the net investment income are allowed. IRA distributions and employer pension annuities
are not net investment income, and therefore, not subject to the tax.
Some common types of income that are not net investment income include wages, unemployment compensation, self-employment income,
Social Security Benefits, alimony, tax-exempt interest, operating income from a non-passive business, IRAs and distributions
from certain Qualified Plans.
The 3.8% tax applies when taxpayers have net investment income and modified adjusted gross income (MAGI) above the following
Non-resident aliens (NRA) are not subject to the Net Investment Income Tax. A nonresident alien who is married to a U.S. citizen
or resident will be subject to NIIT if such NRA makes an election to file a joint return for purposes of NIIT. If spouses
elect to file a joint return under IRC § 6013(g) (where a nonresident alien is married to a U.S. citizen or resident at the
end of the tax year), or under IRC § 6013(h) (where at least one spouse was an NRA at the beginning of the tax year, but is
a U.S. citizen or resident married to a U.S. citizen or resident at the end of the tax year), they can also elect to apply
the joint return election for NIIT purposes.
A single taxpayer has wages of $180,000 and $15,000 of interest and dividends. The taxpayer’s MAGI of $195,000 is less than
the $200,000 threshold, thus no NIIT is due.
A single taxpayer has wages of $180,000 and received $90,000 from a passive partnership interest, which is considered net
investment income. The taxpayer’s total income is $270,000. The taxpayer’s total income exceeds the threshold of $200,000
by $70,000. Since the Net Investment Income Tax is based on the lesser of $70,000 or $90,000, the taxpayer owes NIIT of $2,660
($70,000 X 3.8%).
Before adjusting NIIT, verify the net investment income and the net investment income tax posted in the “NI Income” and “NI
Income Tax” fields on Command Code (CC) TXMOD or IMFOLR.
The “NI Income” field is the lesser of the net investment income or the excess of MAGI over the applicable filing status threshold
amount. The amount of income which is subject to the Net Investment Income Tax is captured on line 16 and net investment income tax
is captured on line 17 of Form 8960.
Programming does not allow IRN 861 / 862 or RC 137 to be input with any other IRN or RC. Until the programming can be updated
Jan. 31, 2015, NIIT adjustments have to be input separately.