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Ammending Taxes

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Ammending Taxes

Ammending taxes 4. Ammending taxes   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Ammending taxes Payments from checking accounts. Ammending taxes Amounts paid within 30 days. Ammending taxes Optional method for determining date of reallocation. Ammending taxes Interest on a segregated account. Ammending taxes How to report. Ammending taxes Interest You Can DeductStatement. Ammending taxes Expenses paid to obtain a mortgage. Ammending taxes Prepayment penalty. Ammending taxes De minimis OID. Ammending taxes Constant-yield method. Ammending taxes Loan or mortgage ends. Ammending taxes Interest You Cannot DeductPenalties. Ammending taxes Who is a key person? Exceptions for pre-June 1997 contracts. Ammending taxes Interest allocated to unborrowed policy cash value. Ammending taxes Capitalization of Interest When To Deduct InterestPrepaid interest. Ammending taxes Discounted loan. Ammending taxes Refunds of interest. Ammending taxes Prepaid interest. Ammending taxes Discounted loan. Ammending taxes Tax deficiency. Ammending taxes Related person. Ammending taxes Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Ammending taxes Introduction This chapter discusses the tax treatment of business interest expense. Ammending taxes Business interest expense is an amount charged for the use of money you borrowed for business activities. Ammending taxes Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Ammending taxes Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Ammending taxes 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Ammending taxes Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Ammending taxes If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Ammending taxes Allocate your interest expense to the following categories. Ammending taxes Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Ammending taxes You allocate loan proceeds by tracing disbursements to specific uses. Ammending taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Ammending taxes Secured loan. Ammending taxes   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Ammending taxes Example. Ammending taxes You secure a loan with property used in your business. Ammending taxes You use the loan proceeds to buy an automobile for personal use. Ammending taxes You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Ammending taxes    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Ammending taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Ammending taxes For more information, see Publication 936. Ammending taxes Allocation period. Ammending taxes   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Ammending taxes The date the loan is repaid. Ammending taxes The date the loan is reallocated to another use. Ammending taxes Proceeds not disbursed to borrower. Ammending taxes   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Ammending taxes This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Ammending taxes Proceeds deposited in borrower's account. Ammending taxes   Treat loan proceeds deposited in an account as property held for investment. Ammending taxes It does not matter whether the account pays interest. Ammending taxes Any interest you pay on the loan is investment interest expense. Ammending taxes If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Ammending taxes Example. Ammending taxes Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Ammending taxes No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Ammending taxes On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Ammending taxes On September 4, Celina uses an additional $40,000 from the account for personal purposes. Ammending taxes Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Ammending taxes From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Ammending taxes From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Ammending taxes Order of funds spent. Ammending taxes   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Ammending taxes Any unborrowed amounts held in the same account. Ammending taxes Any amounts deposited after these loan proceeds. Ammending taxes Example. Ammending taxes On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Ammending taxes The following table shows the transactions in her account during the tax year. Ammending taxes Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Ammending taxes She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Ammending taxes She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Ammending taxes She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Ammending taxes For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Ammending taxes Payments from checking accounts. Ammending taxes   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Ammending taxes You can treat checks written on the same day as written in any order. Ammending taxes Amounts paid within 30 days. Ammending taxes   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Ammending taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Ammending taxes   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Ammending taxes If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Ammending taxes   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Ammending taxes Example. Ammending taxes Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Ammending taxes Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Ammending taxes Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Ammending taxes Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Ammending taxes In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Ammending taxes Optional method for determining date of reallocation. Ammending taxes   You can use the following method to determine the date loan proceeds are reallocated to another use. Ammending taxes You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Ammending taxes The first day of that month. Ammending taxes The date the loan proceeds are deposited in the account. Ammending taxes However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Ammending taxes Interest on a segregated account. Ammending taxes   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Ammending taxes When the interest earned is used up, any remaining payments are from loan proceeds. Ammending taxes Example. Ammending taxes You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Ammending taxes When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Ammending taxes You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Ammending taxes All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Ammending taxes The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Ammending taxes The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Ammending taxes Loan repayment. Ammending taxes   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Ammending taxes Personal use. Ammending taxes Investments and passive activities (other than those included in (3)). Ammending taxes Passive activities in connection with a rental real estate activity in which you actively participate. Ammending taxes Former passive activities. Ammending taxes Trade or business use and expenses for certain low-income housing projects. Ammending taxes Line of credit (continuous borrowings). Ammending taxes   The following rules apply if you have a line of credit or similar arrangement. Ammending taxes Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Ammending taxes Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Ammending taxes Treat these loans as repaid in the order shown on the loan agreement. Ammending taxes Loan refinancing. Ammending taxes   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Ammending taxes Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Ammending taxes Debt-financed distribution. Ammending taxes   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Ammending taxes The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Ammending taxes How to report. Ammending taxes   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Ammending taxes If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Ammending taxes If the proceeds were used in an investment activity, enter the interest on Form 4952. Ammending taxes If the proceeds are used for personal purposes, the interest is generally not deductible. Ammending taxes Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Ammending taxes Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Ammending taxes It does not matter what type of property secures the loan. Ammending taxes You can deduct interest on a debt only if you meet all the following requirements. Ammending taxes You are legally liable for that debt. Ammending taxes Both you and the lender intend that the debt be repaid. Ammending taxes You and the lender have a true debtor-creditor relationship. Ammending taxes Partial liability. Ammending taxes   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Ammending taxes Example. Ammending taxes You and your brother borrow money. Ammending taxes You are liable for 50% of the note. Ammending taxes You use your half of the loan in your business, and you make one-half of the loan payments. Ammending taxes You can deduct your half of the total interest payments as a business deduction. Ammending taxes Mortgage. Ammending taxes   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Ammending taxes However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Ammending taxes Statement. Ammending taxes   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Ammending taxes You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Ammending taxes A governmental unit is a person for purposes of furnishing the statement. Ammending taxes   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Ammending taxes You cannot deduct this amount. Ammending taxes For information on how to report this refund, see Refunds of interest, later in this chapter. Ammending taxes Expenses paid to obtain a mortgage. Ammending taxes   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Ammending taxes These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Ammending taxes If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Ammending taxes Prepayment penalty. Ammending taxes   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Ammending taxes Interest on employment tax deficiency. Ammending taxes   Interest charged on employment taxes assessed on your business is deductible. Ammending taxes Original issue discount (OID). Ammending taxes   OID is a form of interest. Ammending taxes A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Ammending taxes The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Ammending taxes   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Ammending taxes Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Ammending taxes You generally deduct OID over the term of the loan. Ammending taxes Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Ammending taxes De minimis OID. Ammending taxes   The OID is de minimis if it is less than one-fourth of 1% (. Ammending taxes 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Ammending taxes   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Ammending taxes On a constant-yield basis over the term of the loan. Ammending taxes On a straight-line basis over the term of the loan. Ammending taxes In proportion to stated interest payments. Ammending taxes In its entirety at maturity of the loan. Ammending taxes You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Ammending taxes Example. Ammending taxes On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Ammending taxes The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Ammending taxes Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Ammending taxes The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Ammending taxes 0025 × 10). Ammending taxes You choose to deduct the OID on a straight-line basis over the term of the loan. Ammending taxes Beginning in 2013, you can deduct $150 each year for 10 years. Ammending taxes Constant-yield method. Ammending taxes   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Ammending taxes You figure your deduction for the first year using the following steps. Ammending taxes Determine the issue price of the loan. Ammending taxes Generally, this equals the proceeds of the loan. Ammending taxes If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Ammending taxes Multiply the result in (1) by the yield to maturity. Ammending taxes Subtract any qualified stated interest payments from the result in (2). Ammending taxes This is the OID you can deduct in the first year. Ammending taxes   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Ammending taxes To get the adjusted issue price, add to the issue price any OID previously deducted. Ammending taxes Then follow steps (2) and (3) above. Ammending taxes   The yield to maturity is generally shown in the literature you receive from your lender. Ammending taxes If you do not have this information, consult your lender or tax advisor. Ammending taxes In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Ammending taxes Example. Ammending taxes The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Ammending taxes The yield to maturity on your loan is 10. Ammending taxes 2467%, compounded annually. Ammending taxes For 2013, you can deduct $93 [($98,500 × . Ammending taxes 102467) − $10,000]. Ammending taxes For 2014, you can deduct $103 [($98,593 × . Ammending taxes 102467) − $10,000]. Ammending taxes Loan or mortgage ends. Ammending taxes   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Ammending taxes A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Ammending taxes If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Ammending taxes See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Ammending taxes Points. Ammending taxes   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Ammending taxes These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Ammending taxes If any of these charges (points) are solely for the use of money, they are interest. Ammending taxes   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Ammending taxes However, you can choose to fully deduct points in the year paid if you meet certain tests. Ammending taxes For exceptions to the general rule, see Publication 936. Ammending taxes The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Ammending taxes Partial payments on a nontax debt. Ammending taxes   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Ammending taxes You can deduct only the interest. Ammending taxes This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Ammending taxes Installment purchase. Ammending taxes   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Ammending taxes If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Ammending taxes The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Ammending taxes For more information on installment sales and unstated interest, see Publication 537. Ammending taxes Interest You Cannot Deduct Certain interest payments cannot be deducted. Ammending taxes In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Ammending taxes You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Ammending taxes Interest paid with funds borrowed from original lender. Ammending taxes   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Ammending taxes You can deduct the interest expense once you start making payments on the new loan. Ammending taxes   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Ammending taxes All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Ammending taxes Capitalized interest. Ammending taxes   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Ammending taxes See Capitalization of Interest, later. Ammending taxes In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Ammending taxes Add this interest to the basis of the property. Ammending taxes Commitment fees or standby charges. Ammending taxes   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Ammending taxes You may be able to deduct them as business expenses. Ammending taxes   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Ammending taxes See Capitalization of Interest, later. Ammending taxes Interest on income tax. Ammending taxes   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Ammending taxes Treat this interest as a business deduction only in figuring a net operating loss deduction. Ammending taxes Penalties. Ammending taxes   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Ammending taxes You cannot deduct them. Ammending taxes Generally, you cannot deduct any fines or penalties. Ammending taxes Interest on loans with respect to life insurance policies. Ammending taxes   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Ammending taxes   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Ammending taxes However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Ammending taxes Who is a key person?   A key person is an officer or 20% owner. Ammending taxes However, the number of individuals you can treat as key persons is limited to the greater of the following. Ammending taxes Five individuals. Ammending taxes The lesser of 5% of the total officers and employees of the company or 20 individuals. Ammending taxes Exceptions for pre-June 1997 contracts. Ammending taxes   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Ammending taxes If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Ammending taxes Interest allocated to unborrowed policy cash value. Ammending taxes   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Ammending taxes This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Ammending taxes For more information, see section 264(f) of the Internal Revenue Code. Ammending taxes Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Ammending taxes The property must be produced by you for use in your trade or business or for sale to customers. Ammending taxes You cannot capitalize interest related to property that you acquire in any other manner. Ammending taxes Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Ammending taxes Designated property is any of the following. Ammending taxes Real property. Ammending taxes Tangible personal property with a class life of 20 years or more. Ammending taxes Tangible personal property with an estimated production period of more than 2 years. Ammending taxes Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Ammending taxes Property you produce. Ammending taxes   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Ammending taxes Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Ammending taxes Carrying charges. Ammending taxes   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Ammending taxes You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Ammending taxes For more information, see chapter 7. Ammending taxes Capitalized interest. Ammending taxes   Treat capitalized interest as a cost of the property produced. Ammending taxes You recover your interest when you sell or use the property. Ammending taxes If the property is inventory, recover capitalized interest through cost of goods sold. Ammending taxes If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Ammending taxes Partnerships and S corporations. Ammending taxes   The interest capitalization rules are applied first at the partnership or S corporation level. Ammending taxes The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Ammending taxes   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Ammending taxes You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Ammending taxes To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Ammending taxes Additional information. Ammending taxes   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Ammending taxes For more information, see sections 1. Ammending taxes 263A-8 through 1. Ammending taxes 263A-15 of the regulations and Notice 88-99. Ammending taxes Notice 88-99 is in Cumulative Bulletin 1988-2. Ammending taxes When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Ammending taxes Cash method. Ammending taxes   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Ammending taxes You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Ammending taxes Prepaid interest. Ammending taxes   You generally cannot deduct any interest paid before the year it is due. Ammending taxes Interest paid in advance can be deducted only in the tax year in which it is due. Ammending taxes Discounted loan. Ammending taxes   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Ammending taxes For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Ammending taxes Refunds of interest. Ammending taxes   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Ammending taxes If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Ammending taxes Accrual method. Ammending taxes   Under an accrual method, you can deduct only interest that has accrued during the tax year. Ammending taxes Prepaid interest. Ammending taxes   See Prepaid interest, earlier. Ammending taxes Discounted loan. Ammending taxes   See Discounted loan, earlier. Ammending taxes Tax deficiency. Ammending taxes   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Ammending taxes If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Ammending taxes   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Ammending taxes Related person. Ammending taxes   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Ammending taxes The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Ammending taxes See section 267 of the Internal Revenue Code for more information. Ammending taxes Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Ammending taxes See Treatment of gift and demand loans, later, in this discussion. Ammending taxes A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Ammending taxes A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Ammending taxes A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Ammending taxes An additional payment in an amount equal to the forgone interest. Ammending taxes The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Ammending taxes Forgone interest. Ammending taxes   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Ammending taxes Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Ammending taxes Internal Revenue Bulletins are available on the IRS web site at www. Ammending taxes irs. Ammending taxes gov/irb. Ammending taxes You can also contact an IRS office to get these rates. Ammending taxes Loans subject to the rules. Ammending taxes   The rules for below-market loans apply to the following. Ammending taxes Gift loans (below-market loans where the forgone interest is in the nature of a gift). Ammending taxes Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Ammending taxes Corporation-shareholder loans. Ammending taxes Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Ammending taxes Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Ammending taxes   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Ammending taxes Treatment of gift and demand loans. Ammending taxes   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Ammending taxes ) equal to the forgone interest on the loan. Ammending taxes You are then treated as transferring this amount back to the lender as interest. Ammending taxes These transfers are considered to occur annually, generally on December 31. Ammending taxes If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Ammending taxes The lender must report it as interest income. Ammending taxes Limit on forgone interest for gift loans of $100,000 or less. Ammending taxes   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Ammending taxes This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Ammending taxes If the borrower's net investment income is $1,000 or less, it is treated as zero. Ammending taxes This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Ammending taxes Treatment of term loans. Ammending taxes   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Ammending taxes ) on the date the loan is made. Ammending taxes This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Ammending taxes The same amount is treated as original issue discount on the loan. Ammending taxes See Original issue discount (OID) under Interest You Can Deduct, earlier. Ammending taxes Exceptions for loans of $10,000 or less. Ammending taxes   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Ammending taxes This exception applies only to the following. Ammending taxes Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Ammending taxes Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Ammending taxes This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Ammending taxes Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Ammending taxes Exceptions for loans without significant tax effect. Ammending taxes   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Ammending taxes Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Ammending taxes Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Ammending taxes Certain employee-relocation loans. Ammending taxes Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Ammending taxes S. Ammending taxes trade or business and not exempt from U. Ammending taxes S. Ammending taxes tax under an income tax treaty. Ammending taxes Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Ammending taxes Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Ammending taxes Consider all the following factors. Ammending taxes Whether items of income and deduction generated by the loan offset each other. Ammending taxes The amount of the items. Ammending taxes The cost of complying with the below-market loan provisions if they were to apply. Ammending taxes Any reasons, other than taxes, for structuring the transaction as a below-market loan. Ammending taxes Exception for loans to qualified continuing care facilities. Ammending taxes   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Ammending taxes A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Ammending taxes Designed to provide services under continuing care contracts (defined below). Ammending taxes Includes an independent living unit, and either an assisted living or nursing facility, or both. Ammending taxes Substantially all of the independent living unit residents are covered by continuing care contracts. Ammending taxes A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Ammending taxes The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Ammending taxes The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Ammending taxes The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Ammending taxes For more information, see section 7872(h) of the Internal Revenue Code. Ammending taxes Sale or exchange of property. Ammending taxes   Different rules generally apply to a loan connected with the sale or exchange of property. Ammending taxes If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Ammending taxes However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Ammending taxes See Unstated Interest and Original Issue Discount (OID) in Publication 537. Ammending taxes More information. Ammending taxes   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Ammending taxes 7872-5 of the regulations. Ammending taxes Prev  Up  Next   Home   More Online Publications
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    Ammending taxes 12. Ammending taxes   How To Get Tax Help Table of Contents Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Ammending taxes Free help with your tax return. Ammending taxes   You can get free help preparing your return nationwide from IRS-certified volunteers. Ammending taxes The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Ammending taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Ammending taxes 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. Ammending taxes In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Ammending taxes To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Ammending taxes gov, download the IRS2Go app, or call 1-800-906-9887. Ammending taxes   As part of the TCE program, AARP offers the Tax-Aide counseling program. Ammending taxes To find the nearest AARP Tax-Aide site, visit AARP's website at www. Ammending taxes aarp. Ammending taxes org/money/taxaide or call 1-888-227-7669. Ammending taxes For more information on these programs, go to IRS. Ammending taxes gov and enter “VITA” in the search box. Ammending taxes Internet. Ammending taxes    IRS. Ammending taxes gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Ammending taxes Download the free IRS2Go app from the iTunes app store or from Google Play. Ammending taxes Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Ammending taxes Check the status of your 2013 refund with the Where's My Refund? application on IRS. Ammending taxes gov or download the IRS2Go app and select the Refund Status option. Ammending taxes The IRS issues more than 9 out of 10 refunds in less than 21 days. Ammending taxes Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Ammending taxes You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Ammending taxes The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Ammending taxes Use the Interactive Tax Assistant (ITA) to research your tax questions. Ammending taxes No need to wait on the phone or stand in line. Ammending taxes The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Ammending taxes When you reach the response screen, you can print the entire interview and the final response for your records. Ammending taxes New subject areas are added on a regular basis. Ammending taxes  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Ammending taxes gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Ammending taxes You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Ammending taxes The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Ammending taxes When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Ammending taxes Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. Ammending taxes You can also ask the IRS to mail a return or an account transcript to you. Ammending taxes Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Ammending taxes gov or by calling 1-800-908-9946. Ammending taxes Tax return and tax account transcripts are generally available for the current year and the past three years. Ammending taxes Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Ammending taxes Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Ammending taxes If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Ammending taxes Check the status of your amended return using Where's My Amended Return? Go to IRS. Ammending taxes gov and enter Where's My Amended Return? in the search box. Ammending taxes You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Ammending taxes It can take up to 3 weeks from the date you mailed it to show up in our system. Ammending taxes Make a payment using one of several safe and convenient electronic payment options available on IRS. Ammending taxes gov. Ammending taxes Select the Payment tab on the front page of IRS. Ammending taxes gov for more information. Ammending taxes Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Ammending taxes Figure your income tax withholding with the IRS Withholding Calculator on IRS. Ammending taxes gov. Ammending taxes Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Ammending taxes Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Ammending taxes gov. Ammending taxes Request an Electronic Filing PIN by going to IRS. Ammending taxes gov and entering Electronic Filing PIN in the search box. Ammending taxes Download forms, instructions and publications, including accessible versions for people with disabilities. Ammending taxes Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Ammending taxes gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Ammending taxes An employee can answer questions about your tax account or help you set up a payment plan. Ammending taxes Before you visit, check the Office Locator on IRS. Ammending taxes gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Ammending taxes If you have a special need, such as a disability, you can request an appointment. Ammending taxes Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Ammending taxes Apply for an Employer Identification Number (EIN). Ammending taxes Go to IRS. Ammending taxes gov and enter Apply for an EIN in the search box. Ammending taxes Read the Internal Revenue Code, regulations, or other official guidance. Ammending taxes Read Internal Revenue Bulletins. Ammending taxes Sign up to receive local and national tax news and more by email. Ammending taxes Just click on “subscriptions” above the search box on IRS. Ammending taxes gov and choose from a variety of options. Ammending taxes Phone. Ammending taxes    You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Ammending taxes Download the free IRS2Go app from the iTunes app store or from Google Play. Ammending taxes Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Ammending taxes gov, or download the IRS2Go app. Ammending taxes Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Ammending taxes The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Ammending taxes Most VITA and TCE sites offer free electronic filing. Ammending taxes Some VITA and TCE sites provide IRS-certified volunteers who can help prepare your tax return. Ammending taxes Through the TCE program, AARP offers the Tax-Aide counseling program; call 1-888-227-7669 to find the nearest Tax-Aide location. Ammending taxes Call the automated Where's My Refund? information hotline to check the status of your 2013 refund 24 hours a day, 7 days a week at 1-800-829-1954. Ammending taxes If you e-file, you can start checking on the status of your return within 24 hours after the IRS receives your tax return or 4 weeks after you've mailed a paper return. Ammending taxes The IRS issues more than 9 out of 10 refunds in less than 21 days. Ammending taxes Where's My Refund? will give you a personalized refund date as soon as the IRS processes your tax return and approves your refund. Ammending taxes Before you call this automated hotline, have your 2013 tax return handy so you can enter your social security number, your filing status, and the exact whole dollar amount of your refund. Ammending taxes The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Ammending taxes Note, the above information is for our automated hotline. Ammending taxes Our live phone and walk-in assistors can research the status of your refund only if it's been 21 days or more since you filed electronically or more than 6 weeks since you mailed your paper return. Ammending taxes Call the Amended Return Hotline, 1-866-464-2050, to check the status of your amended return. Ammending taxes You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Ammending taxes It can take up to 3 weeks from the date you mailed it to show up in our system. Ammending taxes Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, publications, and prior-year forms and instructions (limited to 5 years). Ammending taxes You should receive your order within 10 business days. Ammending taxes Call TeleTax, 1-800-829-4477, to listen to pre-recorded messages covering general and business tax information. Ammending taxes If, between January and April 15, you still have questions about the Form 1040, 1040A, or 1040EZ (like filing requirements, dependents, credits, Schedule D, pensions and IRAs or self-employment taxes), call 1-800-829-1040. Ammending taxes Call using TTY/TDD equipment, 1-800-829-4059 to ask tax questions or order forms and publications. Ammending taxes The TTY/TDD telephone number is for people who are deaf, hard of hearing, or have a speech disability. Ammending taxes These individuals can also contact the IRS through relay services such as the Federal Relay Service. Ammending taxes Walk-in. Ammending taxes   You can find a selection of forms, publications and services — in-person. Ammending taxes Products. Ammending taxes You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Ammending taxes Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. Ammending taxes Services. Ammending taxes You can walk in to your local TAC for face-to-face tax help. Ammending taxes An employee can answer questions about your tax account or help you set up a payment plan. Ammending taxes Before visiting, use the Office Locator tool on IRS. Ammending taxes gov, or choose the Contact Us option on the IRS2Go app and search Local Offices for days and hours of operation, and services provided. Ammending taxes Mail. Ammending taxes   You can send your order for forms, instructions, and publications to the address below. Ammending taxes You should receive a response within 10 business days after your request is received. Ammending taxes Internal Revenue Service 1201 N. Ammending taxes Mitsubishi Motorway Bloomington, IL 61705-6613    The Taxpayer Advocate Service Is Here to Help You. Ammending taxes The Taxpayer Advocate Service (TAS) is your voice at the IRS. Ammending taxes Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights. Ammending taxes   What can TAS do for you? We can offer you free help with IRS problems that you can't resolve on your own. Ammending taxes We know this process can be confusing, but the worst thing you can do is nothing at all! TAS can help if you can't resolve your tax problem and: Your problem is causing financial difficulties for you, your family, or your business. Ammending taxes You face (or your business is facing) an immediate threat of adverse action. Ammending taxes You've tried repeatedly to contact the IRS but no one has responded, or the IRS hasn't responded by the date promised. Ammending taxes   If you qualify for our help, you'll be assigned to one advocate who'll be with you at every turn and will do everything possible to resolve your problem. Ammending taxes Here's why we can help: TAS is an independent organization within the IRS. Ammending taxes Our advocates know how to work with the IRS. Ammending taxes Our services are free and tailored to meet your needs. Ammending taxes We have offices in every state, the District of Columbia, and Puerto Rico. Ammending taxes   How can you reach us? If you think TAS can help you, call your local advocate, whose number is in your local directory and at www. Ammending taxes irs. Ammending taxes gov/Advocate, or call us toll-free at 1-877-777-4778. Ammending taxes   How else does TAS help taxpayers?  TAS also works to resolve large-scale, systemic problems that affect many taxpayers. Ammending taxes If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System. Ammending taxes Low Income Taxpayer Clinics. Ammending taxes   Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Ammending taxes Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Ammending taxes Visit www. Ammending taxes irs. Ammending taxes gov/Advocate or see IRS Publication 4134, Low Income Taxpayer Clinic List. Ammending taxes Prev  Up  Next   Home   More Online Publications