4.19.15. Discretionary Programs

(1) This section is used by Small Business/Self Employed (SB/SE) and Taxpayer Services (TS) Campus Examination to review and process taxpayers’ correspondence received in response to examination notices. Other IRM chapters will be referenced throughout this IRM to provide specific guidance for individual topics. Examination employees are responsible for researching and utilizing information contained in all reference materials. Legal citations, form and letter references, and IRM references are reviewed and updated as necessary.

(2) IRM 4.19.15, Liability Determination, Discretionary Programs, contains information on examination procedures relative to the Exam Discretionary Programs. It provides a reference for common issues and related items that might be found on tax returns that are not compliant with the current tax laws and regulations for individual income tax returns and their related schedules.

(1) By law, the IRS has the authority to conduct examinations under Title 26, Internal Revenue Code, Subtitle F - Procedure and Administration, Chapter 78, Discovery of Liability and Enforcement of Title, Subchapter A, Examination and Inspection, which includes, but is not limited to, the following IRC sections:

• IRC 7602, Examination of books and witnesses

• IRC 7605, Time and place of examination

Note: Additional information related to conducting examinations is contained in Treas. Reg. section 601.105, in the Statement of Procedural Rules.

(1) Liability Determination - Discretionary Programs is used in Campus Examination Operations by managers, coordinators, examiners, and clerical staff to work, control, and monitor inventory for discretionary tax issues in both SB/SE and TS.

(2) The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see the Taxpayer Bill of Rights.

(1) Program Reviews:

• Campus program reviews are conducted to ensure case actions are in accordance with IRM procedures.

• Examination quality reviews are conducted using IRM 21.10.1, Embedded Quality (EQ) Program for Accounts Management, Campus Compliance, Field Assistance, Tax Exempt/Government Entities, Return Integrity and Compliance Services (RICS), and Electronic Products and Services Support.

• AIMS Centralized Information System (ACIS) reports are used by Headquarters Policy to review closure statistics and determine the effectiveness of each program.

(2) Program Reports:

• See IRM 4.4.27, Reports.

• See IRM 1.4.29, SB/SE Campus Exam/AUR, and TS Exam Operations.

• Embedded Quality Review System (EQRS) Reports are used by managers to evaluate employee performance and by program analysts to identify error trends and coding inconsistencies.

• National Quality Review System (NQRS) Reports are used by managers and program analysts to identify error trends.

(1) IRM 4.19.20, Automated Correspondence Exam (ACE) Processing Guidelines, is used for Campus Exam’s automated case creation, monitoring, and closure. Cases set up in ACE generate taxpayers’s correspondence. Procedures in this IRM are used to process these replies.

(2) Report Generation Software (RGS), is used by Campus Exam to open case controls, monitor incoming taxpayer correspondence, and manual review of case files.

(3) The Audit Information Management System (AIMS), under IDRS command code AMDIS is used to display taxpayer’s account information.

(1) Acronyms used within IRM 4.19.15 are shown in the table below:

(1) Other IRMs referenced within IRM 4.19.15 are:

(2) Helpful information can be found on the Exam Research Portal, located on SERP at: Exam Research Portal.

(3) Helpful information regarding specific correspondence Exam Project Codes can be found on SERP by accessing the Exam Project Code Search tool.

(1) Overview of the Education Tax Credits:

(2) The Hope Credit was available for tax years 2003 through 2008. The American Opportunity Tax Credit (AOTC) replaced the Hope Credit for most taxpayers starting with the 2009 tax year. However, a larger Hope Credit ($3,600 maximum) was available in 2009 for taxpayers meeting the special rules for the Midwestern disaster areas. In order to claim the Hope credit for 2009 a taxpayer had to:

• Claim the Hope Credit for at least one student attending an eligible institution in a Midwestern disaster area, and

• Choose not to claim the AOTC for any student in 2009.

(3) The American Opportunity Tax Credit (AOTC) was first available during the 2009 tax year.

(4) The Hope Credit, AOTC, and the Lifetime Learning credit are phased out (gradually reduced) if the taxpayer’s Modified Adjusted Gross Income (MAGI), is as follows:Hope Credit and Lifetime Learning Credit

(1) Taxpayers may claim a Tuition and Fees Deduction as an adjustment to income on Form 1040. Beginning in TY 2004 through 2020 certain Tuition and Fees deductions can reduce income, depending on the amount of the taxpayer’s modified adjusted gross income (MAGI) – if it does not exceed $65,000 ($130,000 for a joint return), $4000. In the case of a taxpayer whose MAGI is up to $80,000 ($160,000 for a joint return), $2000. In all other cases, the reduction amount is 0. See Pub 970, Tax Benefits for Education, for an explanation of the term, MAGI.

(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 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 cannot claim a Tuition and Fee expense for a student if they or anyone else claimed the Hope or Lifetime Learning Credit for that same student in the same tax year.

• Taxpayer cannot use the following expenses to claim the Tuition and Fee expense: 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.

  Note: For additional information, refer to Pub 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, Tuition Statement, is also acceptable as proof of payment if the issuer completes Box 1 of the form. (The educational institution is not required to complete Box 1. A different proof of payment is required if there is not an amount in Box 1. See above.)

(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.

  Note: In contrast to the Education Credits, expenses used for claiming the Tuition & Fees Deduction must have been paid by the person claiming the deduction. Payments made by the student or on their behalf by a third party are not considered to have been paid by the person who claims an exemption for the student. Compare to IRM 4.19.15.3.1.1, Education Tax Credits - Evaluating Taxpayer Responses. So, for instance, if a student pays their own expenses but can be claimed as a dependent on their parent’s tax return, then neither the student nor their parent may claim the Tuition & Fees Deduction.

• Ensure fees are for post-secondary courses.

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

• Disallow all other expenses other than tuition and fees.

(10) After the Taxpayer Certainty and Disaster Relief Act of 2019 extended the Tuition and Fees for tax year 2018, 2019, and 2020, Form 8917, Tuition and Fees Deduction, was revised in January of 2020 for taxpayers to retroactively claim the deduction for 2018.

(1) For the initial contact, send Letter 566-S/Letter 566-T for TDC cases, and Form 14809, Interest you Paid, to the taxpayer.

(2) The Form 14809 contains the following language: We need to verify that you are eligible to claim the deduction for Interest You Paid taken on Schedule A-Itemized Deductions. Please provide the following information to support the amounts claimed.

• Send copies of mortgage interest statements, equity credit lines/loans, land and mortgage contracts, and amortization schedules for loan outstanding. Send copies of cancelled checks, receipts or other evidence of payments made for the year under examination.

• Send copies of closing statement verifying points paid.

• Send copies of statements from financial institutions, investment brokerages or persons to verify your total investment interest deductions.

(1) If qualified, the taxpayer may claim the credit each year for part of the home mortgage interest paid. Form 8396, Mortgage Interest Credit, is used to compute the amount of the credit. If the certified indebtedness amount (loan) shown on the Mortgage Credit Certificate (MCC) is less than the total mortgage loan, the credit is figured on only the part of the interest paid that is applicable to the MCC loan.

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

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

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

(4) A three-year carry forward is provided IRC 25(e)(1)(A), for the unused portion of such credit caused by the limitation imposed by IRC 26(a), and IRC 25(a)(2)(A), as amended by Economic Growth and Tax Relief Reconciliation Act 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, Mortgage Interest Credit, should be used to assist in the calculation of the allowable credit amount.

(5) If the taxpayer itemized on Schedule A, they must reduce the home mortgage interest deduction by the amount of the Mortgage Interest Credit shown on Line 3 of Form 8396. They must do this even if part of that amount must be carried forward.

(6) If the taxpayer sells the home during the first nine years after the closing date, they may be required to recapture all or part of the benefit received from the program. See Pub 523, Selling Your Home, for more information.

(1) Use the following to evaluate taxpayer responses:

1. Determine that the taxpayer owns the home and is making the payments by reviewing the Mortgage Interest Statement from the lender on Form 1098, Mortgage Interest Statement, 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 certificate credit rate on the Mortgage Credit Certificate to ensure this is the 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 deduction and that they have properly reduced the interest deduction claimed by the amount of mortgage interest 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 claimed the District of Columbia First-Time Home buyer Credit as a Mortgage Interest Credit, see Form 8859, Carryforward of the District of Columbia First-Time Homebuyer Credit, for proper application of that credit and disallow the Mortgage Interest Credit.

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

(2) Tax Resources:

(1) An eligible child for the purposes of claiming Adoption credit is an individual who:

• Has not attained age 18, or

• Is disabled physically or mentally and unable to take care of themself

(2) Taxpayers may claim the credit for as many children as qualify.

(3) The proper year for claiming the adoption credit or exclusion depends on whether the eligible child is a citizen or resident of the United States (including U.S. possessions) at the time the adoption effort begins and whether the adoption is final or in process. See the following tables.

(4) NOTE: If the eligible child is not a U.S. citizen or resident, you cannot take the adoption credit or exclusion unless the adoption becomes final. See the following tables. Generally, foreign adoptions are either non-Hague adoptions or Hague adoptions. IRM 4.19.15.5.1, Eligible Child - Claiming the Credit or Exclusion, See the instructions for Form 8839, Qualified Adoption Expenses, for more information regarding foreign adoptions.

(1) IDRS CC DLITE, using the primary SSN, may provide information and identify filters fired. Examiners should research CC DLITE to assist in identifying the selection criteria. Examiners should refer to the tracking codes displayed on DLITE as guidance in evaluating the taxpayer’s documentation. Holding cursor over the rule, then hitting XMIT, will display the list of Adoption Credit rules. The tracking codes identifying the filters fired are:

• 0379 - The Federal Case Registry (FCR) file indicates the taxpayer is the custodial parent, non-custodial parent, or putative father.

• 0381 - 5 year look back period where the credit claimed and carried over to subsequent years exceeded the maximum allowable.

• 0383 - The primary and/or secondary taxpayer is the father or mother of the child, the date of birth of the child listed on the Form 8839 is less than a year after the update date on the Data Master(DM1)/Kidlink.

(2) Send Letter 566-S/Letter 566-T for TDC cases, as the initial contact letter (ICL) with a fill-in issue box for Adoption Credit.

(3) Form 14806, Adoption Credit Documentation Requirements, is sent with the ICL requesting Adoption Credit documentation.

(1) Taxpayers being audited must verify that a legal adoption has either been finalized or is in process. In addition, taxpayers must provide verification either of their expenses or of any special needs determination. If part of the credit claimed is a carryforward from a prior year, the taxpayer must provide a worksheet explaining how the carryforward was computed. As the credit was refundable for tax years 2010 and 2011, no carryforward is allowable for tax years 2011 and 2012.

(2) Proper documentation must be provided for each child claimed. Follow the guidelines below for acceptable documentation:

(3) Tax law requires the taxpayer to claim QAE that they pay for an In-Process adoption for the year after the expense is paid. Examiners need to be aware of the timing of the expense and that the documentation the taxpayer provides may be for a prior year.

(4) Qualifying adoption expenses include:

• Adoption fees

• Court costs

• Attorney fees

• Travel expenses (including amounts spent for meals and lodging) while away from home

• Other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child

  Note: An expense may be a qualified adoption expense even if the expense is paid before an eligible child has been identified. For example, prospective adoptive parents who pay for a home study at the outset of an adoption effort may treat the fees as qualified adoption expenses.

(5) Acceptable proof of expenses include checks and receipts showing proof of payment.

(6) The following expenses are not allowable and do not qualify for the Adoption Credit:

• That violate state or federal law

• For the purpose of carrying out any surrogate parenting arrangement

• For the adoption of a spouse’s child

• Paid using funds received from any federal, state, or local program

• Allowed as a credit or deduction under any other provision of federal income tax law

• Reimbursed by an employer

• Any other expense that is not directly related to, and whose principal purpose is not for, the legal adoption of an eligible child

(1) If the adoption is domestic and final, and is of a special needs child (as determined by the state where the adoption occurs), the taxpayer is entitled to claim the maximum amount of the credit (minus any amounts claimed for that child in a previous year) even if the taxpayer paid no qualified adoption expenses.

(2) A child meets the definition of special needs if all of the following statements are true:

• The child was a citizen or resident of the United States or its possessions at the time the adoption process began and

• A state (including the District of Columbia) has determined that the child cannot or should not be returned to their parents’ home and

• The state has determined that the child is unlikely to be adopted unless assistance is provided to the adoptive parents

(3) The taxpayer must provide both of the following documents when substantiating the credit for a special needs child. Do not request verification of any expenses:

1. Adoption certificate, report or final decree signed by a representative of the State Court showing the names of the adoptive child and parent and,

2. The state’s determination of special need designation. See (4) for acceptable documentation of the state's determination of special needs.

(4) The following are acceptable documentation of the state's determination of special needs (this list not all inclusive)

• A signed adoption assistance or subsidy agreement issued by the state or county

• Certification from the state or county welfare agency verifying that the child is approved to receive adoption assistance

• Certification from the state or county welfare agency verifying that the child has special needs

(5) Don’t confuse "children with special needs" for purposes of the adoption credit with the definitions of "children with special needs" for other purposes. Foreign children aren’t considered to have special needs for purposes of the adoption credit. Even U.S. children who have disabilities may not have special needs for purposes of the adoption credit. Generally, "special needs adoptions" are the adoptions of children whom the state’s child welfare agency considers difficult to place for adoption.

(1) The nonrefundable adoption credit allows any unused adoption credit to be carried forward for up to five years.

• For taxable year 2010, a refund was allowed for all adoption credit properly carried forward from 2005 through 2009. However, no adoption credit carried forward from 2010 into 2011.

• Adoption credit properly allowable for the first time in taxable year 2011 was refundable for that year. However, no adoption credit carried forward from 2011 to 2012.

• In 2012, the adoption credit reverted to being nonrefundable. Adoption credit properly allowable for the first time in 2012 will be allowed if the taxpayer has enough tax liability to use the credit. Any remaining allowable adoption credit will be carried forward to 2013 (the first year of the five-year carryforward period). Similarly, adoption credit first allowable in 2013 will be carried forward into 2014 if the taxpayer does not have enough tax liability to use all the allowable adoption credit in 2013. The same rule applies to later years. For example, adoption credit first allowable in 2014 will be carried forward into 2015 if the taxpayer does not have enough tax liability to use all the allowable adoption credit in 2014.

• Taxpayers claiming a credit carryforward must provide the same documentation for the carryforward years as a current year adoption. In addition to an explanation or worksheet showing how the carryforward credit was calculated, verification of the adoption and verification of qualified adoption expenses for all years is required.

(2) The year in which adoption expenses are first eligible to be claimed is the determining year for the maximum credit amount as well as the income limitation restriction. If the taxpayer qualifies for the full credit one year, they cannot increase that amount by carrying it forward to another year. Likewise, if they are limited or disqualified from taking the credit based on their MAGI, they cannot change that restriction, by moving the credit into another year. However, if the taxpayer pays additional adoption credit in a subsequent year, the allowable credit for those expenses is subject to the limitations for the year in which they are eligible to be claimed. Any allowable credit must always be reduced by prior credits taken for the same child.

(3) Adoption credit is allowable only if paid in connection with the adoption of an eligible child. Generally, an eligible child is an individual under the age of 18. The relevant date for determining a child's eligibility is when the adoption credit is paid. For example, suppose that adoption credit is paid in year 1, when the child is 16, and the adoption credit becomes allowable in year 2, when the child is 17. Suppose further that the adoptive parent has too little tax liability to use the credit in year 2 and that the credit carries forward into years 3 and 4. In year 5, the adoptive parent has enough tax liability to use the full carried-forward credit. The entire carried-forward credit will be allowable in year 5, even though the child who was adopted is now 20 years old.

(4) In order to claim adoption credit in the year it is first allowable, individuals must file as single, married filing jointly, head of household, or as qualifying widow(er). If the individual's filing status is married filing separately in the year that particular adoption credit first become allowable, the individual will never be eligible to claim a credit or exclusion for that adoption credit unless they file an amended return, using married filing jointly status, within the period of the statute of limitations. However, an individual who is married filing separately may claim an adoption credit carryforward from a prior year or years, provided that, if the individual was married in the year in which the adoption credit first became allowable, the individual filed a joint return for that year. For more information, see Topic 607, Adoption Credit and Adoption Assistance Programs, available at Topic No. 607 Adoption Credit and Adoption Assistance Programs.

(1) Adoption credit current and prior year limitations:Current and Prior Year Credit Limitations

(1) Prepare Letter 2194, Alternative Minimum Tax Proposal, and Form 4549, 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) should include the largest determinable amount(s) as adjustments and tax preference items when computing the AMT on Form 6251, Alternative Minimum Tax-Individuals.

(1) Cases in Project Code 0097 and Project Code 0098 are systemically processed using Automated Correspondence Exam (ACE) processing. The initial contact, Letter 566-S/Letter 566-T for TDC cases, is issued to the taxpayers and the cases are updated to Status 10 on AIMS. For guidance on initiating PC 0628 cases that are not initiated using ACE, refer to IRM 4.19.15.2, Child and Dependent Care Credit, paragraph (6).

(2) Whipsaw cases in Project Code 0059 are manually processed by preparing Letter 566-B/Letter 566-J for TDC cases, Form 4549 Report of Income Tax Examination Changes, and Form 886-H-DEP. The package is issued to taxpayers and the cases are updated to Status 22 on AIMS. The adjustments in the Examination Report include the disallowance of all duplicated 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. Refer to IRM 4.19.15.11.3, Related Taxpayer, before issuing the Examination Report.

(3) Refer to IRM 4.19.14.6.5, EITC - Personal Exemptions and Dependents, for rules on claiming a personal exemption or dependency exemption and for recommended supporting documentation.

(1) Refer to IRM 4.19.13.11, Taxpayer Replies, for procedures for processing replies from the taxpayer

(2) For a child of divorced or separated parents or parents who live apart at all times during the last 6 months of the calendar year, a noncustodial parent claiming a child as a dependent must file a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or substantially similar statement with their return, if the special rule for divorced or separated parents or parents who live apart applies. See Residency Test - Children of divorced or separated parents (or parents who live apart), in Pub 501, Dependents, Standard Deduction and Filing Information.

(3) Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, is a written declaration signed by the custodial parent releasing a claim to an exemption for the child to the noncustodial parent for a single year, a specified number of years, or all future years. The noncustodial parent must attach a copy of the signed Form 8332 or similar statement to their return for each year that the non-custodial parent is claiming an exemption for the child.

(4) The filing requirements for attaching Form 8332 or similar statement to the noncustodial parent's return are based upon the year in which the divorce decree or separation agreement went into effect:

(5) Effective for tax years after 2015, if the taxpayer’s claim for ACTC or AOTC is due to reckless or intentional disregard of rules and regulations, a 2-year ban may apply. If the claim is fraudulent, a 10-year ban may apply. The 2- and 10-year bans do not apply to the Lifetime Learning Credit or the tuition and fees deduction. See IRC 24(g)(1), IRC 25A(b)(4)(A) and IRM 4.19.14.7.1, 2/10 Year Ban - Correspondence Guidelines for Examination Technicians (CET).

(1) The scope of the examination must be expanded to include returns for taxpayers who, from previous audits, have been determined not to be entitled to the dependency deduction. Consideration must also be given to expanding the examination to returns of taxpayers who, based on analysis of internal information, may not be entitled to the dependency exemption. These cases should be likely to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and must be established on the Audit Information Management System (AIMS) under Project Code 0059 and started within 30 days from the closure of the previous audit. For related returns claiming EITC, refer to IRM 4.19.14.21.1, DUPTIN Related Taxpayers.

1. The workpapers on the initial audit must document the reasons the examination was expanded or why it was not expanded.

2. If opening the custodial TIN per Federal Case Registry (FCR) or the TIN of one of the child's parents per Kidlink, the initial audit must be closed as a “No Change” to tax.

(1) Pull IDRS cc IRPTR (Information Returns Processing Transcript Requests) if available.

(2) These cases will start in AIMS Status 10 through the Automated Correspondence Exam (ACE) system.

(3) Letter 718 will be the initial contact letter and will include Form 9549, Explanation of Other Income, which the taxpayer is asked to complete.

(4) Case processing:

If	Then
No response is received in 45 days to Letter 718	Prepare Letter 525/Letter 525-T for TDC cases, and report Form 4549.
No response is received to Letter 525/Letter 525-T for TDC cases	Prepare Statutory Notice of Deficiency (SNOD) from the information available.
Taxpayer responds to initial contact and income is determined to be self-employment income	Prepare Letter 525/Letter 525-T for TDC cases, Exam report and propose correct self-employment tax.
Taxpayer responds to initial contact letter with a Form 1040X agreeing that the income is from Self Employment	Close Case agreed. See IRM 4.19.13.11, Taxpayer Replies
Taxpayer substantiates the income is not from self-employment or the taxpayer is not liable for the employee share of FICA (Federal Insurance Contributions Act) tax	Close the case no change and issue Letter 590
Taxpayer claims an employee-employer relationship existed, but the employer did not withhold FICA tax	Request further information to show employee status. Consider referral to SB/SE Compliance Area Office if warranted. IRM 4.19.15.13, SS-8 Determination of Worker Status.
Taxpayer claims to be exempt from self-employment tax due to a previous filing of Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits	Research Master File to verify if indicator is on file. For a list of indicators, see IRM 4.19.6.3, Minister/Religious Waivers Overview. If no indicator, request approved copy of Form 4361, or Form 4029 from taxpayer.
Taxpayer has not retained approved copy of Form 4361 or Form 4029 and there is No indicator on Master File No verification of approval is available For a list of indicators, see IRM 4.19.6.3, Minister/Religious Waiver Overview.	Determine tax year form was filed. Research Master File entity information to verify indicator is on file. Pull return from files to see if exemption form is attached Continue with the proposed self-employment tax and issue appropriate letter per IRM 4.19.13.11.1, Taxpayer Responses - Prior to Status 24
Reply is a copy of an approved Form 4361 but the MIN-SE-TX-EXEMP-CD field on IDRS cc ENMOD displays a value other than "1", the Form 4361 has NOT been approved.	Route Form 4361 to Philadelphia Campus Mail Stop 4-G08.151 for processing. For general information about Form 4361 see IRM 4.19.6.4.1, General Guidelines for Form 4361.
Reply is a copy of an approved Form 4029 but the MIN-SE-TX-EXEMP-CD field on IDRS cc ENMOD displays a value other than "4", the Form 4029 has NOT been approved.	Route Form 4029 to Philadelphia Campus, Mail Stop 4-G08.151 for processing. For general information about Form 4029 see IRM 4.19.6.5.1, Form 4029-Procedures.
No response.	After the suspension period has expired, process the assessment and close case as a default.

(1) The Form 8082, Notice of Inconsistent Treatment and Administrative Adjustment Request is filed by taxpayers for two different purposes. It is used by taxpayers to report when they are taking a position on their return that is inconsistent with the way the partnership or S- Corporation treated and reported the same item on its return. It is also used by a TEFRA partnership or one of its partners to reflect changes to partnership items. It is also used by BBA partnerships when correcting a previously filed return.

(2) Notice of Inconsistent Treatment.

1. TEFRA and BBA Partners, under IRC 6222 and S corporation shareholders, under IRC 6037(c), are generally required to file their returns consistently with the partnership or S- Corporation return. However, there may be reasons why a member wishes to report items differently. Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR) is used for this purpose. (For tax periods prior to 201812 a partner in an electing large partnership must also file in a manner consist with the partnership, per IRC 6241.)

   Note: TEFRA was repealed as part of the BBA of 2015 and replaced with a new centralized partnership audit regime. The repeal of TEFRA became effective for partnership tax years beginning after December 31, 2017.

2. Refer to IRM 4.31, Pass-Through Entity Handbook, for additional information.

(3) Administrative Adjustment Request (AAR).

1. An AAR is filed to correct items on the original partnership return, or may be filed by a partner to correct partnership items that have passed through to their return. Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR) is used for this purpose.

2. The BBA regime also allows BBA partnerships to file AARs.

3. Refer to IRM 4.31.4, TEFRA Administrative Adjustment Request (AAR) for additional information on TEFRA AARs and BBA AARs.

(1) Payers - Payer cases are initiated through ACE (Automated Correspondence Exam) processing.

1. Payer cases are started in Status 10 with Letter 3541-E, Initial Request For Verification on Alimony Deductions.

2. Letter 3541-E, solicits records supporting the deduction claimed by the payer including proof of alimony payment and a copy of the instrument(s) authorizing payment. It also requests identification of the alimony recipient(s).

3. Cases will be suspended for 45 days in Status 10.

4. When the case moves into Status 22 or when a tax examiner is responding to a reply to the Letter 3541-E, the Letter 3541-D along with the Form 4549 will be mailed.

5. ACE generated reports include a substantial understatement penalty when applicable. Examiners should consider the application of accuracy penalties and information return penalties when processing responses.

(2) Recipients - Open recipient cases on AIMS and initiate manually only upon verification by a payer of unreported alimony or pension income which would generate a deficiency for the recipient ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡. Refer to AIMS Processing IRM 4.4.23.2.1.1, Input Forms, and the IDRS Command Code AM424 Job Aid.

1. Create the recipient case on AIMS no later than 30 days after closure of the related payer case.

2. Initiate recipient cases in Status 10 with Letter 3540-E, Initial letter Inquiring about Unreported Alimony Income.

3. Letter 3540-E, requests a copy of instruments if income is disputed as well as identification of any payers.

4. Cases will be suspended for 45 days.

5. After the suspense period, the case will be manually updated to Status 22 and Letter 3540-D cases along with the Form 4549 will be mailed manually by the campus. The case can be introduced into ACE after the Status 22 action is completed.

6. Recipient workpapers must detail the supporting information for the unreported income provided by the payer and include the payer’s name and SSN from initial contact. Include both the ex-spouse’s (or spouse’s) SSN and the primary TIN of a joint payer return if the ex-spouse filed as the secondary taxpayer.

7. Include a copy of all relevant supporting documents provided by the payer in the recipient’s case file.

8. Examiners should consider the application of accuracy penalties from initial contact.

9. Complete appropriately the Related Return Information Section of Form 5344, Examination Closing Record.

(3) All - Suspend all cases after initial contact for 45 days awaiting taxpayer response.

(4) Recipient Return Not Filed - If the recipient has not filed a return, initiate manually only upon verification by a payer of unreported alimony or pension income which would generate a deficiency for the recipient ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡. No later than 30 days after closure of the related payer case, open on AIMS per IRM 4.19.15.45.2, Non-Filer Source and Project Codes, and follow examination procedures per IRM 4.19.15.45, Non-Filer Program.

(1) Use the following table when reviewing a taxpayer’s reply.

(2) Open a recipient case under the conditions noted in IRM 4.19.15.18.1, Initial Contact and General Processing, paragraph (2). The related payer case need not be closed first. For example, alimony payments may be resolved with respect to one recipient and not another, or the payer case remains open for expanded issues only. Monitor a payer case through default if necessary when the conditions to open a recipient case have been met but additional supporting records are required to resolve the remainder of payments purported to be made to the same recipient. Copy all pertinent documents provided by the payer for inclusion in the recipient’s file in case the latter files an appeal.

(1) While thorough workpaper documentation is important regardless of the issue, it is particularly critical for alimony deductions/income because the outcome of one taxpayer’s case may impact one or more other taxpayers.

(2) Examiners should note the following when applicable on Form 4700, Examination Workpapers (not all inclusive):

• The type of each document received (e.g., divorce decree, separate maintenance agreement, written separation agreement, QDRO (Qualified Domestic Relations Order), cancelled check, pay statement, etc.).

• The date of an instrument, the state in which it was executed, and the parties who signed it.

• The name and SSN of the other party affected by an instrument or QDRO. (Also if the other party filed as the secondary taxpayer on a joint return, note the primary TIN of that return.)

• The nature of the payments ordered by an instrument (e.g., pension, periodic alimony (in general, applicable for instruments executed on or before December 31, 1985), lump-sum alimony (see IRC 71(f) recharacterizing deductible alimony as a nondeductible property settlement), unallocated family support (in general, for instruments executed after December 31, 1984, see IRC 1.71-1T, Q/As 15 through 18, describing the circumstances in which an amount of unallocated family support is fixed as child support and not alimony), etc.) and the amounts specified by type.

  Note: It is not necessary to detail a property settlement unless the payer deducted it or to note any other type of payment if the payer only claimed a pension split.

• The presence or absence of a child support order (not applicable for pension splits). If child support is ordered, it must be verified as paid before allowing a deduction for any direct payments for alimony.

• The presence or absence of a death contingency (not applicable for pension splits). If there’s a death contingency, explain whether it is specifically stated in an instrument or it applies by operation of state law.

• The presence or absence of a child-related contingency if unallocated support was ordered in an instrument.

(3) Taxpayers often deduct payments made to more than one spouse/former spouse. Record documentation received concerning each recipient separately in the payer’s workpapers.

(4) If the payer audit results in a no-change, audit consideration of the recipient taxpayer(s) must be documented in the payer’s workpapers. The workpapers must indicate whether the audit was or was not expanded to the recipient taxpayer(s) and why.

(5) Refer to IRM 4.19.13.3.3, Standard 3 - Workpapers Support Conclusions and IRM 4.19.13.6, Workpapers for All Cases for more information concerning workpapers.

(1) Payers - Since payer cases are initiated systemically, it’s important to thoroughly research IDRS when processing the first response.

1. Screen each recipient’s RTVUE/TRDBV and IRPTR to determine if alimony income was substantially reported on any income line of a recipient’s return.

2. Review each recipient’s account to determine if an amended return was filed to report the alimony income.

3. After verification of payments made, meet IRC 71 requirements, close the payer case as a "no change" if alimony income reported by the recipient(s) substantially matches the alimony deduction claimed by the payer.

4. Screen the payer’s RTVUE/TRDBV and IRPTR to determine if there are large, unusual or questionable items (LUQs) other than the alimony deduction and revise the report if warranted. Do not introduce new deficiency issues when sending Letter 555.

(2) Recipients - Perform IDRS research prior to establishing a recipient case on AIMS.

1. Review the recipient’s account to determine if an amended return was filed. It is common for payers to inform recipients of their examinations, often prompting recipients to amend their returns.

2. Screen the recipient’s RTVUE/TRDBV and IRPTR to determine if there are any LUQs other than the alimony income and expand the scope of the audit if warranted.

(3) All - Review all related CEAS records including any for prior and subsequent years and for the cross-reference taxpayer(s) to determine if they contain pertinent information. However, do not "no change" a case solely because the same issue was examined for another tax year and not adjusted. Each year stands on its own merits.

(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 identifying who received the funds, the dollar amount and the date the payment cleared the bank, the front and back of money orders, or proof of direct deposit that specifically identifies the recipient by name;

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

• Pay statements showing the name of the recipient or court document docket number.

(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 recipient’s ownership for life insurance premiums;

• Bills and receipts for medical and dental expenses;

• Statements for health insurance premiums;

• Proof of ownership of other property such as car, boat, recreational vehicle, etc. The recipient must be the sole owner of said property.

(3) Payments designated as not alimony on or before December 31, 2018, can only be excluded from income if the recipient attaches a copy of the instrument designating the payments as not alimony, on instruments executed to their return. The instrument must be attached to the return for each tax year for which the designation applies.

(4) Unacceptable documentation includes but is not limited to:

• Unsigned (by either a judge or both affected parties), undated, or incomplete instruments,

• Letters unexecuted testifying to verbal agreements,

• Retroactive instruments unless a judge indicates the correction was due to a clerical error made by the court or there is a nunc pro tunc order revising the original decree to conform to the intent of the court at the time of entry.

(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 (such as three 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 with 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 by 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.

(1) Prior to the repeal of IRC 71 by TCJA, IRC 71 required, in part, that for a payment to qualify as alimony, the payment must immediately cease upon the death of the payee. The termination requirement was satisfied if set forth in the applicable instrument or occurred by operation of state law or, in certain cases, federal law. Typically, the state, in which the instrument was executed, applies to determine whether alimony immediately ceases upon the death of the payee. In general, this requirement is applicable only to instruments executed on or before December 31, 2018. See Pub 504.

(1) Qualified Domestic Relations Order (QDRO) - If pension income is paid from a qualified retirement plan that is a private industry plan, an instrument can provide for the division of the retirement benefit or distribution between the plan participant and a non-participant spouse (or former spouse). This instrument is referred to as a qualified domestic relations order (QDRO), and transfers the applicable percentage of distributions or other amounts from the plan to an alternate payee who may be the non-participant spouse (or former spouse) or a child or other dependent. Although pension income paid to a non-participant spouse (or former spouse) is not alimony, it is frequently deducted as such. A distribution that is paid under a QDRO to an alternate payee who is a spouse (or former spouse), is taxed to the spouse (or former spouse). A distribution that is paid under a QDRO to an alternate payee who is a child or other dependent is taxed to the plan participant. However, the participant may be ordered to pay the required percentage directly to a non-participant spouse after distribution. Under a QDRO, separate Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., should be issued to each individual, the plan participant and non-participant spouse, showing only the amount of their respective distributions. If a distribution is paid under a QDRO to a non-spouse, such as a child, only one Form 1099-R is issued to the participant showing the entire distribution. Unlike other property settlements, pension distributions are taxable to the recipients because those distributions were based on amounts previously contributed on a tax-deferred basis.

(2) A QDRO is not a divorce decree. It is the document used to authorize a qualified retirement plan to distribute funds to an alternate payee. However, the participant may be ordered to pay the required percentage directly to a non-participant spouse (or former spouse) after distribution. Unlike other property settlements, pension distributions from a qualified retirement plan generally are taxable to the recipients because those distributions were based on amounts previously contributed to the plan on a tax-deferred basis (unless the participant made after-tax employee contributions). If a plan distributes a portion of a participant’s pension to a participant spouse and, under a QDRO, a portion of the participant’s pension to the non-participant spouse (or former spouse), separate Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., should be issued to each individual, the plan participant and non-participant spouse (or former spouse), showing only the amount of their respective distributions. If the distribution of the pension income under the QDRO is to a non-spouse, such as a child, only one Form 1099-R is issued to the participant showing the entire distribution. Retirement plans that are maintained by governments or churches can also divide a retirement benefit or distribution between the plan participant and non-participant spouse under a domestic relations order as if the document were a QDRO. In such a case, the tax treatment described above applies to distributions from the plan made under the domestic relations order.

(3) Defense Finance and Accounting Services (DFAS) Reporting - A portion of a military pension can be paid by the Defense Finance and Accounting Services (DFAS) directly to a former spouse under a domestic relations order for child support, alimony, or as a division of the retired pay as property. Under these circumstances, DFAS will issue a Form 1099-R to each individual reflecting their shares of the retirement and taxes withheld. If the domestic relations order instead requires a portion of the military retirement pay to be paid to a non-spouse, such as a child, that portion is included in the participant’s taxable income and only one Form 1099-R is issued to the participant showing the entire distribution. A copy of both the front and back of the Retiree Account Statement (DFAS-CL) must be received to verify the taxpayer claimed the entire pension amount. The plan participant can obtain the copies from MyPay at https://mypay.dfas.mil/

(4) State and Local Government/Private Industry Pensions - Total distributions from the plan must be verified to ensure the taxpayer claimed the full amount received by all parties.

(5) Disability Pensions - Disability pensions paid from any retirement plan other than a military plan are taxable. Certain military disability retirement payments are nontaxable to the participant. However, the non-taxable nature of a disability pension paid from a military plan does not transfer to the non-participant spouse (or former spouse). The disabled participant spouse cannot take a deduction for a non-taxable distribution transferred to a non-participant spouse (or former spouse) unless it is first reported in taxable income. The non-participant spouse (or former spouse) is required to report the income on their tax return.

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

(2) Check off the issues identified on the classification sheet on Letter 566-S.

(1) This list is not all inclusive.

(1) Taxpayers are allowed to deduct certain taxes when they itemize deductions on Schedule A (Form 1040). These taxes include:

• State and local income taxes

• General sales taxes

• Real estate taxes

• Personal property taxes

  Note: For tax years beginning in 2018 through 2026, the deduction is limited to $10,000 ($5,000 for a married individual filing separately. See IRC 164(b)(6).)

(2) For additional information on deductible taxes refer to IRM 21.6.4.4.1.4, Taxes and Fees –Deductible and Nondeductible and Instructions for Schedule A (From 1040), Itemized Deductions.

(3) For taxes paid, the examiner should consider having the taxpayer send in the following documentation:

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

• Federal Income and Excise taxes, Social Security Taxes, Federal estate and gift taxes, Federal Unemployment Tax (FUTA), Railroad Retirement Taxes (RRTA), and Medicare.

• Customs duties.

• Tax on gasoline and 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.

• For tax years beginning after 2017 through 2026, foreign real property taxes.

(5) 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, it should be reported on the appropriate line of Form 1040. Beginning in tax year 2018 it is reported on Form 1040 Schedule 1.

• Refunds of real estate taxes deducted in prior years should be reported on the "Other Income" line of the Form 1040, beginning in tax year 2018 use Form 1040 Schedule 1.

(6) Evaluating Taxpayer Responses:

• For 2004 and subsequent tax years, taxpayers can elect to deduct either state and local general sales taxes, or state and local income taxes. The taxpayer cannot deduct both. For tax years beginning in 2018 through 2026, a taxpayer’s total deduction of either type of tax is limited. See IRM 4.19.15.20.2, paragraph 2.

• If the taxpayer deducts state and local income taxes, the taxpayer reports the sales or excise taxes for a new motor vehicle on line 6 of the Schedule A.

• If the taxpayer elects to claim a general sales tax deduction using the general sales tax table amount, the taxpayer can add the sales tax paid for a new motor vehicle to the general sales tax table amount, and report it on line 5(b) of Schedule A.

• 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, double deducted, on Schedule A.

• State and Local Sales Tax Deduction:

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If	Then
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(1) Taxpayers are allowed to deduct mortgage interest paid for their main home and a second home. The deduction is reported on Schedule A of the Form 1040 as an itemized deduction. Personal interest, i.e., for credit cards, unsecured loans, car loans, mortgage interest on a third home, and excess mortgage interest is not deductible. Refer to Pub 936, Home Mortgage Interest Deduction for additional information. During examinations, tax examiners will need to determine the correct amount of mortgage interest allowable as a deduction. In some instances, the mortgage interest deduction including deductible points is limited, as discussed below.

(2) Use IDRS CC IRPTR to search for Form(s) 1098, Mortgage Interest Statement(s), verifying that the taxpayer paid mortgage interest in the year under examination. If there is no data on IRPTR to indicate that mortgage interest was paid by the taxpayer, or if the taxpayer’s name is not on Form 1098, or if the transcribed Form(s) 1098 do not verify the amount deducted, the examiner should request copies of:

• mortgage interest statements for the year being examined

• mortgage or loan contracts

• equity line of credit agreements

• amortization schedules for loans outstanding

• cancelled checks, receipts, or other evidence of payments made for the year under examination

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡

(1) The following table provides some examples of qualifying and non-qualifying payments.

(1) Refer to Pub 526, Charitable Contributions for information related to organizations that qualify to receive deductible contributions.

(2) If an organization provided by the taxpayer is questionable, verification may be obtained using an on-line search tool for exempt organizations called Tax Exempt Organization Search (TEOS). This site identifies organizations eligible to receive tax-deductible charitable contributions. If a search is unsuccessful, the taxpayer should be able to obtain a copy of the letter issued to the organization by the IRS granting it "qualifying organization" status.

(3) Qualified and non-qualified organizations can include, but are not limited to:

(1) Contributions can be in the form of cash or non-cash. Examples of the types of contributions are:

(2) Out of pocket expenses incurred when volunteering services were provided by the taxpayer to a qualified organization are deductible. Refer to Pub 526, Charitable Contributions for details.

(1) In general, a taxpayer can deduct the full amount of a properly substantiated cash contribution, subject to percentage limitations.

(2) If the taxpayer paid the qualified organization more than the fair market value of an item they received in return, such as merchandise or tickets to sporting events, the deduction is limited to the amount in excess of the fair market value.

(3) For non-cash contributions, the deduction is usually equal to the fair market value of the non-cash contribution on the date of the donation.

(4) For contributions of clothing and household goods, the items must be in good used condition or better. If an item is not in good used condition or better, then a deduction may be allowed if the amount claimed for the item is more than $500, and the taxpayer includes a qualified appraisal with their return and a completed Form 8283.

(5) For contributions of motor vehicles, including an automobile, boat, and airplane, the claimed value of which exceeds $500, the deduction is generally equal to the lesser of the gross proceeds from the sale of the vehicle, or the vehicle's fair market value on the date of the contribution. See the chart below for specific rules.

(1) TCJA removed the ability to deduct entertainment, amusement or recreational expenses paid or incurred after December 31, 2017. Business meal expenses remain deductible, generally subject to the 50 percent disallowance. The deductibility of entertainment expenses in the remainder of this subsection only applies to entertainment expenses paid or incurred prior to January 1, 2018.

(2) All responses need to be evaluated using good judgment and consideration of what is known about the occupation.

(3) The reimbursement policy of the employer is the starting point for all EBE audits and MUST be secured.

(4) Employees and self-employed individuals claiming un-reimbursed travel expenses may claim the government per diem rate for the meals and incidental expenses (M&IE) portion of travel expenses, provided they have supported the travel. However, employees and self-employed individuals claiming un-reimbursed lodging expenses must provide receipts for lodging expenses and may not use the government per diem rates for lodging expenses.

(5) An expenditure for travel, meals, or entertainment, to the extent it is lavish or extravagant, shall not be allowable as a deduction.

(6) Unless the taxpayer is eligible to use and does use the government per diem rates, documentary evidence is required for:

1. Any expense for lodging while traveling away from home, and

2. Any other expenditure of $75 or more.

(7) IRC 274(d) provides that no deduction shall be allowed for entertainment, gifts, listed property or travel unless the taxpayer substantiates the following elements of the expenditures:

1. Amount of each expenditure.

2. Time and place of the travel. (Prior to January 1, 2018, entertainment, amusement, recreation, or use of the facility or property.)

3. Date and description of the gift.

4. Business purpose for each expenditure.

5. Business relationship to the taxpayer of each person receiving the benefit.

(8) Many expenses not listed in (5) above can be summarized or aggregated. See Pub 463, Travel, Gift, and Car Expenses, Section 5, Record Keeping, for a table that shows the substantiation requirement for specific expenses.

(9) The deduction for business-related meal and entertainment expenses are generally subject to a 50 percent limit or 80 percent if taxpayer is subject to the Department of Transportation’s "hours of service" limits. Caution: See Notice 2021-25 pertaining to food or beverage provided by a restaurant.

(10) Travel expenses are deductible when taxpayers are temporarily away from their tax home. However, an indefinite assignment to another location is a change in tax home, thus travel expenses are not deductible.

(11) Travel expenses for conventions, seminars, and similar meetings are deductible under IRC 162 if the taxpayer’s attendance benefits or advances the taxpayer’s trade or business. No deduction is allowable if a taxpayer is attending for social, political, or other purposes not related to the taxpayer’s trade or business.

(12) IRC 274(c)(1) states foreign travel must first be deductible under IRC 162 or IRC 212. The travel must be ordinary and necessary in the pursuit of a trade or business, or for the production of income. If the expense meets those requirements, then the business portion of the travel is deductible.

(13) Travel outside of the United States generally must be allocated between business and personal. IRC 274(c)(2) provides two exceptions to the rule that travel expenses be allocated between business and personal. No allocation is made if foreign travel does not exceed one week, or if less than 25 percent of the trip is personal, then travel to and from the business destination is allowed in full.

(14) Any issues beyond the expertise of the examiner assigned the case should be referred to the lead examiner to secure the appropriate technical guidance.

(15) It is not necessary to fully allow or disallow any expenses. Expenses can be partially allowed when revising the report. Special care should be taken to explain these revisions to the taxpayer.

(16) Additional Items to consider. Consider the following points when processing EBE cases.

(17) The employer's letter regarding the company's reimbursement policy helps to establish:

1. the business expenses were ordinary and necessary, and

2. the taxpayer is deducting a legitimate "out of pocket" expense.

(1) Additional EBE information and materials should be referenced when processing EBE cases. These include:

• Pub 463, Travel, Gift, and Car Expenses.

• Training courses available: Training Doc 55421-102, CET Basic Income Tax Law, Standard and Itemized Deductions.

• Pub 529, Miscellaneous Deductions.

• Pub 17, Your Federal Income Tax (For Individuals).

• Treasury Regulation 1.274-5T(c)(6)(i)(B) (Aggregation of Expenditures)

• Treasury Regulations. 1.274-11,12 (Sporting Events).

(1) The Exam RPP Coordinator at each site will be the liaison between Campus Exam and HQ and will elevate any issues for resolution. RPP Coordinator can be any individual (manager, lead, TCO, P&A, TE) as designated by management.

(2) RPP Coordinator's primary role is to provide technical assistance to Correspondence Exam in processing these cases.

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(1) Cases will be opened on AIMS by SB/SE HQ Campus Workload Identification (CWI) team and controlled under Project Code 0133, Source Code 70. Any scheme that is related to EITC will be controlled under Project Code 0132. The AIMS will reflect the respective PBC for each site and an Employee Group Code (EGC) of 5000.

(2) AIMS Tracking Codes may be assigned to identify the scheme.

(3) Returns will be electronically forwarded and established through RGS.

(4) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(5) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(6) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡"≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(1) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(4) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(5) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(1) Normal Exam procedures will apply to processing these cases.

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(4) Consult the RPP Coordinator, Classification TCO (Tax Compliance Officer) or manager and notate workpapers about the additional issues included in the audit.

(5) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(6) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(7) Letter 566-B/Letter 566-J for TDC cases, will be used to initiate the audit process for non-EITC cases. For EITC cases use Letter 566-S/Letter 566-T for TDC cases, as the initial contact letter (ICL). The cases will be started by Filer Bridge and BLP. The letter will be prepared by checking off the appropriate boxes for the issues being examined. Form 886-A with proper paragraphs and Form 4549 will be included, as well as the proper enclosures.

(8) Follow normal deficiency processing from this point, allowing the normal time frames for purging and issuance of the Statutory Notice of Deficiency.

(9) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(10) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(11) The compliance employee or the manager should not obtain advice from CI for a specific case under examination. However, the campus can request clarification or additional information on a scheme, if necessary, via HQ.

(12) Management must approve any short closing - DC 20, 32, or 33. If a determination is made to short close 25 or more cases from one scheme, then management must promptly inform HQ the reason for survey.

(13) If the taxpayer/valid POA requests a transfer of a case(s) to an Area Office Examination or Appeals Office, refer to IRM 4.19.13.16, Transfers to Area Office IRM 4.19.13.17, Appeals - Non Docketed Cases.

(14) Examiners will ensure that procedures are followed for calculation of the interest suspension period as defined in IRC 6404(g). Please refer to IRM 4.31.6.10.6.3, IRC 6404(g) Suspension of Interest and Certain Penalties, for additional information.

(1) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) The examiners are required to familiarize themselves with Schedule A See IRM 4.19.15.20, Schedule A. This IRM subsection will provide information related to the allowable and unallowable deductions on the Schedule A.

(4) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡Refer to IRM 20.1, Penalty Handbook, for additional procedures. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(1) ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(1) The following table lists terms used in the Tip Income Program:

(1) Tip Income Information – The Area Offices will accumulate employer and employee data, on non-participating employees of a tip agreement and rarely on a participating non-filer, to determine which employees will be selected for examination. Data for employee audits will be available on the Employee Data Report based on the Tip Agreement. The Employee Data Report and the list of selected employees will be provided to TS headquarters/ Workload Development and Delivery team. The Food and Beverage and Cosmetology Industry tipped employee audits, referred from Area Offices, will contain a tip allocation worksheet or an Excel spreadsheet.

(2) The following information will be provided for taxpayers selected for examination:

• Employee’s name and SSN

• Employee’s position, venue, and shift

• Number of hours worked or sales (if applicable)

• Form 14980, Employee Tip Examinations Worksheet

• Employer’s name

• Tip agreement date and RTVUE of tax return, if filed

• Tip rate for employee’s position, venue and shift per the Tip Agreement

• Fact of filing

(3) Other Case File Information - Case files may also include the following information:

• AMDISA for the selected year(s)

• IMFOLT for the selected tax year(s)

• IRPTR information for the selected year(s)

• McQuatter's allocation sheet for the Food and Beverage cases

• Employee Data Report

• Tracking sheet. Form 14980, Employee Tip Examinations Worksheet. (Two copies are required: one copy is to be used as a tracking sheet and another copy as part of the administrative file).

(1) The following information describes procedures specific to the Tip Income Program. Unless otherwise stated, normal case processing procedures should be followed.

(2) Due to the specific procedures for assessing FICA taxes, all cases in the Tip Program should be filed separately from other cases or flagged for easy identification.

(3) Adjustments to tip income involve both income tax and FICA taxes. Therefore, two sets of report forms are required:

(4) As the chart shows, report forms must be prepared and sent to the taxpayer (tipped employee): along with Form 2504, Agreement to Assessment and collection of Additional Tax and Acceptance of Over assessment Form 886-A, Explanation of Items, and Form 14980, Employee Tip Examinations Worksheet, must also be sent. If the examination was based on the percentage of gross sales, a Form 14980-B will need to be completed and sent to the taxpayer. Form 14980-A, Explanation of Tip Income, shows how the tip income was computed using the McQuatter's Formula. This provides the taxpayer a detailed computation of the unreported tip income. Make sure your workpapers clearly explain how you arrived at your adjustments. This information will be extremely important if the taxpayer requests a transfer to an Area Office, requests an Appeals conference, or petitions the court.

(5) Research AIMS to determine if another tax year is open for examination. If so, the cases should be worked by the same examiner.

(1) If the taxpayer replies to the Letter 525/Letter 525-T for TDC cases, or Letter 1862 and a revised report is prepared, issue Letter 692-M/Letter 692-T for TDC cases. Follow normal procedures for mail out and suspense of the letter.

(2) Ensure that the assessments for FICA tax and related penalties are made before the 90-day letter is issued. Refer to IRM 25.6, Statute of Limitation, on assessment statute of limitation on unreported tips income and IRM 4.23.7.4, Form 4137 Requirements. If you are evaluating a response to a 90 day letter and have reduced the amount of under-reported tip income, update a corrected Form 4549 and Form 2504 , as shown in the table after the next paragraph to ensure that the taxpayer is not over-assessed for FICA taxes and the penalty.

(3) Send Letter 555 and follow the normal procedures for mail-out and suspense. Keep in mind the restrictions on increasing the assessment and requesting documentation after the statutory notice has been issued. See IRM 4.19.13.14, Statutory Notices.

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(1) There are special rules for assessing FICA taxes. FICA tax and the associated penalties may have to be assessed prior to issuing the 90-day letter. Ensure that assessments are input timely and properly. Refer to IRM 4.19.15.26.3.1, Filed Returns – Initial Contact, and IRM 4.19.15.26.4, Case Processing - Revised Reports and Responses to 90-Day Letters.

(2) Unless otherwise instructed, follow normal closing procedures. Refer to the table to determine the action to take and to IRM 4.4, Audit Information Management System (AIMS) - Validity and Consistency.

(3) Requests for Transfer to an Area Office and Statute Extensions. A case should not be transferred if there are less than 13 months remaining on the statute of limitations. Refer to IRM 4.19.13.16, Transfer to Area Office.

• All Tip program cases that require transfer to Area Office should be routed to the clerical support unit. The support unit will update AIMS and RGS and route to the following address: Internal Revenue Service - Attn: PSP M/S 4031 - 600 17th Street - Denver, CO 80202.

• HQ analyst should be informed of the transfer request to the Area Office.

• Refer to IRM 4.19.15.44, Non-Filer Program, for information on the statute of limitations for non-filers and the returns they file in response to the initial contact letter or subsequent letter.

• In cases where the time constraints do not allow for transferring the case, contact the taxpayer, explain the situation, and ask the taxpayer to explain their concerns. Try to resolve the issues via correspondence. If the taxpayer insists on transferring the case, the Statutory Notice has not yet been issued, and there are less than 13 months remaining on the statute of limitations, the statute of limitations must be extended to transfer the case.

• If the taxpayer filed Form 4137 with the tax return, prepare Form 872, Consent to Extend the Time to Assess Tax, and Form SS-10, Consent to Extend the Time to Assess Employment Tax, to extend the statute of limitations on both the income and the FICA taxes. Follow normal procedures for mail out and suspense of the request to extend the statutes. Refer to IRM 25.6.22.5, Preparation of Consent Forms - General Procedures.

• If Form 4137 was not filed with the return, prepare Form 872, Consent to Extend the Time to Assess Tax, for the income tax only.

(4) Other Processing Guidelines

• If the taxpayer states that they disagree with the report and you cannot clearly determine the basis of the disagreement, follow normal procedures for contacting the taxpayer to get clarification.

• If necessary, the unreported tip income, as shown on the original report, can be adjusted. However, do not change the taxpayer’s hours, shift, position, or venue unless the taxpayer has provided information from the employer.

• Obtain as much information as possible from the taxpayer and document it in detail on your workpapers.

• Access any additional information that is available from the Tip Match database and other employer driven resources.

• If the taxpayer disagrees with an adjustment that is not related to the tip income use normal procedures to evaluate the information the taxpayer provides.

• Tip diaries must meet specific requirements to be accepted. For information on the specific requirements for a tip diary, see Pub 531, Reporting Tip Income, or section 31.6053-4(a)(2) of the Employment Tax Regulations. Also refer to the SERP Job Aids, Compliance Tip Diary Evaluation.

• If the taxpayer states they agree with the adjustment to the tip income but provides information about employee business expenses, the taxpayer may be entitled to, evaluate that information and make the necessary determination based on the information provided.

• If the taxpayer responds to the Letter 1862 with a tax return, review the return for accuracy and process the return as instructed in IRM 4.19.15.45, Non-Filer Program.

• If the taxpayer’s response results in a revision to Form 4549 and Form 2504 make sure you make the corresponding changes to the tracking sheet.

• If the taxpayer wishes to have a representative conduct the examination on their behalf, Form 2848 must give the representative authority to handle the income tax and the FICA tax issues.

(5) If a request is made for printed documentation to be sent to Tax Court or Appeals, follow the instructions below (for clerical only):

1. Request the case file from the CORR team,

2. Case will be sent to Clerical to have all the requested case documents printed.

3. Clerical will send case file to Appeals or Tax Court with printed documentation enclosed.

4. A record should be kept by the Clerical manager.

(1) Tax Examiners who work these cases should take the following Basic Income Tax Training lessons: IRA, Pensions, Annuities, and IRA Deductions.

(2) For more information consult Pub 590-B, Distributions from Individual Retirement Arrangements (IRAs), Pub 575, Pension and Annuity Income, Instructions for Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, and Instructions for Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

(3) Tax examiners must conduct the following research before contacting the taxpayer to determine if the case should be surveyed and to ensure the audit report is correct.

(4) 10 percent additional tax cases are opened on AIMS in Project Code 0123, Source Code 06.

(5) Cases selected using the UCP (Unattended Case Processing) Filter Create Discretionary tool will create in RGS Group B2, pending Status 10, with the Letter 566-S/Letter 566-T for TDC cases, and accompanying Form 886-A. A 100 percent review of these cases is required to identify cases that should be surveyed prior to contacting the taxpayers. Based on the required research shown above, if it is determined the taxpayer meets one of the exceptions and is not liable for the 10 percent additional tax, the case should be surveyed, and letter and forms not issued to the taxpayer. Also, the 10 percent additional tax issue should be reviewed to ensure the tax is only being assessed on applicable distributions and to include any unreported income. Cases which pass review, after any necessary corrections have been made, should be reintroduced to ACE (Automated Correspondence Exam) for subsequent automated processing.

(6) The case will be suspended for 45 days.

(7) The Letter 525/Letter 525-T for TDC cases, Form 886-A and Form 4549 (audit report) will be prepared systemically during ACE Create 2 processing. Cases which fire one of the standard filters during Create 2 processing will reject to RGS Group B2. The audit reports must be randomly reviewed, per ACE procedures in IRM 4.19.20.2.9, Reviews. The standard explanation included in Form 886-A is determined by whether an amount is reported on Line 4b (IRA distributions), and/or Line 5b Pensions, and annuities) of Form 1040 for tax years 2018 forward. Lines 15b and/or 16b on Form 1040, or 11b and/or 12b on Form 1040-A for tax years prior to 2018.

Additional tax of 10 percent due to the early distribution made from your qualified retirement plan.
We are proposing to adjust your tax by 10 percent of the taxable amount of the early distribution made from your qualified retirement plan because you received the distribution before you reached age 591⁄2, and the payment did not qualify for one of the following allowable exceptions: Payments made from the Plan after you separate from service if you will be at least 55 during the year of payment Payments made on account of total and permanent disability Payments made in substantially equal periodic amounts over your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary) Payments made to a beneficiary after the death of the participant Payments of Employee Stock Ownership Plan (ESOP) dividends Payments paid directly to the government to satisfy a federal tax levy Payments made to an alternate payee under a Qualified Domestic Relations Order (QDRO) Payments for medical expenses that do not exceed the amount of your deductible medical expenses (whether or not you itemized deductions) For distributions made before January 1, 2016 from a State or local governmental defined benefit pension plan to a qualified public safety employee who is at least age 50 at the time the public safety employee separates from service For distributions made after December 31, 2015, payments from a governmental plan to a qualified public safety employee who is at least age 50 at the time the public safety employee separates from service. Payments from CSRS and FERS made under a phased retirement annuity Payments while you are on active duty, if you were called to duty after September 11, 2001, for more than 179 days. Payments made to individuals who receive qualified reservist distributions. In-plan Roth rollovers or eligible distributions contributed to another qualified retirement plan or IRA within 60 days. Payments made for a qualified birth or adoption distribution. For distributions to a victim of domestic abuse, up to the lesser of $10,000 or 50% of the vested account balance for distributions made after 12/31/23. For one distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or vested account balance over $1,000, for distributions made after 12/31/23. For corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely. For distributions up to $22,000 to qualified individuals who sustain economic loss by reason of a federally declared disaster where they live, effective for disasters taking place after January 26, 2021. For distributions made from a pension-linked emergency savings account (made after 12/31/2023). For distributions made to a terminally ill employee, on or after the date the employee has been certified by a physician as having a terminal illness, effective for distributions made after December 29, 2022. For distributions made to a qualified public safety employee from a governmental plan provided that the qualified public safety employee has separated from service during or after the year in which they attained age 50 or 25 years of service under the plan, whichever is earlier. Effective for distributions made after December 29, 2022. For distributions made from a plan described in clause (iii), (iv), or (iv) of section 402(c)(8)(B) to an employee who provides firefighting services and who separated from service in or after the year in which they attained age 50 or 25 years of service, whichever is earlier. Effective for distributions made after December 29, 2022.
If you believe you qualify for one of the exceptions, please provide us with documentation that shows you meet one of the above exceptions. Examples of acceptable documents include: corrected Form 1099-R from the issuing entity, or a statement from your plan administrator explaining why you meet the exception, or a statement from your medical practitioner explaining your disability, or copies of cancelled checks or receipts showing when and what qualified expenses were made, or a copy of the QDRO (generally part of your divorce decree).

Additional tax of 10 percent due to the early distribution made from your annuity contract.
We are proposing to adjust your tax by 10 percent of the taxable amount of the early distribution made from your annuity contract because you received a distribution before you reached age 591⁄2, and the payment did not qualify for one of the following allowable exceptions: Payments after the death of the annuity owner Payment made on account of total and permanent disability Payments made in substantially equal amounts over your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary) Payments allocable to an investment in the contract before August 14, 1982 Payments made under a qualified personal injury settlement Payments made under an immediate annuity contract Payments made under a deferred annuity contract purchased by your employer upon termination of a qualified plan that is held by your employer until you separate from service For distributions up to $22,000 to qualified individuals who sustain an economic loss by reason of a federally declared disaster where they live. Effective for disasters taking place after January 26, 2021. For distributions to a victim of domestic abuse, up to the lesser of $10,000 or 50% of the vested account balance (for distributions made after 12/31/2023). For one distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or the vested account balance over $1,000 (made after 12/31/2023). The additional tax does not apply to certain excess contributions to an IRA. See section 333 of SECURE 2.0.
If you believe you qualify for one of the exceptions, please provide us with documentation that shows you meet one of the above exceptions. Acceptable documents include: corrected Form 1099-R from the issuing entity, or a statement from your annuity holder explaining why you meet the exception, or a statement from your medical practitioner explaining your disability

1. Use the following standard explanation if an entry is on Form 1040 Line 15b (IRA distribution taxable amount), but there is no entry on Line 16b (pensions and annuities taxable amount), or if an entry is on Line 11b (IRA distribution taxable amount), but there is no entry on Line 12b (pensions and annuities taxable amount) for Form 1040-A.

   Note: For taxable year 2018, there is no line 15b or 16b. The information was entered on line 4b of the Form 1040. Also, for tax year 2018, there is no Form 1040-A.

Additional tax of 10 percent due to the early distribution made from your Individual Retirement Account (IRA).
We are proposing to adjust your tax by 10 percent of the taxable amount of the early distribution made from your Individual Retirement Account (IRA) because you received the distribution before you reached age 591⁄2, and the payment did not qualify for one of the following allowable exceptions: Payments made on account of the total and permanent disability Payments made in substantially equal amounts over your life or life expectancy (or joint lives or life expectancies of you and your beneficiary) Payments after the death of the IRA owner Payments for qualified higher education expenses Payments to buy, build, or rebuild a first home Payments paid directly to the government to satisfy a federal tax levy Payments not exceeding the amount of your deductible medical expenses (whether or not you itemized deductions) Payments to unemployed individuals for health insurance premiums Payments while you are on active duty if you were called to duty after September 11, 2001, for more than 179 days Payments made for a qualified birth or adoption distribution
If you believe you qualify for one of the exceptions, please provide us with documentation that shows you meet one of the above exceptions. Examples of acceptable documents include: corrected Form 1099-R from the issuing entity a statement from your plan administrator explaining why you meet the exception a statement from your medical practitioner explaining your disability, or copies of cancelled checks or receipts showing when and what qualifying expenses were made

2. Use all of the standard explanations (per 7a and 7b above) on Form 886-A if there is an entry on Line 4b (IRAs, pensions, and annuities) of Form 1040 for tax years 2018 forward. For tax years prior to 2018 both Lines 15b (IRA distribution taxable amount) and 16b (pensions and annuities taxable amount) on Form 1040 [Lines 11b (IRA distribution taxable amount) and 12b (pensions and annuities taxable amount) on Form 1040-A].

(8) Suspend the case for 45 days waiting for taxpayer response to Letter 525/Letter 525-T for TDC cases. If no reply is received, follow the procedures in IRM 4.19.13.13, No Response Cases.

(9) Use the following table when reviewing the taxpayer’s reply.

(10) Table A provides the category of payer (IRA, qualified retirement plan, or annuity) and in what tax year the exception is available. Verify that the correct plan applies to the correct exception. For example, a distribution from a 401(k) Plan is not available for the first-time home buyer exception. The exception for distributions made after separation from service after age 55 is not available for an IRA distribution. Table A