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File A Amended Tax Return Online

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File A Amended Tax Return Online

File a amended tax return online 2. File a amended tax return online   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. File a amended tax return online ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. File a amended tax return online In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. File a amended tax return online Those cases are called “abusive tax shelters. File a amended tax return online ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. File a amended tax return online Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . File a amended tax return online Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. File a amended tax return online Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. File a amended tax return online They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. File a amended tax return online Despite appearances to the contrary, the taxpayer generally risks little. File a amended tax return online Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. File a amended tax return online Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. File a amended tax return online (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. File a amended tax return online ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. File a amended tax return online This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. File a amended tax return online Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. File a amended tax return online However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. File a amended tax return online Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. File a amended tax return online These provisions include the following. File a amended tax return online Disclosure of reportable transactions. File a amended tax return online   You must disclose information for each reportable transaction in which you participate. File a amended tax return online See Reportable Transaction Disclosure Statement , later. File a amended tax return online   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. File a amended tax return online To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. File a amended tax return online   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. File a amended tax return online They must provide this number to all persons to whom they acted as a material advisor. File a amended tax return online They must provide the number at the time the transaction is entered into. File a amended tax return online If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. File a amended tax return online For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. File a amended tax return online Requirement to maintain list. File a amended tax return online   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. File a amended tax return online The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. File a amended tax return online See Regulations section 301. File a amended tax return online 6112-1 for more information (including what information is required to be included on the list). File a amended tax return online Confidentiality privilege. File a amended tax return online   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. File a amended tax return online Appraisal requirement for donated property. File a amended tax return online   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. File a amended tax return online If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. File a amended tax return online If you file electronically, see Form 8453, U. File a amended tax return online S. File a amended tax return online Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. File a amended tax return online For more information about appraisals, including exceptions, see Publication 561. File a amended tax return online Passive activity loss and credit limits. File a amended tax return online   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. File a amended tax return online For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. File a amended tax return online Interest on penalties. File a amended tax return online   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. File a amended tax return online Accounting method restriction. File a amended tax return online   Tax shelters generally cannot use the cash method of accounting. File a amended tax return online Uniform capitalization rules. File a amended tax return online   The uniform capitalization rules generally apply to producing property or acquiring it for resale. File a amended tax return online Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. File a amended tax return online For more information, see Publication 538. File a amended tax return online Denial of deduction for interest on an underpayment due to a reportable transaction. File a amended tax return online   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. File a amended tax return online This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. File a amended tax return online Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. File a amended tax return online The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. File a amended tax return online Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. File a amended tax return online So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. File a amended tax return online In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. File a amended tax return online The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. File a amended tax return online Investor Reporting You may be required to file a reportable transaction disclosure statement. File a amended tax return online Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. File a amended tax return online Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. File a amended tax return online Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). File a amended tax return online In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. File a amended tax return online  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. File a amended tax return online If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. File a amended tax return online If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. File a amended tax return online See Penalty for failure to disclose a reportable transaction , later under Penalties. File a amended tax return online The following discussion briefly describes reportable transactions. File a amended tax return online For more details, see the Instructions for Form 8886. File a amended tax return online Reportable transaction. File a amended tax return online   A reportable transaction is any of the following. File a amended tax return online A listed transaction. File a amended tax return online A confidential transaction. File a amended tax return online A transaction with contractual protection. File a amended tax return online A loss transaction. File a amended tax return online A transaction of interest entered into after November 1, 2006. File a amended tax return online Note. File a amended tax return online Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. File a amended tax return online Listed transaction. File a amended tax return online   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. File a amended tax return online These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. File a amended tax return online For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2009-31_IRB/ar07. File a amended tax return online html. File a amended tax return online Confidential transaction. File a amended tax return online   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. File a amended tax return online A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. File a amended tax return online The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. File a amended tax return online Transaction with contractual protection. File a amended tax return online   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. File a amended tax return online For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2007-07_IRB/ar15. File a amended tax return online html. File a amended tax return online Loss transaction. File a amended tax return online   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. File a amended tax return online A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. File a amended tax return online   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. File a amended tax return online For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2004-50_IRB/ar11. File a amended tax return online html. File a amended tax return online Transaction of interest. File a amended tax return online   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. File a amended tax return online The IRS has identified the following transactions of interest. File a amended tax return online “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. File a amended tax return online R. File a amended tax return online B. File a amended tax return online 545, available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2007-36_IRB/ar20. File a amended tax return online html. File a amended tax return online Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. File a amended tax return online R. File a amended tax return online B. File a amended tax return online 544, available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2007-36_IRB/ar19. File a amended tax return online html. File a amended tax return online Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. File a amended tax return online R. File a amended tax return online B. File a amended tax return online 1194, available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2008-47_IRB/ar11. File a amended tax return online html. File a amended tax return online Certain transactions involving a U. File a amended tax return online S. File a amended tax return online taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. File a amended tax return online R. File a amended tax return online B. File a amended tax return online 312, available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2009-03_IRB/ar10. File a amended tax return online html. File a amended tax return online   For updates to this list, go to www. File a amended tax return online irs. File a amended tax return online gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. File a amended tax return online Penalties Investing in an abusive tax shelter may lead to substantial expenses. File a amended tax return online First, the promoter generally charges a substantial fee. File a amended tax return online If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. File a amended tax return online You may also be subject to the penalty for failure to pay tax. File a amended tax return online These penalties are explained in the following paragraphs. File a amended tax return online Accuracy-related penalties. File a amended tax return online   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). File a amended tax return online Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. File a amended tax return online Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. File a amended tax return online   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. File a amended tax return online   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). File a amended tax return online Negligence or disregard of rules or regulations. File a amended tax return online   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. File a amended tax return online The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. File a amended tax return online    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. File a amended tax return online It also includes any failure to keep adequate books and records. File a amended tax return online A return position that has a reasonable basis is not negligence. File a amended tax return online   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. File a amended tax return online   The penalty for disregard of rules and regulations can be avoided if all the following are true. File a amended tax return online You keep adequate books and records. File a amended tax return online You have a reasonable basis for your position on the tax issue. File a amended tax return online You make an adequate disclosure of your position. File a amended tax return online Use Form 8275 to make your disclosure and attach it to your return. File a amended tax return online To disclose a position contrary to a regulation, use Form 8275-R. File a amended tax return online Use Form 8886 to disclose a reportable transaction (discussed earlier). File a amended tax return online Substantial understatement of tax. File a amended tax return online   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. File a amended tax return online An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. File a amended tax return online The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. File a amended tax return online   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. File a amended tax return online In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. File a amended tax return online Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. File a amended tax return online   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. File a amended tax return online An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. File a amended tax return online Substantial valuation misstatement. File a amended tax return online   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. File a amended tax return online The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. File a amended tax return online You underpaid your tax by more than $5,000 because of the misstatement. File a amended tax return online You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. File a amended tax return online   You may be assessed a penalty of 40% for a gross valuation misstatement. File a amended tax return online If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. File a amended tax return online The penalty rate is also 40% if the property's correct value or adjusted basis is zero. File a amended tax return online Transaction lacking economic substance. File a amended tax return online   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. File a amended tax return online For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. File a amended tax return online   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. File a amended tax return online   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. File a amended tax return online   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. File a amended tax return online Relevant facts include any facts affecting the tax treatment of the transaction. File a amended tax return online    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. File a amended tax return online Undisclosed foreign financial asset understatement. File a amended tax return online   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. File a amended tax return online An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. File a amended tax return online The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. File a amended tax return online Any foreign business you control, reportable on Form 5471, Information Return of U. File a amended tax return online S. File a amended tax return online Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. File a amended tax return online S. File a amended tax return online Persons With Respect to Certain Foreign Partnerships. File a amended tax return online Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. File a amended tax return online S. File a amended tax return online Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. File a amended tax return online Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. File a amended tax return online    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. File a amended tax return online See the Instructions for Form 8938 for details. File a amended tax return online    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. File a amended tax return online Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. File a amended tax return online Penalty for incorrect appraisals. File a amended tax return online   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. File a amended tax return online For details on the penalty amount and exceptions, see Publication 561. File a amended tax return online Penalty for failure to disclose a reportable transaction. File a amended tax return online   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). File a amended tax return online For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). File a amended tax return online This penalty is in addition to any other penalty that may be imposed. File a amended tax return online   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. File a amended tax return online For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. File a amended tax return online irs. File a amended tax return online gov/irb/2007-09_IRB/ar12. File a amended tax return online html. File a amended tax return online Accuracy-related penalty for a reportable transaction understatement. File a amended tax return online   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. File a amended tax return online This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. File a amended tax return online The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. File a amended tax return online You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. File a amended tax return online The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. File a amended tax return online   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. File a amended tax return online Civil fraud penalty. File a amended tax return online   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. File a amended tax return online Joint return. File a amended tax return online   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. File a amended tax return online Failure to pay tax. File a amended tax return online   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. File a amended tax return online Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. File a amended tax return online Prev  Up  Next   Home   More Online Publications
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Understanding your CP11A Notice

We made changes to your return because we believe there's a miscalculation involving your Earned Income Credit. You owe money on your taxes as a result of these changes.

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us within 60 days of the date of your notice if you disagree with the change we made.
  • Correct the copy of your tax return that you kept for your records.

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Answers to Common Questions

How can I find out what caused my tax return to change?
Please contact us at the number listed on your notice for specific information concerning your tax return.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll free number listed on the top right corner of your notice.

If you contact us in writing within 60 days of the date of this notice, we'll reverse the change we made to your account. However, if you're unable to provide us additional information that justifies the reversal and we believe the reversal is in error, we'll forward your case for audit. This step gives you formal appeal rights, including the right to appeal our decision in court before you have to pay the additional tax. After we forward your case, the audit staff will contact you within five to six weeks to fully explain the audit process and your rights. If you don’t contact us within the 60-day period, you'll lose your right to appeal our decision before payment of tax.

If you don't contact us within 60 days, the change won’t be reversed and you must pay the additional tax. You may then file a claim for refund. You must submit the claim within three years of the date you filed the tax return, or within two years of the date of your last payment for this tax.

What happens if I can’t pay the full amount I owe?
You can arrange to make a payment plan with us if you can’t pay the full amount you owe.

Am I charged interest on the money I owe?
Not if you pay the full amount you owe by the date on the payment coupon. However interest accrues on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you will receive a late payment penalty. You can contact us at the number given on your notice at 1-800-829-0922 if you're unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

What's the difference between the "Child Tax Credit" and the "Additional Child Tax Credit?" Can I qualify for both?
The Child Tax Credit is for people who have a qualifying child and meet the eligibility requirements. The maximum amount you can claim is $1000 for each qualifying child. The Additional Child Tax Credit is for eligible individuals who receive less than the full amount of Child Tax Credit. You may qualify for both the Child Tax Credit and the Additional Child Tax Credit. For more information, see:

How do I claim an Additional Child Tax Credit?
You can claim the credit by completing a Form 1040 Schedule 8812, Child Tax Credit and attaching it to your income tax return.

My child is turning 18 this year. Can I still get the Additional Child Tax Credit?
No. Your child must be under age 17 at the end of 2009 to qualify for both the Child Tax Credit and the Additional Child Tax Credit.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Use the EITC Assistant on our website to help you complete your Schedule EIC, Earned Income Credit and claim your Earned Income Credit.

If you have any dependent children, remember to check out if you are eligible to claim the Child Tax Credit and the Additional Child Tax Credit the next time you file your income tax return. Instructions for claiming the Child Tax Credit are found in the Form 1040 Instruction booklet. Use Form 1040 Schedule 8812, Child Tax Credit to claim the Additional Child Tax Credit, if you are eligible.

Page Last Reviewed or Updated: 28-Mar-2014

The File A Amended Tax Return Online

File a amended tax return online Publication 538 - Main Content Table of Contents Accounting PeriodsCalendar Year Fiscal Year Short Tax Year Improper Tax Year Change in Tax Year Individuals Partnerships, S Corporations, and Personal Service Corporations (PSCs) Corporations (Other Than S Corporations and PSCs) Accounting MethodsSpecial methods. File a amended tax return online Hybrid method. File a amended tax return online Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). File a amended tax return online Accounting Periods You must use a tax year to figure your taxable income. File a amended tax return online A tax year is an annual accounting period for keeping records and reporting income and expenses. File a amended tax return online An annual accounting period does not include a short tax year (discussed later). File a amended tax return online You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). File a amended tax return online Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. File a amended tax return online A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. File a amended tax return online You cannot adopt a tax year by merely: Filing an application for an extension of time to file an income tax return; Filing an application for an employer identification number (Form SS-4); or Paying estimated taxes. File a amended tax return online This section discusses: A calendar year. File a amended tax return online A fiscal year (including a period of 52 or 53 weeks). File a amended tax return online A short tax year. File a amended tax return online An improper tax year. File a amended tax return online A change in tax year. File a amended tax return online Special situations that apply to individuals. File a amended tax return online Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. File a amended tax return online Special situations that apply to corporations. File a amended tax return online Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. File a amended tax return online If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year. File a amended tax return online If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. File a amended tax return online See Change in Tax Year, later. File a amended tax return online Generally, anyone can adopt the calendar year. File a amended tax return online However, you must adopt the calendar year if: You keep no books or records; You have no annual accounting period; Your present tax year does not qualify as a fiscal year; or You are required to use a calendar year by a provision in the Internal Revenue Code or the Income Tax Regulations. File a amended tax return online Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. File a amended tax return online If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted. File a amended tax return online 52-53-Week Tax Year You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. File a amended tax return online If you make this election, your 52-53-week tax year must always end on the same day of the week. File a amended tax return online Your 52-53-week tax year must always end on: Whatever date this same day of the week last occurs in a calendar month, or Whatever date this same day of the week falls that is nearest to the last day of the calendar month. File a amended tax return online For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013. File a amended tax return online Election. File a amended tax return online   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. File a amended tax return online The month in which the new 52-53-week tax year ends. File a amended tax return online The day of the week on which the tax year always ends. File a amended tax return online The date the tax year ends. File a amended tax return online It can be either of the following dates on which the chosen day: Last occurs in the month in (1), above, or Occurs nearest to the last day of the month in (1), above. File a amended tax return online   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. File a amended tax return online   To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to: Begin on the first day of the calendar month beginning nearest to the first day of the 52-53-week tax year, and End on the last day of the calendar month ending nearest to the last day of the 52-53-week tax year. File a amended tax return online Example. File a amended tax return online Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. File a amended tax return online For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012. File a amended tax return online Short Tax Year A short tax year is a tax year of less than 12 months. File a amended tax return online A short period tax return may be required when you (as a taxable entity): Are not in existence for an entire tax year, or Change your accounting period. File a amended tax return online Tax on a short period tax return is figured differently for each situation. File a amended tax return online Not in Existence Entire Year Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. File a amended tax return online Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year. File a amended tax return online Example 1. File a amended tax return online XYZ Corporation was organized on July 1, 2012. File a amended tax return online It elected the calendar year as its tax year. File a amended tax return online Therefore, its first tax return was due March 15, 2013. File a amended tax return online This short period return will cover the period from July 1, 2012, through December 31, 2012. File a amended tax return online Example 2. File a amended tax return online A calendar year corporation dissolved on July 23, 2012. File a amended tax return online Its final return is due by October 15, 2012. File a amended tax return online It will cover the short period from January 1, 2012, through July 23, 2012. File a amended tax return online Death of individual. File a amended tax return online   When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. File a amended tax return online The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. File a amended tax return online In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required. File a amended tax return online Example. File a amended tax return online   Agnes Green was a single, calendar year taxpayer. File a amended tax return online She died on March 6, 2012. File a amended tax return online Her final income tax return must be filed by April 15, 2013. File a amended tax return online It will cover the short period from January 1, 2012, to March 6, 2012. File a amended tax return online Figuring Tax for Short Year If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. File a amended tax return online The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year. File a amended tax return online Figure tax for a short year under the general rule, explained below. File a amended tax return online You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. File a amended tax return online General rule. File a amended tax return online   Income tax for a short tax year must be annualized. File a amended tax return online However, self-employment tax is figured on the actual self-employment income for the short period. File a amended tax return online Individuals. File a amended tax return online   An individual must figure income tax for the short tax year as follows. File a amended tax return online Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. File a amended tax return online You must itemize deductions when you file a short period tax return. File a amended tax return online Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. File a amended tax return online Subtract the amount in (2) from the amount in (1). File a amended tax return online The result is your modified taxable income. File a amended tax return online Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. File a amended tax return online The result is your annualized income. File a amended tax return online Figure the total tax on your annualized income using the appropriate tax rate schedule. File a amended tax return online Multiply the total tax by the number of months in the short tax year and divide the result by 12. File a amended tax return online The result is your tax for the short tax year. File a amended tax return online Relief procedure. File a amended tax return online   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. File a amended tax return online It may result in less tax. File a amended tax return online Under this procedure, the tax is figured by two separate methods. File a amended tax return online If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. File a amended tax return online For more information, see section 443(b)(2) of the Internal Revenue Code. File a amended tax return online Alternative minimum tax. File a amended tax return online   To figure the alternative minimum tax (AMT) due for a short tax year: Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps. File a amended tax return online Multiply the AMTI by 12. File a amended tax return online Divide the result by the number of months in the short tax year. File a amended tax return online Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. File a amended tax return online The result is the annualized AMT. File a amended tax return online Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. File a amended tax return online   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. File a amended tax return online For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. File a amended tax return online Tax withheld from wages. File a amended tax return online   You can claim a credit against your income tax liability for federal income tax withheld from your wages. File a amended tax return online Federal income tax is withheld on a calendar year basis. File a amended tax return online The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. File a amended tax return online Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. File a amended tax return online For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. File a amended tax return online See Accounting Periods, earlier, for a description of permissible tax years. File a amended tax return online To change to a proper tax year, you must do one of the following. File a amended tax return online If you are requesting a change to a calendar tax year, file an amended income tax return based on a calendar tax year that corrects the most recently filed tax return that was filed on the basis of an improper tax year. File a amended tax return online Attach a completed Form 1128 to the amended tax return. File a amended tax return online Write “FILED UNDER REV. File a amended tax return online PROC. File a amended tax return online 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. File a amended tax return online If you are requesting a change to a fiscal tax year, file Form 1128 in accordance with the form instructions to request IRS approval for the change. File a amended tax return online Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. File a amended tax return online See the Instructions for Form 1128 for exceptions. File a amended tax return online If you qualify for an automatic approval request, a user fee is not required. File a amended tax return online Individuals Generally, individuals must adopt the calendar year as their tax year. File a amended tax return online An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year. File a amended tax return online Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. File a amended tax return online A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. File a amended tax return online The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). File a amended tax return online The following discussions provide the rules for partnerships, S corporations, and PSCs. File a amended tax return online Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. File a amended tax return online The partnership makes an election under section 444 of the Internal Revenue Code to have a tax year other than a required tax year by filing Form 8716. File a amended tax return online The partnership elects to use a 52-53-week tax year that ends with reference to either its required tax year or a tax year elected under section 444. File a amended tax return online The partnership can establish a business purpose for a different tax year. File a amended tax return online The rules for the required tax year for partnerships are as follows. File a amended tax return online If one or more partners having the same tax year own a majority interest (more than 50%) in partnership profits and capital, the partnership must use the tax year of those partners. File a amended tax return online If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. File a amended tax return online A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. File a amended tax return online If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership generally must use a tax year that results in the least aggregate deferral of income to the partners. File a amended tax return online If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. File a amended tax return online Least aggregate deferral of income. File a amended tax return online   The tax year that results in the least aggregate deferral of income is determined as follows. File a amended tax return online Figure the number of months of deferral for each partner using one partner's tax year. File a amended tax return online Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year. File a amended tax return online Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1). File a amended tax return online Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). File a amended tax return online Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. File a amended tax return online   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. File a amended tax return online If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. File a amended tax return online However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. File a amended tax return online Example. File a amended tax return online A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. File a amended tax return online A uses the calendar year and B uses a fiscal year ending November 30. File a amended tax return online P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table. File a amended tax return online Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. File a amended tax return online 5 -0- -0- B 11/30 0. File a amended tax return online 5 11 5. File a amended tax return online 5 Total Deferral 5. File a amended tax return online 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. File a amended tax return online 5 1 0. File a amended tax return online 5 B 11/30 0. File a amended tax return online 5 -0- -0- Total Deferral 0. File a amended tax return online 5 When determination is made. File a amended tax return online   The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. File a amended tax return online However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. File a amended tax return online This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. File a amended tax return online Short period return. File a amended tax return online   When a partnership changes its tax year, a short period return must be filed. File a amended tax return online The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year. File a amended tax return online   If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. File a amended tax return online The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. File a amended tax return online 706-1. File a amended tax return online ” More information. File a amended tax return online   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. File a amended tax return online S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. File a amended tax return online A permitted tax year is any of the following. File a amended tax return online The calendar year. File a amended tax return online A tax year elected under section 444 of the Internal Revenue Code. File a amended tax return online See Section 444 Election, below for details. File a amended tax return online A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. File a amended tax return online Any other tax year for which the corporation establishes a business purpose. File a amended tax return online If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. File a amended tax return online For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. File a amended tax return online Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. File a amended tax return online The corporation makes an election under section 444 of the Internal Revenue Code. File a amended tax return online See Section 444 Election, below for details. File a amended tax return online The corporation elects to use a 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. File a amended tax return online The corporation establishes a business purpose for a fiscal year. File a amended tax return online See the Instructions for Form 1120 for general information about PSCs. File a amended tax return online For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. File a amended tax return online Section 444 Election A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. File a amended tax return online Certain restrictions apply to the election. File a amended tax return online A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). File a amended tax return online The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later. File a amended tax return online A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. File a amended tax return online It is not a member of a tiered structure (defined in section 1. File a amended tax return online 444-2T of the regulations). File a amended tax return online It has not previously had a section 444 election in effect. File a amended tax return online It elects a year that meets the deferral period requirement. File a amended tax return online Deferral period. File a amended tax return online   The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election. File a amended tax return online Retaining tax year. File a amended tax return online   Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. File a amended tax return online This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. File a amended tax return online Adopting or changing tax year. File a amended tax return online   If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. File a amended tax return online The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: Three months, or The deferral period of the tax year being changed. File a amended tax return online This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. File a amended tax return online If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. File a amended tax return online Example 1. File a amended tax return online BD Partnership uses a calendar year, which is also its required tax year. File a amended tax return online BD cannot make a section 444 election because the deferral period is zero. File a amended tax return online Example 2. File a amended tax return online E, a newly formed partnership, began operations on December 1. File a amended tax return online E is owned by calendar year partners. File a amended tax return online E wants to make a section 444 election to adopt a September 30 tax year. File a amended tax return online E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. File a amended tax return online Making the election. File a amended tax return online   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. File a amended tax return online Form 8716 must be filed by the earlier of: The due date (not including extensions) of the income tax return for the tax year resulting from the section 444 election, or The 15th day of the 6th month of the tax year for which the election will be effective. File a amended tax return online For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. File a amended tax return online Note. File a amended tax return online If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. File a amended tax return online   Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made. File a amended tax return online Example 1. File a amended tax return online AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. File a amended tax return online AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012. File a amended tax return online Example 2. File a amended tax return online The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. File a amended tax return online AB must file Form 8716 by March 17, 2013. File a amended tax return online Example 3. File a amended tax return online B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. File a amended tax return online B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. File a amended tax return online B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012. File a amended tax return online Note. File a amended tax return online The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. File a amended tax return online Extension of time for filing. File a amended tax return online   There is an automatic extension of 12 months to make this election. File a amended tax return online See the Form 8716 instructions for more information. File a amended tax return online Terminating the election. File a amended tax return online   The section 444 election remains in effect until it is terminated. File a amended tax return online If the election is terminated, another section 444 election cannot be made for any tax year. File a amended tax return online   The election ends when any of the following applies to the partnership, S corporation, or PSC. File a amended tax return online The entity changes to its required tax year. File a amended tax return online The entity liquidates. File a amended tax return online The entity becomes a member of a tiered structure. File a amended tax return online The IRS determines that the entity willfully failed to comply with the required payments or distributions. File a amended tax return online   The election will also end if either of the following events occur. File a amended tax return online An S corporation's S election is terminated. File a amended tax return online However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. File a amended tax return online A PSC ceases to be a PSC. File a amended tax return online If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. File a amended tax return online Required payment for partnership or S corporation. File a amended tax return online   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. File a amended tax return online The required payment for that year (or any preceding tax year) is more than $500. File a amended tax return online    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. File a amended tax return online   Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. File a amended tax return online If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. File a amended tax return online If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount. File a amended tax return online Applicable election year. File a amended tax return online   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. File a amended tax return online Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins. File a amended tax return online Required distribution for PSC. File a amended tax return online   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. File a amended tax return online If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. File a amended tax return online The amount deferred is treated as paid or incurred in the following tax year. File a amended tax return online   For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC). File a amended tax return online Back-up election. File a amended tax return online   A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. File a amended tax return online If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). File a amended tax return online Making back-up election. File a amended tax return online   The general rules for making a section 444 election, as discussed earlier, apply. File a amended tax return online When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. File a amended tax return online However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print “FORM 1128 (or FORM 2553) BACK-UP ELECTION” at the top of Form 8716. File a amended tax return online Activating election. File a amended tax return online   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. File a amended tax return online The due date for filing Form 8752 and making the payment is the later of the following dates. File a amended tax return online May 15 of the calendar year following the calendar year in which the applicable election year begins. File a amended tax return online 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. File a amended tax return online   A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, “ACTIVATING BACK-UP ELECTION. File a amended tax return online ” 52-53-Week Tax Year A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier). File a amended tax return online A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. File a amended tax return online However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128. File a amended tax return online Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. File a amended tax return online See the Instructions for Form 1128 for details. File a amended tax return online Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. File a amended tax return online A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. File a amended tax return online An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. File a amended tax return online Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. File a amended tax return online See the Instructions for Form 1128 for details. File a amended tax return online Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. File a amended tax return online Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. File a amended tax return online You choose an accounting method when you file your first tax return. File a amended tax return online If you later want to change your accounting method, you must get IRS approval. File a amended tax return online See Change in Accounting Method, later. File a amended tax return online No single accounting method is required of all taxpayers. File a amended tax return online You must use a system that clearly reflects your income and expenses and you must maintain records that will enable you to file a correct return. File a amended tax return online In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. File a amended tax return online You must use the same accounting method from year to year. File a amended tax return online An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. File a amended tax return online If you do not regularly use an accounting method that clearly reflects your income, your income will be refigured under the method that, in the opinion of the IRS, does clearly reflect income. File a amended tax return online Methods you can use. File a amended tax return online   In general, you can compute your taxable income under any of the following accounting methods. File a amended tax return online Cash method. File a amended tax return online Accrual method. File a amended tax return online Special methods of accounting for certain items of income and expenses. File a amended tax return online A hybrid method which combines elements of two or more of the above accounting methods. File a amended tax return online The cash and accrual methods of accounting are explained later. File a amended tax return online Special methods. File a amended tax return online   This publication does not discuss special methods of accounting for certain items of income or expenses. File a amended tax return online For information on reporting income using one of the long-term contract methods, see section 460 of the Internal Revenue Code and the related regulations. File a amended tax return online The following publications also discuss special methods of reporting income or expenses. File a amended tax return online Publication 225, Farmer's Tax Guide. File a amended tax return online Publication 535, Business Expenses. File a amended tax return online Publication 537, Installment Sales. File a amended tax return online Publication 946, How To Depreciate Property. File a amended tax return online Hybrid method. File a amended tax return online   Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. File a amended tax return online However, the following restrictions apply. File a amended tax return online If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. File a amended tax return online See Exceptions under Inventories, later. File a amended tax return online Generally, you can use the cash method for all other items of income and expenses. File a amended tax return online See Inventories, later. File a amended tax return online If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. File a amended tax return online If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. File a amended tax return online Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. File a amended tax return online Business and personal items. File a amended tax return online   You can account for business and personal items using different accounting methods. File a amended tax return online For example, you can determine your business income and expenses under an accrual method, even if you use the cash method to figure personal items. File a amended tax return online Two or more businesses. File a amended tax return online   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. File a amended tax return online No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. File a amended tax return online Note. File a amended tax return online If you use different accounting methods to create or shift profits or losses between businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct. File a amended tax return online Cash Method Most individuals and many small businesses use the cash method of accounting. File a amended tax return online Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. File a amended tax return online See Inventories, later, for exceptions to this rule. File a amended tax return online Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. File a amended tax return online If you receive property and services, you must include their fair market value (FMV) in income. File a amended tax return online Constructive receipt. File a amended tax return online   Income is constructively received when an amount is credited to your account or made available to you without restriction. File a amended tax return online You need not have possession of it. File a amended tax return online If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. File a amended tax return online Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. File a amended tax return online Example. File a amended tax return online You are a calendar year taxpayer. File a amended tax return online Your bank credited, and made available, interest to your bank account in December 2012. File a amended tax return online You did not withdraw it or enter it into your books until 2013. File a amended tax return online You must include the amount in gross income for 2012, the year you constructively received it. File a amended tax return online You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. File a amended tax return online You must report the income in the year the property is received or made available to you without restriction. File a amended tax return online Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. File a amended tax return online This includes business expenses for which you contest liability. File a amended tax return online However, you may not be able to deduct an expense paid in advance. File a amended tax return online Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. File a amended tax return online Expense paid in advance. File a amended tax return online   An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. File a amended tax return online   Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. File a amended tax return online 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. File a amended tax return online   If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule. File a amended tax return online See Change in Accounting Method, later. File a amended tax return online Example 1. File a amended tax return online You are a calendar year taxpayer and pay $3,000 in 2012 for a business insurance policy that is effective for three years (36 months), beginning on July 1, 2012. File a amended tax return online The general rule that an expense paid in advance is deductible only in the year to which it applies is applicable to this payment because the payment does not qualify for the 12-month rule. File a amended tax return online Therefore, only $500 (6/36 x $3,000) is deductible in 2012, $1,000 (12/36 x $3,000) is deductible in 2013, $1,000 (12/36 x $3,000) is deductible in 2014, and the remaining $500 is deductible in 2015. File a amended tax return online Example 2. File a amended tax return online You are a calendar year taxpayer and pay $10,000 on July 1, 2012, for a business insurance policy that is effective for only one year beginning on July 1, 2012. File a amended tax return online The 12-month rule applies. File a amended tax return online Therefore, the full $10,000 is deductible in 2012. File a amended tax return online Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. File a amended tax return online (See Special rules for farming businesses, later. File a amended tax return online ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. File a amended tax return online See Gross receipts test, below. File a amended tax return online A partnership with a corporation (other than an S corporation) as a partner, and with the partnership having average annual gross receipts exceeding $5 million. File a amended tax return online See Gross receipts test, below. File a amended tax return online A tax shelter. File a amended tax return online Exceptions The following entities are not prohibited from using the cash method of accounting. File a amended tax return online Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. File a amended tax return online A qualified personal service corporation (PSC). File a amended tax return online Gross receipts test. File a amended tax return online   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. File a amended tax return online A corporation or a partnership meets the test if, for each prior tax year beginning after 1985, its average annual gross receipts are $5 million or less. File a amended tax return online    An entity's average annual gross receipts for a prior tax year is determined by: Adding the gross receipts for that tax year and the 2 preceding tax years; and Dividing the total by 3. File a amended tax return online See Gross receipts test for qualifying taxpayers, for more information. File a amended tax return online Generally, a partnership applies the test at the partnership level. File a amended tax return online Gross receipts for a short tax year are annualized. File a amended tax return online Aggregation rules. File a amended tax return online   Organizations that are members of an affiliated service group or a controlled group of corporations treated as a single employer for tax purposes are required to aggregate their gross receipts to determine whether the gross receipts test is met. File a amended tax return online Change to accrual method. File a amended tax return online   A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method and must change to an accrual method of accounting, effective for the tax year in which the entity fails to meet this test. File a amended tax return online Special rules for farming businesses. File a amended tax return online   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. File a amended tax return online However, certain corporations (other than S corporations) and partnerships that have a partner that is a corporation must use an accrual method for their farming business. File a amended tax return online For this purpose, farming does not include the operation of a nursery or sod farm or the raising or harvesting of trees (other than fruit and nut trees). File a amended tax return online   There is an exception to the requirement to use an accrual method for corporations with gross receipts of $1 million or less for each prior tax year after 1975. File a amended tax return online For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. File a amended tax return online See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. File a amended tax return online Qualified PSC. File a amended tax return online   A PSC that meets the following function and ownership tests can use the cash method. File a amended tax return online Function test. File a amended tax return online   A corporation meets the function test if at least 95% of its activities are in the performance of services in the fields of health, veterinary services, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting. File a amended tax return online Ownership test. File a amended tax return online   A corporation meets the ownership test if at least 95% of its stock is owned, directly or indirectly, at all times during the year by one or more of the following. File a amended tax return online Employees performing services for the corporation in a field qualifying under the function test. File a amended tax return online Retired employees who had performed services in those fields. File a amended tax return online The estate of an employee described in (1) or (2). File a amended tax return online Any other person who acquired the stock by reason of the death of an employee referred to in (1) or (2), but only for the 2-year period beginning on the date of death. File a amended tax return online   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. File a amended tax return online Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. File a amended tax return online Other forms of indirect stock ownership, such as stock owned by family members, are generally not considered when determining if the ownership test is met. File a amended tax return online   For purposes of the ownership test, a person is not considered an employee of a corporation unless that person performs more than minimal services for the corporation. File a amended tax return online Change to accrual method. File a amended tax return online   A corporation that fails to meet the function test for any tax year; or fails to meet the ownership test at any time during any tax year must change to an accrual method of accounting, effective for the year in which the corporation fails to meet either test. File a amended tax return online A corporation that fails to meet the function test or the ownership test is not treated as a qualified PSC for any part of that tax year. File a amended tax return online Accrual Method Under the accrual method of accounting, generally you report income in the year it is earned and deduct or capitalize expenses in the year incurred. File a amended tax return online The purpose of an accrual method of accounting is to match income and expenses in the correct year. File a amended tax return online Income Generally, you include an amount in gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. File a amended tax return online Under this rule, you report an amount in your gross income on the earliest of the following dates. File a amended tax return online When you receive payment. File a amended tax return online When the income amount is due to you. File a amended tax return online When you earn the income. File a amended tax return online When title has passed. File a amended tax return online Estimated income. File a amended tax return online   If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination. File a amended tax return online Change in payment schedule. File a amended tax return online   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a reduced rate. File a amended tax return online Continue this procedure until you complete the services, then account for the difference. File a amended tax return online Advance Payment for Services Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. File a amended tax return online However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. File a amended tax return online However, you cannot postpone including any payment beyond that tax year. File a amended tax return online Service agreement. File a amended tax return online   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. File a amended tax return online This includes an agreement providing for incidental replacement of parts or materials. File a amended tax return online However, this applies only if you offer the property without a service agreement in the normal course of business. File a amended tax return online Postponement not allowed. File a amended tax return online   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. File a amended tax return online You are to perform any part of the service after the end of the tax year immediately following the year you receive the advance payment. File a amended tax return online You are to perform any part of the service at any unspecified future date that may be after the end of the tax year immediately following the year you receive the advance payment. File a amended tax return online Examples. File a amended tax return online   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. File a amended tax return online Example 1. File a amended tax return online You manufacture, sell, and service computers. File a amended tax return online You received payment in 2012 for a one-year contingent service contract on a computer you sold. File a amended tax return online You can postpone including in income the part of the payment you did not earn in 2012 if, in the normal course of your business, you offer computers for sale without a contingent service contract. File a amended tax return online Example 2. File a amended tax return online You are in the television repair business. File a amended tax return online You received payments in 2012 for one-year contracts under which you agree to repair or replace certain parts that fail to function properly in television sets manufactured and sold by unrelated parties. File a amended tax return online You include the payments in gross income as you earn them. File a amended tax return online Example 3. File a amended tax return online You own a dance studio. File a amended tax return online On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. File a amended tax return online You give eight lessons in 2012. File a amended tax return online Under this method of including advance payments, you must include one-sixth (8/48) of the payment in income for 2012, and five-sixths (40/48) of the payment in 2013, even if you do not give all the lessons by the end of 2013. File a amended tax return online Example 4. File a amended tax return online Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. File a amended tax return online You must include the entire payment in income in 2012 since part of the services may be performed after the following year. File a amended tax return online Guarantee or warranty. File a amended tax return online   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. File a amended tax return online Prepaid rent. File a amended tax return online   You cannot postpone reporting income from prepaid rent. File a amended tax return online Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. File a amended tax return online You provide significant service when you supply space in a hotel, boarding house, tourist home, motor court, motel, or apartment house that furnishes hotel services. File a amended tax return online Books and records. File a amended tax return online   Any advance payment you include in gross receipts on your tax return for the year you receive payment must not be less than the payment you include in income for financial reports under the method of accounting used for those reports. File a amended tax return online Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. File a amended tax return online IRS approval. File a amended tax return online   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. File a amended tax return online Advance Payment for Sales Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods held primarily for sale to customers in the ordinary course of your trade or business. File a amended tax return online However, the rules do not apply to a payment (or part of a payment) for services that are not an integral part of the main activities covered under the agreement. File a amended tax return online An agreement includes a gift certificate that can be redeemed for goods. File a amended tax return online Amounts due and payable are considered received. File a amended tax return online How to report payments. File a amended tax return online   Generally, include an advance payment in income in the year in which you receive it. File a amended tax return online However, you can use the alternative method, discussed next. File a amended tax return online Alternative method of reporting. File a amended tax return online   Under the alternative method, generally include an advance payment in income in the earlier tax year in which you: Include advance payments in gross receipts under the method of accounting you use for tax purposes, or Include any part of advance payments in income for financial reports under the method of accounting used for those reports. File a amended tax return online Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. File a amended tax return online Example 1. File a amended tax return online You are a retailer. File a amended tax return online You use an accrual method of accounting and account for the sale of goods when you ship the goods. File a amended tax return online You use this method for both tax and financial reporting purposes. File a amended tax return online You can include advance payments in gross receipts for tax purposes in either: (a) the tax year in which you receive the payments; or (b) the tax year in which you ship the goods. File a amended tax return online However, see Exception for inventory goods, later. File a amended tax return online Example 2. File a amended tax return online You are a calendar year taxpayer. File a amended tax return online You manufacture household furniture and use an accrual method of accounting. File a amended tax return online Under this method, you accrue income for your financial reports when you ship the furniture. File a amended tax return online For tax purposes, you do not accrue income until the furniture has been delivered and accepted. File a amended tax return online In 2012, you received an advance payment of $8,000 for an order of furniture to be manufactured for a total price of $20,000. File a amended tax return online You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. File a amended tax return online For tax purposes, you include the $8,000 advance payment in gross income for 2012; and include the remaining $12,000 of the contract price in gross income for 2013. File a amended tax return online Information schedule. File a amended tax return online   If you use the alternative method of reporting advance payments, you must attach a statement with the following information to your tax return each year. File a amended tax return online Total advance payments received in the current tax year. File a amended tax return online Total advance payments received in earlier tax years and not included in income before the current tax year. File a amended tax return online Total payments received in earlier tax years included in income for the current tax year. File a amended tax return online Exception for inventory goods. File a amended tax return online   If you have an agreement to sell goods properly included in inventory, you can postpone including the advance payment in income until the end of the second tax year following the year you receive an advance payment if, on the last day of the tax year, you meet the following requirements. File a amended tax return online You account for the advance payment under the alternative method (discussed earlier). File a amended tax return online You have received a substantial advance payment on the agreement (discussed next). File a amended tax return online You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. File a amended tax return online These rules also apply to an agreement, such as a gift certificate, that can be satisfied with goods that cannot be identified in the tax year you receive an advance payment. File a amended tax return online   If you meet these conditions, all advance payments you receive by the end of the second tax year, including payments received in prior years but not reported, must be included in income by the second tax year following the tax year of receipt of substantial advance payments. File a amended tax return online You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. File a amended tax return online If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. File a amended tax return online Note. File a amended tax return online You must report any advance payments you receive after the second year in the year received. File a amended tax return online No further deferral is allowed. File a amended tax return online Substantial advance payments. File a amended tax return online   Under an agreement for a future sale, you have substantial advance payments if, by the end of the tax year, the total advance payments received during that year and preceding tax years are equal to or more than the total costs reasonably estimated to be includible in inventory because of the agreement. File a amended tax return online Example. File a amended tax return online You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. File a amended tax return online In 2008, you entered into a contract for the sale of goods properly includible in your inventory. File a amended tax return online The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. File a amended tax return online You receive the following advance payments under the contract. File a amended tax return online 2009 $17,500 2010 10,000 2011 7,500 2012 5,000 2013 5,000 2014 5,000 Total contract price $50,000   Your customer asked you to deliver the goods in 2015. File a amended tax return online In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. File a amended tax return online Since the advance payments you had received by the end of 2010 were more than the costs you estimated, the payments are substantial advance payments. File a amended tax return online   For 2012, include in income all payments you received by the end of 2012, the second tax year following the tax year in which you received substantial advance payments. File a amended tax return online You must include $40,000 in sales for 2012 (the total amounts received from 2009 through 2012) and include in inventory the cost of the goods (or similar goods) on hand. File a amended tax return online If no such goods are on hand, then estimate the cost necessary to satisfy the contract. File a amended tax return online   No further deferral is allowed. File a amended tax return online You must include in gross income the advance payment you receive each remaining year of the contract. File a amended tax return online Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. File a amended tax return online IRS approval. File a amended tax return online   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. File a amended tax return online Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. File a amended tax return online The all-events test has been met. File a amended tax return online The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. File a amended tax return online Economic performance has occurred. File a amended tax return online Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. File a amended tax return online 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. File a amended tax return online If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. File a amended tax return online Example. File a amended tax return online You are a calendar year taxpayer. File a amended tax return online You buy office supplies in December 2012. File a amended tax return online You receive the supplies and the bill in December, but you pay the bill in January 2013. File a amended tax return online You can deduct the expense in 2012 because all events have occurred to fix the liability, the amount of the liability can be determined, and economic performance occurred in 2012. File a amended tax return online Your office supplies may qualify as a recurring item, discussed later. File a amended tax return online If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). File a amended tax return online Workers' compensation and tort liability. File a amended tax return online   If you are required to make payments under workers' compensation laws or in satisfaction of any tort liability, economic performance occurs as you make the payments. File a amended tax return online If you are required to make payments to a special designated settlement fund established by court order for a tort liability, economic performance occurs as you make the payments. File a amended tax return online Taxes. File a amended tax return online   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. File a amended tax return online are paid. File a amended tax return online However, you can elect to treat taxes as a recurring item, discussed later. File a amended tax return online You can also elect to ratably accrue real estate taxes. File a amended tax return online See chapter 5 of Publication 535 for information about real estate taxes. File a amended tax return online Other liabilities. File a amended tax return online   Other liabilities for which economic performance occurs as you make payments include liabilities for breach of contract (to the extent of incidental, consequential, and liquidated damages), violation of law, rebates and refunds, awards, prizes, jackpots, insurance, and warranty and service contracts. File a amended tax return online Interest. File a amended tax return online   Economic performance occurs with the passage of time (as the borrower uses, and the lender forgoes use of, the lender's money) rather than as payments are made. File a amended tax return online Compensation for services. File a amended tax return online   Generally, economic performance occurs as an employee renders service to the employer. File a amended tax return online However, deductions for compensation or other benefits paid to an employee in a year subsequent to economic performance are subject to the rules governing deferred compensation, deferred benefits, and funded welfare benefit plans. File a amended tax return online For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. File a amended tax return online Vacation pay. File a amended tax return online   You can take a current deduction for vacation pay earned by your employees if you pay it during the year or, if the amount is vested, within 2½ months after the end of the year. File a amended tax return online If you pay it later than this, you must deduct it in the year actually paid. File a amended tax return online An amount is vested if your right to it cannot be nullified or cancelled. File a amended tax return online Exception for recurring items. File a amended tax return online   An exception to the economic performance rule allows certain recurring items to be treated as incurred during the tax year even though economic performance has not occurred. File a amended tax return online The exception applies if all the following requirements are met. File a amended tax return online The all-events test, discussed earlier, is met. File a amended tax return online Economic performance occurs by the earlier of the following dates. File a amended tax return online 8½ months after the close of the year. File a amended tax return online The date you file a timely return (including extensions) for the year. File a amended tax return online The item is recurring in nature and you consistently treat similar items as incurred in the tax year in which the all-events test is met. File a amended tax return online Either: The item is not material, or Accruing the item in the year in which the all-events test is met results in a better match against income than accruing the item in the year of economic performance. File a amended tax return online This exception does not apply to workers' compensation or tort liabilities. File a amended tax return online Amended return. File a amended tax return online   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. File a amended tax return online You can do so if economic performance for the liability occurs after you file your tax return for the year, but within 8½ months after the close of the tax year. File a amended tax return online Recurrence and consistency. File a amended tax return online   To determine whether an item is recurring and consistently reported, consider the frequency with which the item and similar items are incurred (or expected to be incurred) and how you report these items for tax purposes. File a amended tax return online A new expense or an expense not incurred every year can be treated as recurring if it is reasonable to expect that it will be incurred regularly in the future. File a amended tax return online Materiality. File a amended tax return online   Factors to consider in determining the materiality of a recurring item include the size of the item (both in absolute terms and in relation to your income and other expenses) and the treatment of the item on your financial statements. File a amended tax return online   An item considered material for financial statement purposes is also considered material for tax purposes. File a amended tax return online However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. File a amended tax return online Matching expenses with income. File a amended tax return online   Costs directly associated with the revenue of a period are properly allocable to that period. File a amended tax return online To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles (GAAP; visit www. File a amended tax return online fasab. File a amended tax return online gov/accepted. File a amended tax return online html) are an important factor. File a amended tax return online   For example, if you report sales income in the year of sale, but you do not ship the goods until the following year, the shipping costs are more properly matched to income in the year of sale than the year the goods are shipped. File a amended tax return online Expenses that cannot be practically associated with income of a particular period, such as advertising costs, should be assigned to the period the costs are incurred. File a amended tax return online However, the matching requirement is considered met for certain types of expenses. File a amended tax return online These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. File a amended tax return online Expenses Paid in Advance An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. File a amended tax return online Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. File a amended tax return online 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. File a amended tax return online If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must get IRS approval before using the general rule and/or the 12-month rule. File a amended tax return online See Change in Accounting Method, later, for information on how to get IRS approval. File a amended tax return online See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. File a amended tax return online Related Persons Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. File a amended tax return online Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. File a amended tax return online See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. File a amended tax return online Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. File a amended tax return online If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. File a amended tax return online However, see Exceptions, next. File a amended tax return online See also Accrual Method, earlier. File a amended tax return online To figure taxable income, you must value your inventory at the beginning and end of each tax year. File a amended tax return online To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. File a amended tax return online See Identifying Cost and Valuing Inventory, later. File a amended tax return online The rules for valuing inventory are not the same for all businesses. File a amended tax return online The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. File a amended tax return online Your inventory practices must be consistent from year to year. File a amended tax return online The rules discussed here apply only if they do not conflict with the uniform capitalization rules of section 263A and the mark-to-market rules of section 475. File a amended tax return online Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. File a amended tax return online These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). File a amended tax return online A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. File a amended tax return online irs. File a amended tax return online gov/pub/irs-irbs/irb01–02. File a amended tax return online pdf. File a amended tax return online A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. File a amended tax return online irs. File a amended tax return online gov/pub/irs-irbs/irb02–18. File a amended tax return online pdf. File a amended tax return online In addition to the information provided in this publication, you should see the revenue procedures referenced in the list, above, and the instructions for Form 3115 for information you will need to adopt or change to these accounting methods (see Changing methods, later). File a amended tax return online Qualifying taxpayer. File a amended tax return online   You are a qualifying taxpayer under Revenue Procedure 2001-10 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 17, 1998 (see Gross receipts test for qualifying taxpayers, next). File a amended tax return online Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. File a amended tax return online You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. File a amended tax return online Gross receipts test for qualifying taxpayers. File a amended tax return online   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. File a amended tax return online List each of the test years. File a amended tax return online For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. File a amended tax return online Step 2. File a amended tax return online Determine your average annual gross receipts for each test year listed in Step 1. File a amended tax return online Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. File a amended tax return online Step 3. File a amended tax return online You meet the gross receipts test for qualifying taxpayers if your average annual gross receipts for each test year listed in Step 1 is $1 million or less. File a amended tax return online Qualifying small business taxpayer. File a amended tax return online   You are a qualifying small business taxpayer under Revenue Procedure 2002-28 only if: You satisfy the gross receipts test for each prior tax year ending on or after December 31, 2000 (see Gross receipts test for qualifying small business taxpayers, next). File a amended tax return online Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. File a amended tax return online You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. File a amended tax return online Your principle business activity is an eligible business. File a amended tax return online See Eligible business, later. File a amended tax return online You have not changed (or have not been required to change) from the cash method because you became ineligible to use the cash method under Revenue Procedure 2002-28. File a amended tax return online Note. File a amended tax return online Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. File a amended tax return online A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. File a amended tax return online See Special rules for farming businesses under Cash Method, earlier. File a amended tax return online Gross receipts test for qualifying small business taxpayers. File a amended tax return online   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. File a amended tax return online List each of the test years. File a amended tax return online For qualifying small business taxpayers under Revenue Procedure 2002-28, the test years are each prior tax year ending on or after December 31, 2000. File a amended tax return online Step 2. File a amended tax return online Determine your average annual gross receipts for each test year listed in Step 1. File a amended tax return online Your average annual gross receipts for a tax year is determined by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. File a amended tax return online Step 3. File a amended tax return online You meet the gross receipts test for qualifying small business taxpayers if your average annual gross receipts for each test year listed in Step 1 is $10 million or less. File a amended tax return online Eligible business. File a amended tax return online   An eligible business is any business for which a qualified small business taxpayer can use the cash method and choose to not keep an inventory. File a amended tax return online You have an eligible business if you meet any of the following requirements. File a amended tax return online Your principal business activity is described in a North American Industry Classification System (NAICS) code other than any of the following NAICS subsector codes: NAICS codes 211 and 212 (mining activities). File a amended tax return online NAICS codes 31-33 (manufacturing). File a amended tax return online NAICS code 42 (wholesale trade). File a amended tax return online NAICS codes 44-45 (retail trade). File a amended tax return online NAICS codes 5111 and 5122 (information industries). File a amended tax return online Your principal business activity is the provision of services, including the provision of property incident to those services. File a amended tax return online Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. File a amended tax return online   Information about the NAICS codes can be found at http://www. File a amended tax return online census. File a amended tax return online gov/naics or in the instructions for your federal income tax return. File a amended tax return online Gross receipts. File a amended tax return online   In general, gross receipts must include all receipts from all your trades or businesses that must be recognized under the method of accounting you used for that tax year for federal income tax purposes. File a amended tax return online See the definit