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1040 easy Publication 947 - Main Content Table of Contents Practice Before the IRSWhat Is Practice Before the IRS? Who Can Practice Before the IRS? Who Cannot Practice Before the IRS? How Does an Individual Become Enrolled? What Are the Rules of Practice? Authorizing a RepresentativeWhat Is a Power of Attorney? When Is a Power of Attorney Required? When Is a Power of Attorney Not Required? How Do I Fill Out Form 2848? What Happens to the Power of Attorney When Filed? How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040 easy Practice Before the IRS The Office of Professional Responsibility and the Return Preparer Office generally are responsible for administering and enforcing the regulations governing practice before the IRS. 1040 easy The Office of Professional Responsibility generally has responsibility for matters related to practitioner conduct and exclusive responsibility for discipline, including disciplinary proceedings and sanctions. 1040 easy The Return Preparer Office is responsible for matters related to the authority to practice, including acting on applications for enrollment and administering competency testing and continuing education. 1040 easy What Is Practice Before the IRS? Practice before the IRS covers all matters relating to any of the following. 1040 easy Communicating with the IRS for a taxpayer regarding the taxpayer's rights, privileges, or liabilities under laws and regulations administered by the IRS. 1040 easy Representing a taxpayer at conferences, hearings, or meetings with the IRS. 1040 easy Preparing and filing documents, including tax returns, with the IRS for a taxpayer. 1040 easy Providing a client with written advice which has a potential for tax avoidance or evasion. 1040 easy Furnishing information at the request of the IRS or appearing as a witness for the taxpayer is not practice before the IRS. 1040 easy Who Can Practice Before the IRS? The following individuals can practice before the IRS. 1040 easy However, any individual who is recognized to practice (a recognized representative) must be designated as the taxpayer's representative and file a written declaration with the IRS stating that he or she is authorized and qualified to represent a particular taxpayer. 1040 easy Form 2848 can be used for this purpose. 1040 easy Attorneys. 1040 easy   Any attorney who is not currently under suspension or disbarment from practice before the IRS and who is a member in good standing of the bar of the highest court of any state, possession, territory, commonwealth, or the District of Columbia may practice before the IRS. 1040 easy Certified public accountants (CPAs). 1040 easy   Any CPA who is not currently under suspension or disbarment from practice before the IRS and who is duly qualified to practice as a CPA in any state, possession, territory, commonwealth, or the District of Columbia may practice before the IRS. 1040 easy Enrolled agents. 1040 easy   Any enrolled agent in active status who is not currently under suspension or disbarment from practice before the IRS may practice before the IRS. 1040 easy Enrolled retirement plan agents. 1040 easy   Any enrolled retirement plan agent in active status who is not currently under suspension or disbarment from practice before the IRS may practice before the IRS. 1040 easy The practice of enrolled retirement plan agents is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans. 1040 easy Enrolled actuaries. 1040 easy   Any individual who is enrolled as an actuary by the Joint Board for the Enrollment of Actuaries who is not currently under suspension or disbarment from practice before the IRS may practice before the IRS. 1040 easy The practice of enrolled actuaries is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans. 1040 easy Student. 1040 easy    Under certain circumstances, a student who is supervised by a practitioner may request permission to represent another person before the IRS. 1040 easy For more information, see Authorization for special appearances, later. 1040 easy Registered tax return preparers and unenrolled return preparers. 1040 easy   A registered tax return preparer is an individual who has passed an IRS competency test and is authorized to prepare and sign tax returns as the preparer. 1040 easy An unenrolled return preparer is an individual other than an attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary who prepares and signs a taxpayer's return as the preparer, or who prepares a return but is not required (by the instructions to the return or regulations) to sign the return. 1040 easy   Registered tax return preparers and unenrolled return preparers may only represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the Internal Revenue Service (including the Taxpayer Advocate Service) during an examination of the taxable year or period covered by the tax return they prepared and signed. 1040 easy Registered tax return preparers and unenrolled return preparers cannot represent taxpayers, regardless of the circumstances requiring representation, before appeals officers, revenue officers, counsel or similar officers or employees of the Internal Revenue Service or the Department of Treasury. 1040 easy Registered tax return preparers and unenrolled return preparers cannot execute closing agreements, extend the statutory period for tax assessments or collection of tax, execute waivers, execute claims for refund, or sign any document on behalf of a taxpayer. 1040 easy   If the unenrolled return preparer does not meet the requirements for limited representation, you may file Form 8821 to allow the preparer to inspect your tax information and receive copies of notices sent to you by the IRS. 1040 easy See Form 8821. 1040 easy Practice denied. 1040 easy   Any individual engaged in limited practice before the IRS who is involved in disreputable conduct is subject to disciplinary action. 1040 easy Disreputable conduct includes, but is not limited to, the list of items under Incompetence and Disreputable Conduct shown later under What Are the Rules of Practice. 1040 easy Other individuals who may serve as representatives. 1040 easy   Because of their special relationship with a taxpayer, the following individuals can represent the specified taxpayers before the IRS, provided they present satisfactory identification and, except in the case of an individual described in (1) below, proof of authority to represent the taxpayer. 1040 easy An individual. 1040 easy An individual can represent himself or herself before the IRS and does not have to file a written declaration of qualification and authority. 1040 easy A family member. 1040 easy An individual can represent members of his or her immediate family. 1040 easy Immediate family includes a spouse, child, parent, brother, or sister of the individual. 1040 easy An officer. 1040 easy A bona fide officer of a corporation (including a parent, subsidiary, or other affiliated corporation), association, or organized group can represent the corporation, association, or organized group. 1040 easy An officer of a governmental unit, agency, or authority, in the course of his or her official duties, can represent the organization before the IRS. 1040 easy A partner. 1040 easy A general partner may represent the partnership before the IRS. 1040 easy An employee. 1040 easy A regular full-time employee can represent his or her employer. 1040 easy An employer can be, but is not limited to, an individual, partnership, corporation (including a parent, subsidiary, or other affiliated corporation), association, trust, receivership, guardianship, estate, organized group, governmental unit, agency, or authority. 1040 easy A fiduciary. 1040 easy A fiduciary (trustee, executor, personal representative, administrator, receiver, or guardian) stands in the position of a taxpayer and acts as the taxpayer, not as a representative. 1040 easy See Fiduciary under When Is a Power of Attorney Not Required, later. 1040 easy Representation Outside the United States Any individual may represent an individual or entity, who is outside the United States, before personnel of the IRS when such representation occurs outside the United States. 1040 easy See section 10. 1040 easy 7(c)(1)(vii) of Circular 230. 1040 easy Authorization for Special Appearances The Commissioner of Internal Revenue, or delegate, can authorize an individual who is not otherwise eligible to practice before the IRS to represent another person for a particular matter. 1040 easy The prospective representative must request this authorization in writing from the Office of Professional Responsibility. 1040 easy However, it is granted only when extremely compelling circumstances exist. 1040 easy If granted, the Commissioner, or delegate, will issue a letter that details the conditions related to the appearance and the particular tax matter for which the authorization is granted. 1040 easy The authorization letter should not be confused with a letter from an IRS center advising an individual that he or she has been assigned a Centralized Authorization File (CAF) number. 1040 easy The issuance of a CAF number does not indicate that an individual is either recognized or authorized to practice before the IRS. 1040 easy It merely confirms that a centralized file for authorizations has been established for the individual under that number. 1040 easy Students in LITCs and the STCP. 1040 easy   A student who works in a Low Income Taxpayer Clinic (LITC) or Student Tax Clinic Program (STCP) who is supervised by a practitioner may request permission to represent another person before the IRS. 1040 easy Authorization requests must be made to the Office of Professional Responsibility. 1040 easy If granted, a letter authorizing the student's special appearance and detailing any conditions related to the appearance will be issued. 1040 easy Students receiving an authorization letter generally can represent taxpayers before any IRS function or office subject to any conditions in the authorization letter. 1040 easy If you intend to have a student represent you, review the authorization letter and ask your student, your student's supervisor, or the Office of Professional Responsibility if you have questions about the terms of the authorization. 1040 easy Who Cannot Practice Before the IRS? In general, individuals who are not eligible or who have lost the privilege as a result of certain actions cannot practice before the IRS. 1040 easy If an individual loses eligibility to practice, the IRS will not recognize a power of attorney that names the individual as a representative. 1040 easy Corporations, associations, partnerships, and other persons that are not individuals. 1040 easy   These organizations (or persons) are not eligible to practice before the IRS. 1040 easy Loss of Eligibility Generally, individuals lose their eligibility to practice before the IRS in the following ways. 1040 easy Not meeting the requirements for renewal of enrollment (such as continuing professional education). 1040 easy Requesting to be placed in inactive retirement status. 1040 easy Being suspended or disbarred by the Office of Professional Responsibility for violating the regulations governing practice before the IRS. 1040 easy Failure to meet requirements. 1040 easy   Individuals who fail to comply with the requirements for eligibility for renewal of enrollment will be notified by the IRS. 1040 easy The notice will explain the reason for noncompliance and provide the individual with an opportunity to furnish information for reconsideration. 1040 easy The individual has 60 days from the date of the notice to respond. 1040 easy Inactive roster. 1040 easy   An individual will be placed on the roster of inactive individuals for a period of three years, if he or she: Fails to respond timely to the notice of noncompliance with the renewal requirements, Fails to file timely the application for renewal, or Does not satisfy the requirements of eligibility for renewal. 1040 easy The individual must file an application for renewal and satisfy all requirements for renewal after being placed in inactive status. 1040 easy Otherwise, at the conclusion of the next renewal cycle, he or she will be removed from the roster and the enrollment or registration terminated. 1040 easy Inactive retirement status. 1040 easy   Individuals who request to be placed in an inactive retirement status will be ineligible to practice before the IRS. 1040 easy They must continue to adhere to all renewal requirements. 1040 easy They can be reinstated to an active enrollment status by filing an application for renewal and providing evidence that they have completed the required continuing professional education hours for the enrollment cycle or registration year. 1040 easy Suspension and disbarment. 1040 easy   Individuals authorized to practice before the IRS are subject to disciplinary proceedings and may be suspended or disbarred for violating any regulation governing practice before the IRS. 1040 easy This includes engaging in acts of disreputable conduct. 1040 easy For more information, see Incompetence and Disreputable Conduct under What are the Rules of Practice, later. 1040 easy   Practitioners who are suspended in a disciplinary proceeding are not allowed to practice before the IRS during the period of suspension. 1040 easy See What Is Practice Before the IRS, earlier. 1040 easy   Practitioners who are disbarred in a disciplinary proceeding are not allowed to practice before the IRS. 1040 easy However, a practitioner can seek reinstatement from the Office of Professional Responsibility five years after disbarment. 1040 easy   If the practitioner seeks reinstatement, he or she may not practice before the IRS until the Office of Professional Responsibility authorizes reinstatement. 1040 easy The Office of Professional Responsibility may reinstate the practitioner if it is determined that: The practitioner's future conduct is not likely to be in violation of the regulations, and Granting the reinstatement would not be contrary to the public interest. 1040 easy How Does an Individual Become Enrolled? The Return Preparer Office can grant enrollment to practice before the IRS to an applicant who demonstrates special competence in tax matters by passing a written examination administered by the IRS. 1040 easy Enrollment also can be granted to an applicant who qualifies because of past service and technical experience in the IRS. 1040 easy In either case, certain application forms, discussed next, must be filed. 1040 easy Additionally, an applicant must not have engaged in any conduct that would justify suspension or disbarment from practice before the IRS. 1040 easy See Incompetence and Disreputable Conduct, later. 1040 easy Form 2587. 1040 easy   Applicants can apply to take the special enrollment examination by filing Form 2587, Application for Special Enrollment Examination. 1040 easy Form 2587 can be filed online, by mail, or by fax. 1040 easy For more information, see instructions and fees listed on the form. 1040 easy To get Form 2587, see How To Get Tax Help, later. 1040 easy Form 23 and Form 23-EP. 1040 easy   Individuals who have passed the examination or are applying on the basis of past service and technical experience with the IRS can apply for enrollment by filing Form 23, Application for Enrollment to Practice Before the Internal Revenue Service, or Form 23-EP, Application for Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent. 1040 easy The application must include a check or money order in the amount of the fee shown on Form 23 or Form 23-EP. 1040 easy Alternatively, payment may be made electronically pursuant to instructions on the forms. 1040 easy To get Form 23 or Form 23-EP, see How To Get Tax Help, later. 1040 easy Form 5434. 1040 easy   An individual may apply as an enrolled actuary on the basis of past employment with the IRS and technical experience by filing Form 5434, Application for Enrollment, with the Joint Board for the Enrollment of Actuaries. 1040 easy The application must include a check or money order in the amount of the fee shown on Form 5434. 1040 easy To get Form 5434, see How To Get Tax Help, later. 1040 easy Period of enrollment. 1040 easy   An enrollment card will be issued to each individual whose enrollment application is approved. 1040 easy The individual is enrolled until the expiration date shown on the enrollment card or certificate. 1040 easy To continue practicing beyond the expiration date, the individual must request renewal of the enrollment by filing Form 8554, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service, or Form 8554-EP, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent (ERPA). 1040 easy What Are the Rules of Practice? The rules governing practice before the IRS are published in the Code of Federal Regulations at 31 C. 1040 easy F. 1040 easy R. 1040 easy part 10 and reprinted in Treasury Department Circular No. 1040 easy 230 (Circular 230). 1040 easy An attorney, CPA, enrolled agent, enrolled retirement plan agent, registered tax return preparer, or enrolled actuary authorized to practice before the IRS (referred to hereafter as a practitioner) has the duty to perform certain acts and is restricted from performing other acts. 1040 easy In addition, a practitioner cannot engage in disreputable conduct (discussed later). 1040 easy Any practitioner who does not comply with the rules of practice or engages in disreputable conduct is subject to disciplinary action. 1040 easy Also, unenrolled preparers must comply with the rules of practice and conduct to exercise the privilege of limited practice before the IRS. 1040 easy See Publication 470 for a discussion of the special rules for limited practice by unenrolled preparers. 1040 easy Duties Practitioners must promptly submit records or information requested by officers or employees of the IRS, except when the practitioner believes on reasonable belief and good faith that the information is privileged. 1040 easy Communications with respect to tax advice between a federally authorized tax practitioner and a taxpayer generally are confidential to the same extent that communication would be privileged if it were between a taxpayer and an attorney if the advice relates to: Noncriminal tax matters before the IRS, or Noncriminal tax proceedings brought in federal court by or against the United States. 1040 easy Communications regarding corporate tax shelters. 1040 easy   This protection of tax advice communications does not apply to any written communications between a federally authorized tax practitioner and any person, including a director, shareholder, officer, employee, agent, or representative of a corporation if the communication involves the promotion of the direct or indirect participation of the corporation in any tax shelter. 1040 easy Duty to advise. 1040 easy   A practitioner who knows that his or her client has not complied with the revenue laws or has made an error or omission in any return, document, affidavit, or other required paper, has the responsibility to advise the client promptly of the noncompliance, error, or omission, and the consequences of the noncompliance, error, or omission. 1040 easy Due diligence. 1040 easy   A practitioner must exercise due diligence when performing the following duties. 1040 easy Preparing or assisting in the preparing, approving, and filing of returns, documents, affidavits, and other papers relating to IRS matters. 1040 easy Determining the correctness of oral or written representations made by him or her to the Department of the Treasury. 1040 easy Determining the correctness of oral or written representations made by him or her to clients with reference to any matter administered by the IRS. 1040 easy Restrictions Practitioners are restricted from engaging in certain practices. 1040 easy The following paragraphs discuss some of these restricted practices. 1040 easy Delays. 1040 easy   A practitioner must not unreasonably delay the prompt disposition of any matter before the IRS. 1040 easy Assistance from disbarred or suspended persons and former IRS employees. 1040 easy   A practitioner must not knowingly, directly or indirectly, do the following. 1040 easy Accept assistance from, or assist, any person who is under disbarment or suspension from practice before the IRS if the assistance relates to matters considered practice before the IRS. 1040 easy Accept assistance from any former government employee where provisions of Circular 230 or any federal law would be violated. 1040 easy Performance as a notary. 1040 easy   A practitioner who is a notary public and is employed as counsel, attorney, or agent in a matter before the IRS, or has a material interest in the matter, cannot engage in any notary activities related to that matter. 1040 easy Negotiations of taxpayer refund checks. 1040 easy   Practitioners must not endorse or otherwise negotiate (cash) any refund check (including directing or accepting payment by any means, electronic or otherwise, in an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to the taxpayer. 1040 easy Incompetence and Disreputable Conduct Any practitioner or unenrolled return preparer may be disbarred or suspended from practice before the IRS, or censured, for incompetence or disreputable conduct. 1040 easy The following list contains examples of conduct that is considered disreputable. 1040 easy Being convicted of any criminal offense under the revenue laws or of any offense involving dishonesty or breach of trust. 1040 easy Knowingly giving false or misleading information in connection with federal tax matters, or participating in such activity. 1040 easy Soliciting employment by prohibited means as discussed in section 10. 1040 easy 30 of Circular 230. 1040 easy Willfully failing to file a federal tax return, evading or attempting to evade any federal tax or payment, or participating in such actions. 1040 easy Misappropriating, or failing to properly and promptly remit, funds received from clients for payment of taxes or other obligations due the United States. 1040 easy Directly or indirectly attempting to influence the official action of IRS employees by the use of threats, false accusations, duress, or coercion, or by offering gifts, favors, or any special inducements. 1040 easy Being disbarred or suspended from practice as an attorney, CPA, public accountant, or actuary, by the District of Columbia or any state, possession, territory, commonwealth, or any federal court, or any federal agency, body, or board. 1040 easy Knowingly aiding and abetting another person to practice before the IRS during a period of suspension, disbarment, or ineligibility of that other person. 1040 easy Using abusive language, making false accusations and statements knowing them to be false, circulating or publishing malicious or libelous matter, or engaging in any contemptuous conduct in connection with practice before the IRS. 1040 easy Giving a false opinion knowingly, recklessly, or through gross incompetence; or following a pattern of providing incompetent opinions in questions arising under the federal tax laws. 1040 easy Censure, Disbarments, and Suspensions The Office of Professional Responsibility may censure or institute proceedings to censure, suspend or disbar any attorney, CPA, or enrolled agent who has violated Circular 230. 1040 easy A practitioner will be given the opportunity to demonstrate compliance with the rules before any disciplinary action is taken. 1040 easy Authorizing a Representative You may either represent yourself, or you may authorize an individual to represent you before the IRS. 1040 easy If you chose to have someone represent you, your representative must be a person eligible to practice before the IRS. 1040 easy See Who Can Practice Before the IRS, earlier. 1040 easy What Is a Power of Attorney? A power of attorney is your written authorization for an individual to act on your behalf. 1040 easy If the authorization is not limited, the individual generally can perform all acts that you can perform. 1040 easy The authority granted to a registered tax return preparer or an unenrolled preparer is limited. 1040 easy For information on the limits regarding registered tax return preparers, see Circular 230 §10. 1040 easy 3(f). 1040 easy For information on the limits regarding unenrolled preparers, see Publication 470. 1040 easy Acts performed. 1040 easy   Any representative, other than a registered tax return preparer or an unenrolled return preparer, can usually perform the following acts. 1040 easy Represent you before any office of the IRS. 1040 easy Sign an offer or a waiver of restriction on assessment or collection of a tax deficiency, or a waiver of notice of disallowance of claim for credit or refund. 1040 easy Sign a consent to extend the statutory time period for assessment or collection of a tax. 1040 easy Sign a closing agreement. 1040 easy Signing your return. 1040 easy   The representative named under a power of attorney is not permitted to sign your income tax return unless: The signature is permitted under the Internal Revenue Code and the related regulations (see Regulations section 1. 1040 easy 6012-1(a)(5)). 1040 easy You specifically authorize this in your power of attorney. 1040 easy For example, the regulation permits a representative to sign your return if you are unable to sign the return due to: Disease or injury. 1040 easy Continuous absence from the United States (including Puerto Rico) for a period of at least 60 days prior to the date required by law for filing the return. 1040 easy Other good cause if specific permission is requested of and granted by the IRS. 1040 easy When a return is signed by a representative, it must be accompanied by a power of attorney (or copy) authorizing the representative to sign the return. 1040 easy For more information, see the Form 2848 instructions. 1040 easy Limitation on substitution or delegation. 1040 easy   A recognized representative can substitute or delegate authority under the power of attorney to another recognized representative only if the act is specifically authorized by you on the power of attorney. 1040 easy   After a substitution has been made, only the newly recognized representative will be recognized as the taxpayer's representative. 1040 easy If a delegation of power has been made, both the original and the delegated representative will be recognized by the IRS to represent you. 1040 easy Disclosure of returns to a third party. 1040 easy   Your representative cannot execute consents that will allow the IRS to disclose tax return or return information to a third party unless you specifically delegate this authority to your representative on line 5 of Form 2848. 1040 easy Incapacity or incompetency. 1040 easy   A power of attorney is generally terminated if you become incapacitated or incompetent. 1040 easy   The power of attorney can continue, however, in the case of your incapacity or incompetency if you authorize this on line 5 “Other” of the Form 2848 and if your non-IRS durable power of attorney meets all the requirements for acceptance by the IRS. 1040 easy See Non-IRS powers of attorney, later. 1040 easy When Is a Power of Attorney Required? Submit a power of attorney when you want to authorize an individual to represent you before the IRS, whether or not the representative performs any of the other acts cited earlier under What Is a Power of Attorney. 1040 easy A power of attorney is most often required when you want to authorize another individual to perform at least one of the following acts on your behalf. 1040 easy Represent you at a meeting with the IRS. 1040 easy Prepare and file a written response to the IRS. 1040 easy Form Required Use Form 2848 to appoint a recognized representative to act on your behalf before the IRS. 1040 easy Individuals recognized to practice before the IRS are listed under Part II, Declaration of Representative, of Form 2848. 1040 easy Your representative must complete that part of the form. 1040 easy Non-IRS powers of attorney. 1040 easy   The IRS will accept a non-IRS power of attorney, but a completed Form 2848 must be attached in order for the power of attorney to be entered on the Centralized Authorization File (CAF) system. 1040 easy For more information, see Processing a non-IRS power of attorney, later. 1040 easy   If you want to use a power of attorney document other than Form 2848, it must contain the following information. 1040 easy Your name and mailing address. 1040 easy Your social security number and/or employer identification number. 1040 easy Your employee plan number, if applicable. 1040 easy The name and mailing address of your representative(s). 1040 easy The types of tax involved. 1040 easy The federal tax form number. 1040 easy The specific year(s) or period(s) involved. 1040 easy For estate tax matters, the decedent's date of death. 1040 easy A clear expression of your intention concerning the scope of authority granted to your representative(s). 1040 easy Your signature and date. 1040 easy You also must attach to the non-IRS power of attorney a signed and dated statement made by your representative. 1040 easy This statement, which is referred to as the Declaration of Representative, is contained in Part II of Form 2848. 1040 easy The statement should read: I am not currently under suspension or disbarment from practice before the Internal Revenue Service or other practice of my profession by any other authority, I am aware of the regulations contained in Circular 230, I am authorized to represent the taxpayer(s) identified in the power of attorney, and I am an individual described in 26 CFR 601. 1040 easy 502(b). 1040 easy Required information missing. 1040 easy   The IRS will not accept your non-IRS power of attorney if it does not contain all the information listed above. 1040 easy You can sign and submit a completed Form 2848 or a new non-IRS power of attorney that contains all the information. 1040 easy If you cannot sign an acceptable replacement document, your attorney-in-fact may be able to perfect (make acceptable to the IRS) your non-IRS power of attorney by using the procedure described next. 1040 easy Procedure for perfecting a non-IRS power of attorney. 1040 easy   Under the following conditions, the attorney-in-fact named in your non-IRS power of attorney can sign a Form 2848 on your behalf. 1040 easy The original non-IRS power of attorney grants authority to handle federal tax matters (for example, general authority to perform any acts). 1040 easy The attorney-in-fact attaches a statement (signed under penalty of perjury) to the Form 2848 stating that the original non-IRS power of attorney is valid under the laws of the governing jurisdiction. 1040 easy Example. 1040 easy John Elm, a taxpayer, signs a non-IRS durable power of attorney that names his neighbor and CPA, Ed Larch, as his attorney-in-fact. 1040 easy The power of attorney grants Ed the authority to perform any and all acts on John's behalf. 1040 easy However, it does not list specific tax-related information such as types of tax or tax form numbers. 1040 easy Shortly after John signs the power of attorney, he is declared incompetent. 1040 easy Later, a federal tax matter arises concerning a prior year return filed by John. 1040 easy Ed attempts to represent John before the IRS but is rejected because the durable power of attorney does not contain required information. 1040 easy If Ed attaches a statement (signed under the penalty of perjury) that the durable power of attorney is valid under the laws of the governing jurisdiction, he can sign a completed Form 2848 and submit it on John's behalf. 1040 easy If Ed can practice before the IRS (see Who Can Practice Before the IRS, earlier), he can name himself as representative on Form 2848. 1040 easy Otherwise, he must name another individual who can practice before the IRS. 1040 easy Processing a non-IRS power of attorney. 1040 easy   The IRS has a centralized computer database system called the CAF system. 1040 easy This system contains information on the authority of taxpayer representatives. 1040 easy Generally, when you submit a power of attorney document to the IRS, it is processed for inclusion on the CAF system. 1040 easy Entry of your power of attorney on the CAF system enables IRS personnel, who do not have a copy of your power of attorney, to verify the authority of your representative by accessing the CAF. 1040 easy It also enables the IRS to automatically send copies of notices and other IRS communications to your representative if you specify that your representative should receive those communications. 1040 easy   You can have your non-IRS power of attorney entered on the CAF system by attaching it to a completed Form 2848 and submitting it to the IRS. 1040 easy Your signature is not required; however, your attorney-in-fact must sign the Declaration of Representative (see Part II of Form 2848). 1040 easy Preparation of Form — Helpful Hints The preparation of Form 2848 is illustrated by an example, later under How Do I Fill Out Form 2848. 1040 easy However, the following will also assist you in preparing the form. 1040 easy Line-by-line hints. 1040 easy   The following hints are summaries of some of the line-by-line instructions for Form 2848. 1040 easy Line 1—Taxpayer information. 1040 easy   If a joint return is involved, the husband and wife each file a separate Form 2848 if they both want to be represented. 1040 easy If only one spouse wants to be represented in the matter, that spouse files a Form 2848. 1040 easy Line 2—Representative(s). 1040 easy   Only individuals may be named as representatives. 1040 easy If your representative has not been assigned a CAF number, enter “None” on that line and the IRS will issue one to your representative. 1040 easy If the representative's address or phone number has changed since the CAF number was issued, you should check the appropriate box. 1040 easy Enter your representative's fax number if available. 1040 easy   If you want to name more than three representatives, attach additional Form(s) 2848. 1040 easy The IRS can send copies of notices and communications to two of your representatives. 1040 easy You must, however, check the boxes on line 2 of the Form 2848 if you want the IRS to routinely send copies of notices and communications to your representatives. 1040 easy If you do not check the boxes, your representatives will not routinely receive copies of notices and communications. 1040 easy Line 3—Tax matters. 1040 easy   You may list any tax years or periods that have already ended as of the date you sign the power of attorney. 1040 easy However, you may include on a power of attorney only future tax periods that end no later than 3 years after the date the power of attorney is received by the IRS. 1040 easy The 3 future periods are determined starting after December 31 of the year the power of attorney is received by the IRS. 1040 easy However, avoid general references such as “all years” or “all taxes. 1040 easy ” Any Form 2848 with general references will be returned. 1040 easy Line 4—Specific use not recorded on Centralized Authorization File (CAF). 1040 easy   Certain matters cannot be recorded on the CAF system. 1040 easy Examples of such matters include, but are not limited to, the following. 1040 easy Requests for a private letter ruling or technical advice. 1040 easy Applications for an employer identification number (EIN). 1040 easy Claims filed on Form 843, Claim for Refund and Request for Abatement. 1040 easy Corporate dissolutions. 1040 easy Requests for change of accounting method. 1040 easy Requests for change of accounting period. 1040 easy Applications for recognition of exemption under sections 501(c)(3), 501(a), or 521 (Forms 1023, 1034, or 1028). 1040 easy Request for a determination of the qualified status of an employee benefit plan (Forms 5300, 5307, or 5310). 1040 easy Application for Award for Original Information under section 7623. 1040 easy Voluntary submissions under the Employee Plans Compliance Resolution System (EPCRS). 1040 easy Freedom of Information Act requests. 1040 easy If the tax matter described on line 3 of Form 2848 concerns one of these matters specifically, check the box on line 4. 1040 easy If this box is checked, the representative should mail or fax the power of attorney to the IRS office handling the matter. 1040 easy Otherwise, the representative should bring a copy of the power of attorney to each meeting with the IRS. 1040 easy Where To File a Power of Attorney Generally, you can mail or fax a paper Form 2848 directly to the IRS. 1040 easy To determine where you should file Form 2848, see Where To File in the instructions for Form 2848. 1040 easy If Form 2848 is for a specific use, mail or fax it to the office handling that matter. 1040 easy For more information on specific use, see the Instructions for Form 2848, line 4. 1040 easy FAX copies. 1040 easy   The IRS will accept a copy of a power of attorney that is submitted by facsimile transmission (fax). 1040 easy If you choose to file a power of attorney by fax, be sure the appropriate IRS office is equipped to accept this type of transmission. 1040 easy Your representative may be able to file Form 2848 electronically via the IRS website. 1040 easy For more information, your representative can go to www. 1040 easy irs. 1040 easy gov and under the Tax Professionals tab, click on e-services–Online Tools for Tax Professionals. 1040 easy If you complete Form 2848 for electronic signature authorization, do not file Form 2848 with the IRS. 1040 easy Instead, give it to your representative, who will retain the document. 1040 easy Updating a power of attorney. 1040 easy   Submit any update or modification to an existing power of attorney in writing. 1040 easy Your signature (or the signature of the individual(s) authorized to sign on your behalf) is required. 1040 easy Do this by sending the updated Form 2848 or non-IRS power of attorney to the IRS office(s) where you previously sent the original(s), including the center where the related return was, or will be filed. 1040 easy   A recognized representative may substitute or delegate authority if you specifically authorize your representative to substitute or delegate representation in the original power of attorney. 1040 easy To make a substitution or delegation, the representative must file the following items with the IRS office(s) where the power of attorney was filed. 1040 easy A written notice of substitution or delegation signed by the recognized representative. 1040 easy A written declaration of representative made by the new representative. 1040 easy A copy of the power of attorney that specifically authorizes the substitution or delegation. 1040 easy Retention/Revocation of Prior Power(s) of Attorney A newly filed power of attorney concerning the same matter will revoke a previously filed power of attorney. 1040 easy However, the new power of attorney will not revoke the prior power of attorney if it specifically states it does not revoke such prior power of attorney and either of the following are attached to the new power of attorney. 1040 easy A copy of the unrevoked prior power of attorney, or A statement signed by the taxpayer listing the name and address of each representative authorized under the prior unrevoked power of attorney. 1040 easy Note. 1040 easy The filing of Form 2848 will not revoke any  Form 8821 that is in effect. 1040 easy Revocation of Power of Attorney/Withdrawal of Representative If you want to revoke an existing power of attorney and do not want to name a new representative, or if a representative wants to withdraw from representation, mail or fax a copy of the previously executed power of attorney to the IRS, or if the power of attorney is for a specific matter, to the IRS office handling the matter. 1040 easy If the taxpayer is revoking the power of attorney, the taxpayer must write “REVOKE” across the top of the first page with a current signature and date below this annotation. 1040 easy If the representative is withdrawing from the representation, the representative must write “WITHDRAW” across the top of the first page with a current signature and date below this annotation. 1040 easy If you do not have a copy of the power of attorney you want to revoke or withdraw, send a statement to the IRS. 1040 easy The statement of revocation or withdrawal must indicate that the authority of the power of attorney is revoked or withdrawn, list the matters and periods, and must be signed and dated by the taxpayer or representative as applicable. 1040 easy If the taxpayer is revoking, list the name and address of each recognized representative whose authority is revoked. 1040 easy When the taxpayer is completely revoking authority, the form should state “remove all years/periods” instead of listing the specific tax matter, years, or periods. 1040 easy If the representative is withdrawing, list the name, TIN, and address (if known) of the taxpayer. 1040 easy To revoke a specific use power of attorney, send the power of attorney or statement of revocation to the IRS office handling your case, using the above instructions. 1040 easy A power of attorney held by a student will be recorded on the CAF system for 130 days from the receipt date. 1040 easy If you are authorizing a student to represent you after that time, you will need to submit a current and valid Form 2848. 1040 easy When Is a Power of Attorney Not Required? A power of attorney is not required when the third party is not dealing with the IRS as your representative. 1040 easy The following situations do not require a power of attorney. 1040 easy Providing information to the IRS. 1040 easy Authorizing the disclosure of tax return information through Form 8821, Tax Information Authorization, or other written or oral disclosure consent. 1040 easy Allowing the IRS to discuss return information with a third party via the checkbox provided on a tax return or other document. 1040 easy Allowing a tax matters partner or person (TMP) to perform acts for the partnership. 1040 easy Allowing the IRS to discuss return information with a fiduciary. 1040 easy How Do I Fill Out Form 2848? The following example illustrates how to complete Form 2848. 1040 easy The two completed forms for this example are shown on the next pages. 1040 easy Example. 1040 easy Stan and Mary Doe have been notified that their joint tax returns (Forms 1040) for 2009, 2010, and 2011 are being examined. 1040 easy They have decided to appoint Jim Smith, an enrolled agent, to represent them in this matter and any future matters concerning these returns. 1040 easy Jim, who has prepared returns at the same location for years, already has a Centralized Authorization File (CAF) number assigned to him. 1040 easy Mary does not want Jim to sign any agreements on her behalf, but Stan is willing to have Jim do so. 1040 easy They want copies of all notices and written communications sent to Jim. 1040 easy This is the first time Stan and Mary have given power of attorney to anyone. 1040 easy They should each complete a Form 2848 as follows. 1040 easy Line 1—Taxpayer information. 1040 easy   Stan and Mary must each file a separate Form 2848. 1040 easy On his separate Form 2848, Stan enters his name, street address, and social security number in the spaces provided. 1040 easy Mary does likewise on her separate Form 2848. 1040 easy Line 2—Representative(s). 1040 easy   On their separate Forms 2848, Stan and Mary each enters the name and current address of their chosen representative, Jim Smith. 1040 easy Both Stan and Mary want Jim Smith to receive notices and communications concerning the matters identified in line 3, so on their separate Forms 2848, Stan and Mary each checks the box in the first column of line 2. 1040 easy They also enter Mr. 1040 easy Smith's CAF number, his telephone number, and his fax number. 1040 easy Mr. 1040 easy Smith's address, telephone number, and fax number have not changed since the IRS issued his CAF number, so Stan and Mary do not check the boxes in the second column. 1040 easy Line 3—Tax Matters. 1040 easy   On their separate Forms 2848, Stan and Mary each enters “income” for the type of tax, “1040” for the form number, and “2009, 2010, and 2011” for the tax years. 1040 easy Line 4—Specific use not recorded on Centralized Authorization File (CAF). 1040 easy   On their separate Forms 2848, Stan and Mary make no entry on this line because they do not want to restrict the use of their powers of attorney to a specific use that is not recorded on the CAF. 1040 easy See Preparation of Form — Helpful Hints, earlier. 1040 easy Line 5—Acts authorized. 1040 easy   Mary wants to sign any agreement that reflects changes to her and Stan's joint 2009, 2010, and 2011 income tax liability, so she writes “Taxpayer must sign any agreement form” on line 5 of her Form 2848. 1040 easy Stan does not wish to restrict the authority of Jim Smith in this regard, so he leaves line 5 of his Form 2848 blank. 1040 easy If either Mary or Stan had chosen, they could have listed other restrictions on line 5 of their separate Forms 2848. 1040 easy Line 6—Retention/revocation of prior power(s) of attorney. 1040 easy   Stan and Mary are each filing their first powers of attorney, so they make no entry on this line. 1040 easy However, if they had filed prior powers of attorney, the filing of this current power would revoke any earlier ones for the same tax matter(s) unless they checked the box on line 6 and attached a copy of the prior power of attorney that they wanted to remain in effect. 1040 easy   If Mary later decides that she can handle the examination on her own, she can revoke her power of attorney even though Stan does not revoke his power of attorney. 1040 easy (See Revocation of Power of Attorney/Withdrawal of Representative, earlier, for the special rules that apply. 1040 easy ) Line 7—Signature of taxpayer. 1040 easy   Stan and Mary each signs and dates his or her Form 2848. 1040 easy If a taxpayer does not sign, the IRS cannot accept the form. 1040 easy Part II—Declaration of Representative. 1040 easy   Jim Smith must complete this part of Form 2848. 1040 easy If he does not sign this part, the IRS cannot accept the form. 1040 easy What Happens to the Power of Attorney When Filed? A power of attorney will be recognized after it is received, reviewed, and determined by the IRS to contain the required information. 1040 easy However, until a power of attorney is entered on the CAF system, IRS personnel may be unaware of the authority of the person you have named to represent you. 1040 easy Therefore, during this interim period, IRS personnel may request that you or your representative bring a copy to any meeting with the IRS. 1040 easy This image is too large to be displayed in the current screen. 1040 easy Please click the link to view the image. 1040 easy Filled-in Form 2848 - Page 1 This image is too large to be displayed in the current screen. 1040 easy Please click the link to view the image. 1040 easy Filled-in Form 2848 - Page 2 This image is too large to be displayed in the current screen. 1040 easy Please click the link to view the image. 1040 easy Filled-in Form 2848 - Page 1 This image is too large to be displayed in the current screen. 1040 easy Please click the link to view the image. 1040 easy Filled-in Form 2848 - Page 2 Processing and Handling How the power of attorney is processed and handled depends on whether it is a complete or incomplete document. 1040 easy Incomplete document. 1040 easy   If Form 2848 is incomplete, the IRS will attempt to secure the missing information either by writing or telephoning you or your representative. 1040 easy For example, if your signature or signature date is missing, the IRS will contact you. 1040 easy If information concerning your representative is missing and information sufficient to make a contact (such as an address and/or a telephone number) is on the document, the IRS will try to contact your representative. 1040 easy   In either case, the power of attorney is not considered valid until all required information is entered on the document. 1040 easy The individual(s) named as representative(s) will not be recognized to practice before the IRS, on your behalf, until the document is complete and accepted by the IRS. 1040 easy Complete document. 1040 easy   If the power of attorney is complete and valid, the IRS will take action to recognize the representative. 1040 easy In most instances, this includes processing the document on the CAF system. 1040 easy Recording the data on the CAF system enables the IRS to direct copies of mailings to authorized representatives and to readily recognize the scope of authority granted. 1040 easy Documents not processed on CAF. 1040 easy   Specific-use powers of attorney are not processed on the CAF system (see Preparation of Form – Helpful Hints, earlier). 1040 easy For example, a power of attorney that is a one-time or specific-issue grant of authority is not processed on the CAF system. 1040 easy These documents remain with the related case files. 1040 easy In this situation, you should check the box on line 4 of Form 2848. 1040 easy In these situations, the representative should bring a copy of the power of attorney to each meeting with the IRS. 1040 easy Dealing With the Representative After a valid power of attorney is filed, the IRS will recognize your representative. 1040 easy However, if it appears the representative is responsible for unreasonably delaying or hindering the prompt disposition of an IRS matter by failing to furnish, after repeated requests, nonprivileged information, the IRS can contact you directly. 1040 easy For example, in most instances in which a power of attorney is recognized, the IRS will contact the representative to set up appointments and to provide lists of required items. 1040 easy However, if the representative is unavailable, does not respond to repeated requests, and does not provide required items (other than items considered privileged), the IRS can bypass your representative and contact you directly. 1040 easy If a representative engages in conduct described above, the matter can be referred to the Office of Professional Responsibility for consideration of possible disciplinary action. 1040 easy Notices and other correspondence. 1040 easy   If you have a recognized representative, you and the representative will routinely receive notices and other correspondence from the IRS (either the original or a copy) if you checked the box in the left column of line 2 of Form 2848. 1040 easy If the power of attorney is processed on the CAF system, the IRS will send your representative(s) a duplicate of all computer-generated correspondence that is sent to you. 1040 easy This includes notices and letters produced either at the Martinsburg Computing Center, or other IRS centers. 1040 easy The IRS employee handling the case is responsible for ensuring that the original and any requested copies of each manually-generated correspondence are sent to you and your representative(s) in accordance with your authorization. 1040 easy How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. 1040 easy By selecting the method that is best for you, you will have quick and easy access to tax help. 1040 easy Free help with your return. 1040 easy   Free help in preparing your return is available nationwide from IRS-certified volunteers. 1040 easy The Volunteer Income Tax Assistance (VITA) program is designed to help low and moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. 1040 easy Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. 1040 easy To find the nearest VITA or TCE site, visit IRS. 1040 easy gov or call 1-800-906-9887 or 1-800-829-1040. 1040 easy   As part of the TCE program, AARP offers the Tax-Aide counseling program. 1040 easy To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www. 1040 easy aarp. 1040 easy org/money/taxaide. 1040 easy   For more information on these programs, go to IRS. 1040 easy gov and enter keyword “VITA” in the upper right-hand corner. 1040 easy Internet. 1040 easy You can access the IRS website at IRS. 1040 easy gov 24 hours a day, 7 days a week to: E-file your return. 1040 easy Find out about commercial tax preparation and e-file services available free to eligible taxpayers. 1040 easy Check the status of your refund. 1040 easy Go to IRS. 1040 easy gov and click on Where's My Refund. 1040 easy Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. 1040 easy If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). 1040 easy Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. 1040 easy Download forms, including talking tax forms, instructions, and publications. 1040 easy Order IRS products online. 1040 easy Research your tax questions online. 1040 easy Search publications online by topic or keyword. 1040 easy Use the online Internal Revenue Code, regulations, or other official guidance. 1040 easy View Internal Revenue Bulletins (IRBs) published in the last few years. 1040 easy Figure your withholding allowances using the withholding calculator online at www. 1040 easy irs. 1040 easy gov/individuals. 1040 easy Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at www. 1040 easy irs. 1040 easy gov/individuals. 1040 easy Sign up to receive local and national tax news by email. 1040 easy Get information on starting and operating a small business. 1040 easy Phone. 1040 easy Many services are available by phone. 1040 easy   Ordering forms, instructions, and publications. 1040 easy Call 1-800-TAX -FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. 1040 easy You should receive your order within 10 days. 1040 easy Asking tax questions. 1040 easy Call the IRS with your tax questions at 1-800-829-1040. 1040 easy Solving problems. 1040 easy You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. 1040 easy An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. 1040 easy Call your local Taxpayer Assistance Center for an appointment. 1040 easy To find the number, go to www. 1040 easy irs. 1040 easy gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. 1040 easy TTY/TDD equipment. 1040 easy If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. 1040 easy TeleTax topics. 1040 easy Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. 1040 easy Refund information. 1040 easy To check the status of your refund, call 1-800-829-1954 or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). 1040 easy Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. 1040 easy If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). 1040 easy Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. 1040 easy If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. 1040 easy Other refund information. 1040 easy To check the status of a prior-year refund or amended return refund, call 1-800-829-1040. 1040 easy Evaluating the quality of our telephone services. 1040 easy To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. 1040 easy One method is for a second IRS representative to listen in on or record random telephone calls. 1040 easy Another is to ask some callers to complete a short survey at the end of the call. 1040 easy Walk-in. 1040 easy Many products and services are available on a walk-in basis. 1040 easy   Products. 1040 easy You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. 1040 easy Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. 1040 easy Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. 1040 easy Services. 1040 easy You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. 1040 easy An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. 1040 easy If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. 1040 easy No appointment is necessary—just walk in. 1040 easy If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. 1040 easy A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. 1040 easy If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. 1040 easy All other issues will be handled without an appointment. 1040 easy To find the number of your local office, go to  www. 1040 easy irs. 1040 easy gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. 1040 easy Mail. 1040 easy You can send your order for forms, instructions, and publications to the address below. 1040 easy You should receive a response within 10 days after your request is received. 1040 easy  Internal Revenue Service 1201 N. 1040 easy Mitsubishi Motorway Bloomington, IL 61705-6613 Taxpayer Advocate Service. 1040 easy   The Taxpayer Advocate Service (TAS) is your voice at the IRS. 1040 easy Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. 1040 easy We offer free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. 1040 easy Remember, the worst thing you can do is nothing at all. 1040 easy   TAS can help if you can’t resolve your problem with the IRS and: Your problem is causing financial difficulties for you, your family, or your business. 1040 easy You face (or your business is facing) an immediate threat of adverse action. 1040 easy You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised. 1040 easy   If you qualify for our help, we’ll do everything we can to get your problem resolved. 1040 easy You will be assigned to one advocate who will be with you at every turn. 1040 easy We have offices in every state, the District of Columbia, and Puerto Rico. 1040 easy Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. 1040 easy And our services are always free. 1040 easy   As a taxpayer, you have rights that the IRS must abide by in its dealings with you. 1040 easy Our tax toolkit at www. 1040 easy TaxpayerAdvocate. 1040 easy irs. 1040 easy gov can help you understand these rights. 1040 easy   If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www. 1040 easy irs. 1040 easy gov/advocate. 1040 easy You can also call our toll-free number at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 1040 easy   TAS also handles large-scale or systemic problems that affect many taxpayers. 1040 easy If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www. 1040 easy irs. 1040 easy gov/advocate. 1040 easy Low Income Taxpayer Clinics (LITCs). 1040 easy   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. 1040 easy Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. 1040 easy These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. 1040 easy Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. 1040 easy For more information and to find a clinic near you, see the LITC page on www. 1040 easy irs. 1040 easy gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. 1040 easy This publication is also available by calling 1-800-829-3676 or at your local IRS office. 1040 easy Free tax services. 1040 easy   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 1040 easy Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 1040 easy The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 1040 easy The majority of the information and services listed in this publication are available to you free of charge. 1040 easy If there is a fee associated with a resource or service, it is listed in the publication. 1040 easy   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. 1040 easy DVD for tax products. 1040 easy You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. 1040 easy Prior-year forms, instructions, and publications. 1040 easy Tax Map: an electronic research tool and finding aid. 1040 easy Tax law frequently asked questions. 1040 easy Tax Topics from the IRS telephone response system. 1040 easy Internal Revenue Code—Title 26 of the U. 1040 easy S. 1040 easy Code. 1040 easy Links to other Internet based Tax Research Materials. 1040 easy Fill-in, print, and save features for most tax forms. 1040 easy Internal Revenue Bulletins. 1040 easy Toll-free and email technical support. 1040 easy Two releases during the year. 1040 easy  – The first release will ship the beginning of January. 1040 easy  – The final release will ship the beginning of March. 1040 easy Purchase the DVD from National Technical Information Service (NTIS) at www. 1040 easy irs. 1040 easy gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). 1040 easy Prev  Up  Next   Home   More Online Publications
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Fuel Tax Credit Extensions Frequently Asked Questions

American Taxpayer Relief Act of 2012 (Pub. L. 112-240)

The American Taxpayer Relief Act of 2012 (Pub. L. 112-240) retroactively extends certain fuel tax credits that expired on Dec. 31, 2011. The retroactively extended fuel tax credits are the biodiesel mixture credit, biodiesel credit, alternative fuel credit and alternative fuel mixture credit. These credits are now scheduled to expire on Dec. 31, 2013.

These Q&As tell taxpayers how to claim the credits for qualifying sales or uses during 2012. They also describe changes to the cellulosic biofuel credit for 2013. 

More information on qualification for the credits is on Form 720, Quarterly Federal Excise Tax Return; Form 720X, Amended Quarterly Federal Excise Tax Return; Form 4136, Credit for Federal Tax Paid on Fuels; Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit; Form 8849, Claim for Refund of Excise Taxes; and Form 8864, Biodiesel and Renewable Diesel Fuels Credit.

Q1. How do I claim the biodiesel mixture (including renewable diesel mixture) credit for qualifying sales and uses during 2012? What is the deadline for filing a claim?

A1. Choose one of the following options to claim the credit:

OPTION 1: Follow the procedures in Notice 2013-26. These procedures allow all claims to be made on Form 8849 for all qualifying sales and uses in 2012. These claims must be made by July 1, 2013.

OPTION 2: If you do not make the claim by July 1, 2013, for sales and uses in 2012, follow the procedures below.

If you reported excise tax liability for gasoline, diesel fuel, or kerosene on Form 720 during any quarter of 2012, you must amend that Form 720 to claim a credit against those liabilities. The amount of this credit may not exceed the total amount of those liabilities.

    • To amend your Form 720, file Form 720X in accordance with the instructions to that form.
    • You may use a single Form 720X to amend multiple quarters, but state each quarter separately.
    • If your biodiesel mixture (including renewable diesel mixture) credit exceeds the amount that you claim on Form 720X, you may claim that excess as an income tax credit on your 2012 federal income tax return by attaching to the return Form 4136 in accordance with the instructions for that form.
    • Generally, you have three years from the due date of each Form 720 you filed during 2012 to claim the credit against your excise tax liability for a particular quarter. Generally, you have three years from the due date of your income tax return to claim the credit by attaching Form 4136 to an amended income tax return.

Q2. Do I need to submit Certificates for Biodiesel with my biodiesel mixture claims?

A2. Yes. See the instructions to Form 720, Form 8849, or Form 4136, as appropriate. If you did not receive certificates during 2012, the biodiesel producer may issue them to you now. However, the IRS cannot require biodiesel producers to issue a certificate.

Q3. How do I claim the biodiesel (including renewable diesel) credit for qualifying sales or uses during 2012? What is the deadline for filing a claim?

A3. You may claim the biodiesel (including renewable diesel) credit for qualifying sales or uses during 2012 as an income tax credit on your 2012 federal income tax return by attaching to the return Form 8864, in accordance with the instructions for that form. Generally, you have three years from the due date of your income tax return to claim the credit by attaching Form 8864 to an amended income tax return.

Q4. How do I claim the alternative fuel credit for qualifying sales or uses during 2012? What is the deadline for filing a claim?

A4. The term “alternative fuel” generally includes:

  • Liquefied petroleum gas.
  • P Series Fuels.
  • Compressed or liquefied natural gas.
  • Liquefied hydrogen.
  • Any liquid fuel which meets certain carbon recapture requirements and that is derived from coal (including peat) through the Fischer-Tropsch process.
  • Compressed or liquefied gas derived from biomass (as defined in section 45K(c)(3)).
  • Liquid fuel derived from biomass (as defined in section 45K(c)(3)).

Choose one of the following options to claim the credit:

OPTION 1: Follow the procedures in Notice 2013-26. These procedures allow all claims to be made on Form 8849 for all qualifying sales and uses in 2012. These claims must be made by July 1, 2013.

OPTION 2: If you do not make the claim by July 1, 2013, for sales and uses in 2012, follow the procedures below.

    • If you reported excise tax liability for alternative fuel on Form 720 during any quarter of 2012, you must amend that Form 720 to claim a credit against those liabilities. The amount of this credit may not exceed the total amount of those liabilities.
    • To amend your Form 720, file Form 720X in accordance with the instructions to that form.
    • You may use a single Form 720X to amend multiple quarters, but state each quarter separately.
    • If your alternative fuel credit exceeds the amount that you claim on Form 720X, you may claim the excess as an income tax credit on your 2012 federal income tax return by attaching to the return Form 4136 in accordance with the instructions for that form.
    • Generally, you have three years from the due date of each Form 720 you filed during 2012 to claim the credit against your excise tax liability for a particular quarter. Generally, you have three years from the due date of your income tax return to claim the credit by attaching Form 4136 to an amended income tax return.

Q5. How do I claim the alternative fuel mixture credit for qualifying sales or uses during 2012? What is the deadline for filing a claim?

A5. See below.

  • If you reported excise tax liability for gasoline, diesel fuel or kerosene on Form 720, during any quarter of 2012, you must amend that Form 720 to claim a credit against those liabilities. The amount of this credit may not exceed the amount of those liabilities.
  • To amend your Form 720, file Form 720X in accordance with the instructions to the form.
  • You may use a single Form 720X to amend multiple quarters, but state each quarter separately.
  • You may claim the alternative fuel mixture credit only up to the amount of your tax liabilities for gasoline, diesel fuel or kerosene.
  • You may not claim any excess alternative fuel mixture credit on your income tax return or receive a payment for that amount. 

Q6. Do I have to be registered by IRS to claim the biodiesel mixture credit (including renewable diesel mixture credit), biodiesel credit (including renewable diesel credit), alternative fuel credit or alternative fuel mixture credit?

A6. You must be registered by the IRS at the time you file your claims for the alternative fuel credit and the alternative fuel mixture credit.

If you are already registered with an AL (alternative fuel) or AM (alternative fuel mixture) activity letter, as appropriate, do not apply again for registration. 

However, if you are not already registered by the IRS with the appropriate activity letter, apply to the IRS for registration by filing Form 637, Application for Registration (For Certain Excise Tax Activities), in accordance with the instructions to Form 637. You are not registered with the IRS until you receive your letter of registration from the IRS.

Q7. How do I claim the cellulosic biofuel credit for qualifying sales or uses during 2012?

A7. You may claim the cellulosic biofuel credit for qualifying sales or uses during 2012 as an income tax credit on your 2012 federal income tax return by attaching Form 6478 to the return in accordance with the instructions for that form.

You must be registered by the IRS at the time you file your claim for the cellulosic biofuel credit.

If you are already registered with a CB (producers of cellulosic biofuel) activity letter, do not apply again for registration. However, if you are not already registered by the IRS with the CB activity letter, you may apply to the IRS for registration by filing Form 637, Application for Registration (For Certain Excise Tax Activities), in accordance with the instructions to Form 637. You are not registered with the IRS until you receive your letter of registration from the IRS.

Q8. What changes did the American Taxpayer Relief Act make to the cellulosic biofuel credit?

A8. Effective Jan. 3, 2013, the Act changed the designation of the credit to “second generation biofuel credit.” Also effective on Jan. 3, 2013, biofuels produced from algae, cyanobacteria, and lemna feedstocks are eligible for the credit. The second generation biofuel credit expires for fuel produced after Dec. 31, 2013.

Q9. If I am a second generation biofuel producer, do I need to be registered by the IRS to claim the credit?

A9. Yes, you must be registered by the IRS at the time you file your claims for second generation biofuel credit. Apply for activity letter “CB” using Form 637. If you are already registered by the IRS with a CB activity letter, do not apply again for registration.

Related Item: IRS Forms and Publications

Page Last Reviewed or Updated: 07-Mar-2014

The 1040 Easy

1040 easy 1. 1040 easy   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. 1040 easy At-risk limits. 1040 easy Passive activities. 1040 easy Net operating loss. 1040 easy When Can I Deduct an Expense?Economic performance. 1040 easy Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. 1040 easy  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. 1040 easy See Optional safe harbor method under Business use of your home , later. 1040 easy Introduction This chapter covers the general rules for deducting business expenses. 1040 easy Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. 1040 easy Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. 1040 easy What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. 1040 easy An ordinary expense is one that is common and accepted in your industry. 1040 easy A necessary expense is one that is helpful and appropriate for your trade or business. 1040 easy An expense does not have to be indispensable to be considered necessary. 1040 easy Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. 1040 easy In some cases you may not be allowed to deduct the expense at all. 1040 easy Therefore, it is important to distinguish usual business expenses from expenses that include the following. 1040 easy The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. 1040 easy Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. 1040 easy Some of your business expenses may be included in figuring cost of goods sold. 1040 easy Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. 1040 easy If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. 1040 easy The following are types of expenses that go into figuring cost of goods sold. 1040 easy The cost of products or raw materials, including freight. 1040 easy Storage. 1040 easy Direct labor (including contributions to pension or annuity plans) for workers who produce the products. 1040 easy Factory overhead. 1040 easy Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 1040 easy Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. 1040 easy This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. 1040 easy For more information, see the following sources. 1040 easy Cost of goods sold—chapter 6 of Publication 334. 1040 easy Inventories—Publication 538. 1040 easy Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. 1040 easy Capital Expenses You must capitalize, rather than deduct, some costs. 1040 easy These costs are a part of your investment in your business and are called “capital expenses. 1040 easy ” Capital expenses are considered assets in your business. 1040 easy In general, you capitalize three types of costs. 1040 easy Business start-up costs (See Tip below). 1040 easy Business assets. 1040 easy Improvements. 1040 easy You can elect to deduct or amortize certain business start-up costs. 1040 easy See chapters 7 and 8. 1040 easy Cost recovery. 1040 easy   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. 1040 easy These recovery methods allow you to deduct part of your cost each year. 1040 easy In this way, you are able to recover your capital expense. 1040 easy See Amortization (chapter 8) and Depletion (chapter 9) in this publication. 1040 easy A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. 1040 easy A greater portion of these costs can be deducted if the property is qualified disaster assistance property. 1040 easy See Publication 946 for details. 1040 easy Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. 1040 easy These costs may include expenses for advertising, travel, or wages for training employees. 1040 easy If you go into business. 1040 easy   When you go into business, treat all costs you had to get your business started as capital expenses. 1040 easy   Usually you recover costs for a particular asset through depreciation. 1040 easy Generally, you cannot recover other costs until you sell the business or otherwise go out of business. 1040 easy However, you can choose to amortize certain costs for setting up your business. 1040 easy See Starting a Business in chapter 8 for more information on business start-up costs. 1040 easy If your attempt to go into business is unsuccessful. 1040 easy   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. 1040 easy The costs you had before making a decision to acquire or begin a specific business. 1040 easy These costs are personal and nondeductible. 1040 easy They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. 1040 easy The costs you had in your attempt to acquire or begin a specific business. 1040 easy These costs are capital expenses and you can deduct them as a capital loss. 1040 easy   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. 1040 easy   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. 1040 easy You cannot take a deduction for these costs. 1040 easy You will recover the costs of these assets when you dispose of them. 1040 easy Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. 1040 easy You must fully capitalize the cost of these assets, including freight and installation charges. 1040 easy Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. 1040 easy See Regulations section 1. 1040 easy 263A-2 for information on these rules. 1040 easy Improvements Improvements are generally major expenditures. 1040 easy Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. 1040 easy The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. 1040 easy Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. 1040 easy Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. 1040 easy However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. 1040 easy Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. 1040 easy Restoration plan. 1040 easy   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. 1040 easy This applies even if some of the work would by itself be classified as repairs. 1040 easy Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. 1040 easy Motor vehicles. 1040 easy   You usually capitalize the cost of a motor vehicle you use in your business. 1040 easy You can recover its cost through annual deductions for depreciation. 1040 easy   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. 1040 easy See Publication 463. 1040 easy   Generally, repairs you make to your business vehicle are currently deductible. 1040 easy However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. 1040 easy Roads and driveways. 1040 easy    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. 1040 easy The cost of maintaining a private road on your business property is a deductible expense. 1040 easy Tools. 1040 easy   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. 1040 easy Machinery parts. 1040 easy   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. 1040 easy Heating equipment. 1040 easy   The cost of changing from one heating system to another is a capital expense. 1040 easy Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. 1040 easy However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. 1040 easy You can deduct the business part. 1040 easy For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. 1040 easy The remaining 30% is personal interest and generally is not deductible. 1040 easy See chapter 4 for information on deducting interest and the allocation rules. 1040 easy Business use of your home. 1040 easy   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. 1040 easy These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. 1040 easy   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. 1040 easy The business part of your home must be used exclusively and regularly for your trade or business. 1040 easy The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. 1040 easy   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. 1040 easy   Your home office qualifies as your principal place of business if you meet the following requirements. 1040 easy You use the office exclusively and regularly for administrative or management activities of your trade or business. 1040 easy You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1040 easy   If you have more than one business location, determine your principal place of business based on the following factors. 1040 easy The relative importance of the activities performed at each location. 1040 easy If the relative importance factor does not determine your principal place of business, consider the time spent at each location. 1040 easy Optional safe harbor method. 1040 easy   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. 1040 easy This method is an alternative to the calculation, allocation, and substantiation of actual expenses. 1040 easy   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. 1040 easy Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). 1040 easy You are not required to allocate these deductions between personal and business use, as is required under the regular method. 1040 easy If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. 1040 easy   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. 1040 easy All of the requirements discussed earlier under Business use of your home still apply. 1040 easy   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. 1040 easy    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. 1040 easy Business use of your car. 1040 easy   If you use your car exclusively in your business, you can deduct car expenses. 1040 easy If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. 1040 easy Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. 1040 easy   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. 1040 easy Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. 1040 easy Beginning in 2013, the standard mileage rate is 56. 1040 easy 5 cents per mile. 1040 easy   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. 1040 easy   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. 1040 easy How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. 1040 easy Recovery of amount deducted (tax benefit rule). 1040 easy   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. 1040 easy If you have a recovery in a later year, include the recovered amount in income in that year. 1040 easy However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. 1040 easy   For more information on recoveries and the tax benefit rule, see Publication 525. 1040 easy Payments in kind. 1040 easy   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. 1040 easy You cannot deduct the cost of your own labor. 1040 easy   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. 1040 easy If these costs are included in the cost of goods sold, do not deduct them again as a business expense. 1040 easy Limits on losses. 1040 easy   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. 1040 easy There may be limits on how much of the loss you can deduct. 1040 easy Not-for-profit limits. 1040 easy   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. 1040 easy See Not-for-Profit Activities , later. 1040 easy At-risk limits. 1040 easy   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. 1040 easy You are at risk in any activity for the following. 1040 easy The money and adjusted basis of property you contribute to the activity. 1040 easy Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. 1040 easy For more information, see Publication 925. 1040 easy Passive activities. 1040 easy   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. 1040 easy In general, deductions for losses from passive activities only offset income from passive activities. 1040 easy You cannot use any excess deductions to offset other income. 1040 easy In addition, passive activity credits can only offset the tax on net passive income. 1040 easy Any excess loss or credits are carried over to later years. 1040 easy Suspended passive losses are fully deductible in the year you completely dispose of the activity. 1040 easy For more information, see Publication 925. 1040 easy Net operating loss. 1040 easy   If your deductions are more than your income for the year, you may have a “net operating loss. 1040 easy ” You can use a net operating loss to lower your taxes in other years. 1040 easy See Publication 536 for more information. 1040 easy   See Publication 542 for information about net operating losses of corporations. 1040 easy When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. 1040 easy An accounting method is a set of rules used to determine when and how income and expenses are reported. 1040 easy The two basic methods are the cash method and the accrual method. 1040 easy Whichever method you choose must clearly reflect income. 1040 easy For more information on accounting methods, see Publication 538. 1040 easy Cash method. 1040 easy   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. 1040 easy Accrual method. 1040 easy   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. 1040 easy The all-events test has been met. 1040 easy The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. 1040 easy Economic performance has occurred. 1040 easy Economic performance. 1040 easy   You generally cannot deduct or capitalize a business expense until economic performance occurs. 1040 easy If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. 1040 easy If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040 easy Example. 1040 easy Your tax year is the calendar year. 1040 easy In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. 1040 easy You paid it by check in January 2014. 1040 easy If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. 1040 easy If you use the cash method of accounting, deduct the expense on your 2014 return. 1040 easy Prepayment. 1040 easy   You generally cannot deduct expenses in advance, even if you pay them in advance. 1040 easy This rule applies to both the cash and accrual methods. 1040 easy It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040 easy Example. 1040 easy In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. 1040 easy Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. 1040 easy You can deduct the rent for 2014 and 2015 on your tax returns for those years. 1040 easy Contested liability. 1040 easy   Under the cash method, you can deduct a contested liability only in the year you pay the liability. 1040 easy Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. 1040 easy S. 1040 easy possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. 1040 easy However, to take the deduction in the year of payment or transfer, you must meet certain conditions. 1040 easy See Regulations section 1. 1040 easy 461-2. 1040 easy Related person. 1040 easy   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. 1040 easy However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. 1040 easy Your deduction is allowed when the amount is includible in income by the related cash method payee. 1040 easy See Related Persons in Publication 538. 1040 easy Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. 1040 easy Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. 1040 easy The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. 1040 easy It does not apply to corporations other than S corporations. 1040 easy In determining whether you are carrying on an activity for profit, several factors are taken into account. 1040 easy No one factor alone is decisive. 1040 easy Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. 1040 easy Presumption of profit. 1040 easy   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. 1040 easy Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. 1040 easy The activity must be substantially the same for each year within this period. 1040 easy You have a profit when the gross income from an activity exceeds the deductions. 1040 easy   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. 1040 easy   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. 1040 easy This means the limits discussed here will not apply. 1040 easy You can take all your business deductions from the activity, even for the years that you have a loss. 1040 easy You can rely on this presumption unless the IRS later shows it to be invalid. 1040 easy Using the presumption later. 1040 easy   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. 1040 easy   You can elect to do this by filing Form 5213. 1040 easy Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. 1040 easy   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. 1040 easy Accordingly, it will not restrict your deductions. 1040 easy Rather, you will gain time to earn a profit in the required number of years. 1040 easy If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. 1040 easy If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. 1040 easy   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. 1040 easy The period is extended only for deductions of the activity and any related deductions that might be affected. 1040 easy    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. 1040 easy Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. 1040 easy Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. 1040 easy You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. 1040 easy However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. 1040 easy Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. 1040 easy If you are an individual, these deductions may be taken only if you itemize. 1040 easy These deductions may be taken on Schedule A (Form 1040). 1040 easy Category 1. 1040 easy   Deductions you can take for personal as well as for business activities are allowed in full. 1040 easy For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. 1040 easy Deduct them on the appropriate lines of Schedule A (Form 1040). 1040 easy For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). 1040 easy The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. 1040 easy The reduction amount returns to $100 for tax years beginning after December 31, 2009. 1040 easy See Publication 547 for more information on casualty losses. 1040 easy For the limits that apply to home mortgage interest, see Publication 936. 1040 easy Category 2. 1040 easy   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. 1040 easy Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. 1040 easy Category 3. 1040 easy   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. 1040 easy Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. 1040 easy Where more than one asset is involved, allocate depreciation and these other deductions proportionally. 1040 easy    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). 1040 easy They are subject to the 2%-of-adjusted-gross-income limit. 1040 easy See Publication 529 for information on this limit. 1040 easy Example. 1040 easy Adriana is engaged in a not-for-profit activity. 1040 easy The income and expenses of the activity are as follows. 1040 easy Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. 1040 easy The limit is reached in category (3), as follows. 1040 easy Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. 1040 easy $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. 1040 easy Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. 1040 easy The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). 1040 easy Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. 1040 easy Partnerships and S corporations. 1040 easy   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. 1040 easy They are reflected in the individual shareholder's or partner's distributive shares. 1040 easy More than one activity. 1040 easy   If you have several undertakings, each may be a separate activity or several undertakings may be combined. 1040 easy The following are the most significant facts and circumstances in making this determination. 1040 easy The degree of organizational and economic interrelationship of various undertakings. 1040 easy The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. 1040 easy The similarity of the undertakings. 1040 easy   The IRS will generally accept your characterization if it is supported by facts and circumstances. 1040 easy    If you are carrying on two or more different activities, keep the deductions and income from each one separate. 1040 easy Figure separately whether each is a not-for-profit activity. 1040 easy Then figure the limit on deductions and losses separately for each activity that is not for profit. 1040 easy Prev  Up  Next   Home   More Online Publications