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File Taxes For 2010

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File Taxes For 2010

File taxes for 2010 Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. File taxes for 2010 Proc. File taxes for 2010 2013-16 Table of Contents SECTION 1. File taxes for 2010 PURPOSE SECTION 2. File taxes for 2010 BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. File taxes for 2010 BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. File taxes for 2010 FEDERAL INCOME TAX TREATMENT SECTION 5. File taxes for 2010 INFORMATION-REPORTING OBLIGATIONS SECTION 6. File taxes for 2010 HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. File taxes for 2010 PENALTY RELIEF FOR 2012 SECTION 8. File taxes for 2010 SCOPE AND EFFECTIVE DATE SECTION 9. File taxes for 2010 DRAFTING INFORMATION SECTION 1. File taxes for 2010 PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). File taxes for 2010 Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). File taxes for 2010 In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. File taxes for 2010 Current plans call for HAMP to continue accepting new borrowers through the end of 2013. File taxes for 2010 The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. File taxes for 2010 SECTION 2. File taxes for 2010 BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . File taxes for 2010 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). File taxes for 2010 A description of the program can be found at www. File taxes for 2010 makinghomeaffordable. File taxes for 2010 gov. File taxes for 2010 . File taxes for 2010 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. File taxes for 2010 These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. File taxes for 2010 . File taxes for 2010 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. File taxes for 2010 The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. File taxes for 2010 However, as noted in section 2. File taxes for 2010 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. File taxes for 2010 (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. File taxes for 2010 ”) . File taxes for 2010 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. File taxes for 2010 . File taxes for 2010 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. File taxes for 2010 The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. File taxes for 2010 (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. File taxes for 2010 ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). File taxes for 2010 Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. File taxes for 2010 Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. File taxes for 2010 . File taxes for 2010 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. File taxes for 2010 (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. File taxes for 2010 ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. File taxes for 2010 . File taxes for 2010 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). File taxes for 2010 If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. File taxes for 2010 These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. File taxes for 2010 The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. File taxes for 2010 The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. File taxes for 2010 For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. File taxes for 2010 ” . File taxes for 2010 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). File taxes for 2010 . File taxes for 2010 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. File taxes for 2010 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. File taxes for 2010 . File taxes for 2010 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. File taxes for 2010 SECTION 3. File taxes for 2010 BACKGROUND—APPLICABLE PROVISIONS OF LAW . File taxes for 2010 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. File taxes for 2010 See § 61(a)(12). File taxes for 2010 . File taxes for 2010 02 Under § 1. File taxes for 2010 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. File taxes for 2010 In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. File taxes for 2010 However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. File taxes for 2010 See § 1. File taxes for 2010 1001-3(c)(6). File taxes for 2010 . File taxes for 2010 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. File taxes for 2010 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. File taxes for 2010 If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. File taxes for 2010 See also § 1. File taxes for 2010 61-12(c). File taxes for 2010 . File taxes for 2010 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. File taxes for 2010 If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. File taxes for 2010 See, e. File taxes for 2010 g. File taxes for 2010 , §§ 1. File taxes for 2010 1272-1(c)(5) and 1. File taxes for 2010 1274-2(d). File taxes for 2010 . File taxes for 2010 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. File taxes for 2010 Section 108(a)(1)(E) and 108(a)(1)(B). File taxes for 2010 (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. File taxes for 2010 ) . File taxes for 2010 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. File taxes for 2010 . File taxes for 2010 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. File taxes for 2010 See §§ 108(h) and 163(h)(3)(B)(i). File taxes for 2010 . File taxes for 2010 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). File taxes for 2010 Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. File taxes for 2010 . File taxes for 2010 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. File taxes for 2010 . File taxes for 2010 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. File taxes for 2010 Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. File taxes for 2010 . File taxes for 2010 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. File taxes for 2010 See § 108(h)(1). File taxes for 2010 If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). File taxes for 2010 See § 108(b). File taxes for 2010 For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). File taxes for 2010 . File taxes for 2010 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). File taxes for 2010 See Form 982 instructions and Publication 4681. File taxes for 2010 This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. File taxes for 2010 . File taxes for 2010 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. File taxes for 2010 See Notice 2003-18, 2003-1 C. File taxes for 2010 B. File taxes for 2010 699, and Rev. File taxes for 2010 Rul. File taxes for 2010 79-356, 1979-2 C. File taxes for 2010 B. File taxes for 2010 28. File taxes for 2010 However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). File taxes for 2010 See Rev. File taxes for 2010 Rul. File taxes for 2010 2005-46, 2005-2 C. File taxes for 2010 B. File taxes for 2010 120, and Rev. File taxes for 2010 Rul. File taxes for 2010 75-246, 1975-1 C. File taxes for 2010 B. File taxes for 2010 24. File taxes for 2010 . File taxes for 2010 14 Under § 451 and § 1. File taxes for 2010 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. File taxes for 2010 . File taxes for 2010 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. File taxes for 2010 See § 6041(a) and (d) and § 1. File taxes for 2010 6041-1(a)(1) and (b). File taxes for 2010 . File taxes for 2010 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. File taxes for 2010 See § 6050P(a)-(c) and §§ 1. File taxes for 2010 6050P-1(a) and 1. File taxes for 2010 6050P-2(a) and (d). File taxes for 2010 . File taxes for 2010 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. File taxes for 2010 These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. File taxes for 2010 Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. File taxes for 2010 ” . File taxes for 2010 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. File taxes for 2010 These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. File taxes for 2010 Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. File taxes for 2010 SECTION 4. File taxes for 2010 FEDERAL INCOME TAX TREATMENT . File taxes for 2010 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. File taxes for 2010 See § 1. File taxes for 2010 1001-3. File taxes for 2010 At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. File taxes for 2010 See also § 61(a)(12) and § 1. File taxes for 2010 61-12(c). File taxes for 2010 . File taxes for 2010 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. File taxes for 2010 Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. File taxes for 2010 Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. File taxes for 2010 . File taxes for 2010 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. File taxes for 2010 Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. File taxes for 2010 . File taxes for 2010 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. File taxes for 2010 Therefore, for purposes of § 1. File taxes for 2010 1001-3, the date of the modification is the date of the permanent modification. File taxes for 2010 . File taxes for 2010 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. File taxes for 2010 01 of this revenue procedure for the taxable year in which the permanent modification occurs. File taxes for 2010 Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. File taxes for 2010 The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. File taxes for 2010 . File taxes for 2010 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. File taxes for 2010 . File taxes for 2010 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. File taxes for 2010 This is consistent with Rev. File taxes for 2010 Rul. File taxes for 2010 2009-19, 2009-28 I. File taxes for 2010 R. File taxes for 2010 B. File taxes for 2010 111, which addressed the treatment of Pay-for-Performance Success Payments. File taxes for 2010 . File taxes for 2010 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. File taxes for 2010 If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. File taxes for 2010 . File taxes for 2010 09 As described in section 2. File taxes for 2010 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. File taxes for 2010 To the extent that the HAMP-PRA borrower is described in section 4. File taxes for 2010 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. File taxes for 2010 To the extent that the HAMP-PRA borrower is described in section 4. File taxes for 2010 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. File taxes for 2010 SECTION 5. File taxes for 2010 INFORMATION-REPORTING OBLIGATIONS . File taxes for 2010 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. File taxes for 2010 A copy of this form is required to be furnished to the borrower. File taxes for 2010 . File taxes for 2010 02 As stated in sections 4. File taxes for 2010 01 and 4. File taxes for 2010 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. File taxes for 2010 . File taxes for 2010 03 An investor is an applicable entity that is required under § 1. File taxes for 2010 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. File taxes for 2010 Under § 1. File taxes for 2010 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. File taxes for 2010 Identifiable events determine when Forms 1099-C have to be issued. File taxes for 2010 Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. File taxes for 2010 This rule under § 1. File taxes for 2010 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. File taxes for 2010 . File taxes for 2010 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. File taxes for 2010 That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). File taxes for 2010 . File taxes for 2010 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. File taxes for 2010 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. File taxes for 2010 Under § 6041, these payments are not subject to information reporting. File taxes for 2010 See Notice 2011-14, 2011-11 I. File taxes for 2010 R. File taxes for 2010 B. File taxes for 2010 544, 546. File taxes for 2010 . File taxes for 2010 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. File taxes for 2010 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. File taxes for 2010 The payment is subject to the information reporting requirements of § 6041, as described in section 3. File taxes for 2010 15 of this revenue procedure. File taxes for 2010 Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. File taxes for 2010 SECTION 6. File taxes for 2010 HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . File taxes for 2010 01 In general. File taxes for 2010 The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). File taxes for 2010 As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. File taxes for 2010 Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. File taxes for 2010 A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. File taxes for 2010 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. File taxes for 2010 Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. File taxes for 2010 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. File taxes for 2010 . File taxes for 2010 02 HAMP-PRA borrower options. File taxes for 2010 A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. File taxes for 2010 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. File taxes for 2010 If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. File taxes for 2010 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. File taxes for 2010 . File taxes for 2010 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. File taxes for 2010 (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. File taxes for 2010 (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. File taxes for 2010 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. File taxes for 2010 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. File taxes for 2010 This section 6. File taxes for 2010 03(2) applies only if the change to reporting the discharge using the method described in section 6. File taxes for 2010 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. File taxes for 2010 To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. File taxes for 2010 (3) Example. File taxes for 2010 The following example illustrates the application of section 6. File taxes for 2010 03(2) of this revenue procedure. File taxes for 2010 In 2010, B’s basis in B’s principal residence was $330,000. File taxes for 2010 In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. File taxes for 2010 B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). File taxes for 2010 The trial period plan effective date also fell in 2010. File taxes for 2010 B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. File taxes for 2010 02(2) of this revenue procedure. File taxes for 2010 That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. File taxes for 2010 The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. File taxes for 2010 For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. File taxes for 2010 02(1) of this revenue procedure. File taxes for 2010 Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. File taxes for 2010 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). File taxes for 2010 (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. File taxes for 2010 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. File taxes for 2010 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. File taxes for 2010 Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. File taxes for 2010 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. File taxes for 2010 Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. File taxes for 2010 (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. File taxes for 2010 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. File taxes for 2010 The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. File taxes for 2010 (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. File taxes for 2010 The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). File taxes for 2010 The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. File taxes for 2010 . File taxes for 2010 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. File taxes for 2010 (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. File taxes for 2010 Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. File taxes for 2010 Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. File taxes for 2010 If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. File taxes for 2010 (2) A HAMP-PRA borrower who has been using the method described in section 6. File taxes for 2010 02(1) of this revenue procedure may change to the method described in section 6. File taxes for 2010 02(2) but must comply with the consistency and open-year requirements described in section 6. File taxes for 2010 01 of this revenue procedure. File taxes for 2010 SECTION 7. File taxes for 2010 PENALTY RELIEF FOR 2012 . File taxes for 2010 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. File taxes for 2010 03 through 5. File taxes for 2010 04 and section 8. File taxes for 2010 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. File taxes for 2010 01 through 4. File taxes for 2010 04 of this revenue procedure) that is required to be reported for 2012. File taxes for 2010 (2) Not later than March 28, 2013, a statement is sent to the Service. File taxes for 2010 It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. File taxes for 2010 01(1) of this revenue procedure. File taxes for 2010 The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . File taxes for 2010 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. File taxes for 2010 06 and 8. File taxes for 2010 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. File taxes for 2010 . File taxes for 2010 03 Section 8. File taxes for 2010 03 and 8. File taxes for 2010 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. File taxes for 2010 SECTION 8. File taxes for 2010 SCOPE AND EFFECTIVE DATE . File taxes for 2010 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. File taxes for 2010 . File taxes for 2010 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. File taxes for 2010 . File taxes for 2010 03 Because of the effective date in section 8. File taxes for 2010 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. File taxes for 2010 03 through 5. File taxes for 2010 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. File taxes for 2010 03 through 5. File taxes for 2010 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. File taxes for 2010 . File taxes for 2010 04 Because of the effective date in section 8. File taxes for 2010 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. File taxes for 2010 06 of this revenue procedure. File taxes for 2010 SECTION 9. File taxes for 2010 DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. File taxes for 2010 Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. File taxes for 2010 Pflanz and Sheldon A. File taxes for 2010 Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. File taxes for 2010 Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). File taxes for 2010 For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). File taxes for 2010 Prev  Up  Next   Home   More Internal Revenue Bulletins
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Audit Techniques Guides (ATGs)

These Audit Techniques Guides (ATGs) help IRS examiners during audits by providing insight into issues and accounting methods unique to specific industries. While ATGs are designed to provide guidance for IRS employees, they’re also useful to small business owners and tax professionals who prepare returns.

ATGs explain industry-specific examination techniques and include common, as well as, unique industry issues, business practices and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence. So they may be helpful for business and tax planning purposes. To find out more about how these guides may be helpful to you, watch this short video.

Audit Techniques Guides are available here in Adobe PDF, or as Web pages, or both. The PDF versions must be viewed with the Acrobat Reader.

NOTE: These guides are current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of these documents, no guarantees are made concerning the technical accuracy after the publication date.


A B C D E F G H I J K L M N O P Q R S T U V W X Y Z


Aerospace Industry
Publication Date: 01/2005
The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating research credit in the aerospace industry. The guide focuses on the particular unique aspects of the industry and provides examiners tools and tests to utilize in evaluating and auditing research credit.


Air Transportation (PDF - 1.85MB)
Publication Date: 04/2008
Overview of excise tax paid for transportation of persons or property by air.


Architects and Landscape Architects (PDF - 378.27KB)
Publication Date:
08/2011
This audit technique guide (ATG) has been developed to provide guidance to taxpayers as well as to revenue agents and tax compliance officers conducting examinations in the architect and landscape architect service industries.


Art Galleries - Audit Technique Guide (PDF - 461KB)
Publication Date: 01/2012
This Audit Technique Guide (ATG) has been developed to provide guidance to taxpayers as well as to revenue agents and tax compliance officers conducting examinations of Art Galleries.


Attorneys Audit Technique Guide (PDF - 525.34KB)
Publication Date: 03/2011
The Attorneys Audit Techniques Guide is intended to provide guidance to the examiner who is auditing a taxpayer who is an attorney or an attorney firm and to provide tax related guidance to taxpayers and other professionals in this industry.


Business Consultants (PDF - 700KB)
Publication Date: 07/2011
The Business Consultants ATG now includes an income section that addresses the shifting or the assignment of income issue and the substance versus form issue an examiner may encounter when conducting an examination.


Capitalization v Repairs
Publication Date: 11/2010
The ATG provides techniques for reviewing and examining capitalization v repairs issues.


Cash Intensive Businesses
Publication Date: 04/2010
Businesses that have substantial cash transactions are included in the consolidated Cash Intensive Businesses Audit Techniques Guide. Some of these businesses include bail bonds, beauty shops, car washes, check cashing establishments, coin operated amusements, laundromats, scrap metal, some convenience stores and Taxicabs. Guidance is also provided on examination of income, interview techniques, and evaluation of evidence.


Child Care Provider (PDF - 220KB)
Publication Date: 3/30/2009
This Audit Techniques Guide will provide information on tax related issues pertaining to the child care providers industry. It provides guidance on accounting for income and deductions. Intended audiences are taxpayers, tax professionals and IRS examiners.


Coal Excise Tax (PDF - 471KB)
Publication Date: 05/2005
Provides excise tax agents with specific tools to examine issues relating to domestically produced coal.


Commercial Banking (PDF - 857KB)
Publication Date: 05/2001
Overview of the industry. Discusses potential issues and terminology unique to banking.


Conservation Easement (PDF - 926KB)
Publication Date: 11/2011
Audit Techniques Guide providing guidance on charitable contributions of conservation easements.


Construction Industry (PDF - 2.6MB)
Publication Date: 05/2009
Overview of the industry including a glossary. Discusses types of contracts; types of contractors; methods of accounting; and joint ventures. This updated guide includes the filing locations for Rev. Proc. 92-29 elections (Chpt 7); includes contractor square footage costs (Chpt. 11); and common errors in look-back interest filings (Chpt. 5). See also Examination and Closing Procedures Form 8697, Look-Back Interest, Publication Date: 05/2007, for general information regarding the application of Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts.


Continuation of Employee Healthcare Coverage (PDF - 360KB)
Publication Date: 03/2012
This audit techniques guide was developed to provide guidance to IRS employees and taxpayers concerning the Consolidated Omnibus Budget Reconciliation Act of 1985.


Cost Segregation
Publication Date: 01/14/2005
The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating cost segregation studies submitted by taxpayers in support of depreciation deductions. The guide is also beneficial for taxpayers and practitioners in preparing these studies.


Credit for Increasing Research Activities (i.e. Research Tax Credit) IRC § 41 (PDF -116KB)
Publication Date: 06/2005
This audit techniques guide sets forth the Research Credit Technical Advisors’ suggested guidelines for auditing research credit issues.


Excise Tax on Indoor Tanning Services (PDF - 469KB)
Publication Date: 12/2013

The Excise Tax on Indoor Tanning Services Audit Techniques Guide provides an overview of the indoor tanning tax and examination direction. Intended audiences are taxpayers, tax professionals and IRS examiners.


Executive Compensation - Fringe Benefits
Publication Date: 02/04/2005
Corporate executives often receive extraordinary fringe benefits that are not provided to other corporate employees. Any property or service that an executive receives in lieu of or in addition to regular taxable wages is a fringe benefit that may be subject to taxation.


Factoring of Receivables (PDF - 32KB)
Publication Date: 06/2006
This audit techniques guide focuses on a strategy in which multinational corporations use factoring of accounts receivable among related parties to avoid U.S. taxation by shifting income offshore and reducing U.S. income by deducting expenses related to the same income.


Farmers
Publication Date:
07/2006
The Farmers Audit Techniques Guide (ATG) focuses on developing highly trained examiners for the agricultural market segment. The Guide contain examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations. Some agricultural guides covered include cotton, raisin grapes, general livestock, livestock marketing/auction barns, grain, and tobacco.


Fishing Audit Technique Guide (PDF - 851KB)
Publication Date:
08/2011
This guide provides technical information and audit techniques for common issues in the fishing industry. The intended audience is fishermen, tax professionals and IRS examiners.


Foreign Insurance (PDF - 434KB)
Publication Date: 04/2008
This audit techniques guide was designed to assist the examiner in conducting audits where Excise Tax of Foreign Insurance transactions may be due.


Golden Parachute
Publication Date: 02/04/2005
The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating parachute examinations. The parachute examination can occur during the examination of either the corporation's or the individual's return.


Hardwood Timber Industry (PDF - 480KB)
Publication Date:
12/2012
This Industry Guide is intended for examiners conducting audits in the hardwood timber industry and as information for taxpayers and practitioners associated with the hardwood timber industry.


IC-DISC Audit Guide
Publication Date: 03/2012
This IC-DISC Audit Guide is intended to provide guidance to examiners who are auditing a Form 1120 IC-DISC and/or its related shareholder(s).


Inland Waterways (PDF - 607KB)
Publication Date: 12/2008
This audit techniques guide is intended to provide assistance to the examiner who is auditing a taxpayer for which the use of the Inland Waterways is an issue.


IRC 162(m) Salary Deduction Limitation
Publication Date: 02/04/2005
Every publicly held corporation maintains its executive compensation records differently. Likewise, every publicly held corporation maintains different methods for compensating its executives. As the examining agent, you must first learn the identity of the individual(s) within the corporation who are most familiar with how the executive compensation records are maintained.


IRC § 183: Activities Not Engaged in For Profit (PDF - 723KB)
Publication Date: 06/19/2009
This audit techniques guide (ATG) has been developed to provide guidance to Revenue Agents and Tax Compliance Officers in pursuing the application of IRC § 183, Activities Not Engaged in for Profit (sometimes referred to as the "hobby loss rule").


Lawsuits, Awards, and Settlements (PDF - 568 KB)
Publication Date: 05/2011
This guide focuses on taxability of lawsuits, awards and settlements.


Low-Income Housing Credit - Guide for Completing Form 8823 (PDF - 841 KB)
Publication Date: 01/2011
IRC 42, The Low-Income Housing Credit (LIHC) Program, is co-administered by the IRS and state housing credit agencies. As part of their administrative responsibilities, the agencies monitor the housing project for compliance with IRC 42 requirements and report any observed noncompliance to the IRS using Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition. This ATG provides state agencies with guidelines for evaluating taxpayer compliance and reporting noncompliance to the IRS.


Ministers (PDF - 243KB)
Publication Date: 04/23/2009
The Ministers Audit Techniques Guide is intended to provide guidance to the examiner who is auditing a taxpayer who is a minister and to provide tax related guidance to taxpayers and other professionals in this industry.


New Markets Tax Credit (PDF - 208KB)
Publication Date: 05/2010
The New Markets Tax Credit (NMTC) Program, enacted by Congress as part of the Community Renewal Tax Relief Act of 2000, is incorporated as section 45D of the Internal Revenue Code. This Code section permits individual and corporate taxpayers to receive a credit against federal income taxes for making Qualified Equity Investments (QEIs) in qualified community development entities (CDEs).


New Vehicle Dealership (PDF - 1.99 MB)
Publication Date: 1/2005
This guide will give you the key to a quick and competent closure of any new vehicle dealership examination which hinges on narrowing the scope of the examination to items that may prove productive.


Non-Qualified Deferred Compensation
Publication Date: 02/04/2005
The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating non-qualified deferred compensation. A nonqualified deferred compensation (NQDC) plan is any elective or nonelective plan, agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee compensation some time in the future.


Obligations Not in Registered Form (PDF - 275KB)
Publication Date: 6/2006
Obligations Not in Registered Form


Obligations Not in Registered Form D (PDF - 84KB)
Publication Date: 06/2006
Obligations Not in Registered Form D


Oil and Gas Industry (PDF - 494KB)
Publication Date: 5/1996
Provides information on basic operations and common terminology. Includes reference to royalty owners and an introduction to financial products.


Ozone Depleting Chemicals (PDF - 412KB)
Publication Date: 9/2007
This is the audit techniques guide for Ozone Depleting Chemicals (ODC).


Partnerships
Publication Date: See Table of Contents for Publication/Revision Date of the Individual Chapters
The focus is on issues that fall within sections 701 through 761 of the Code (Subchapter K). Subchapter K deals primarily with the formation, operation, and termination of partnerships. Many issues arise during the initial or final year of the partnership.


Passive Activity Losses (PDF - 3437 KB)
Publication Date: 02/2005
Provides examiners with specific guidance on potential audit issues, issue identification and lead sheets and other job aids.


Placer Mining (PDF - 181KB)
Publication Date: 7/1999
Provides guidelines for the examination of taxpayers in this industry. Focuses on small mining operations represented as sole proprietorships on Schedule C, but can be adapted for partnership and corporate returns.


The Port Project (PDF - 282KB)
Publication Date: 8/1995
Provides examiners assistance in auditing industries related to coastal and inland waterways.


Reforestation Industry (PDF - 120KB)
Publication Date: 8/1995
Overview of the industry. Discusses some issues that may be encountered - including employment taxes; poor accounting records; etc.


Rehabilitation Tax Credit (PDF - 353KB)
Publication Date: 12/2002
Provides examiners with audit aids (i.e. issue checksheet, pro forma Information Document Request, and standardized audit reports, etc.) which assist in identifying and addressing common rehab tax credit issues.


Research Credit Claims: Credit for Increasing Research Activities § 41
Publication Date: See table of contents for publication/revision date for the individual chapters, exhibits, and letters & forms. This guide provides guidance on the handling and evaluation of research credit claims.


Retail Industry (PDF 785KB)
Publication Date: 2/2009
Overview of the Retail Industry.


Sections 48A and 48B - Advanced Coal and Gasification Project Credits
Publication Date: 5/2009
Section 46 provides that the amount of investment credit for purposes of § 38 for any taxable year is the sum of the credits listed in § 46. Section 1307(a) of the Energy Tax Incentives Act of 2005, Pub. L. 109-58, 119 Stat. 594 (August 8, 2005), amended § 46 to add two new credits to that list: The qualifying advanced coal project credit, (section 48A) and the qualifying gasification project credit, (section 48B).


Split Dollar Life Insurance
Publication Date: 03/07/2005
Split-dollar life insurance arrangements can be a key feature of executive compensation packages. Over the years, the Service has provided limited guidance regarding the taxation of these arrangements. Beginning in 2001, transitional guidance on the valuation of split-dollar life insurance arrangements was provided in the form of notices and proposed regulations in anticipation of final regulations.


Stock Based Compensation
Publication Date: 02/04/2005
The Service has prepared a comprehensive audit techniques guide to assist examiners in evaluating stock-based compensation. Stock-based compensation generally consists of either the transferring of stock or the issuance of stock options to an employee or independent contractor.


Structured Settlement Factoring (PDF - 282KB)
Publication Date: 11/2006
Structured Settlement Factoring


Timber Casualty Loss (PDF - 611KB)
Publication Date: 04/2011
The purpose of this Audit Technique Guide is to provide guidance on conducting income tax examinations with a Timber Casualty Loss.


Veterinary Medicine (PDF - 495KB)
Publication Date: 4/2005
Overview of industry includes discussion of types of business entities (especially personal service corporation); cash vs. accrual method of accounting; and inventory vs. supplies.


Wine Industry ATG (PDF - 354KB)
Publication Date: 05/2011
The Wine Industry Audit Technique Guide is designed to assist examiners in their compliance reviews of both winery and vineyard operations.


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The File Taxes For 2010

File taxes for 2010 10. File taxes for 2010   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. File taxes for 2010 Cash method. File taxes for 2010 Debt acquired from a decedent. File taxes for 2010 Liquidation. File taxes for 2010 Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. File taxes for 2010 Introduction You have a bad debt if you cannot collect money owed to you. File taxes for 2010 A bad debt is either a business bad debt or a nonbusiness bad debt. File taxes for 2010 This chapter discusses only business bad debts. File taxes for 2010 Generally, a business bad debt is one that comes from operating your trade or business. File taxes for 2010 You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. File taxes for 2010 All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. File taxes for 2010 For more information on nonbusiness bad debts, see Publication 550. File taxes for 2010 Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. File taxes for 2010 S. File taxes for 2010 Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. File taxes for 2010 Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. File taxes for 2010 A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. File taxes for 2010 Bad debts of a corporation (other than an S corporation) are always business bad debts. File taxes for 2010 Credit sales. File taxes for 2010   Business bad debts are mainly the result of credit sales to customers. File taxes for 2010 Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. File taxes for 2010 After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. File taxes for 2010   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. File taxes for 2010 If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. File taxes for 2010    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. File taxes for 2010 This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. File taxes for 2010 Accrual method. File taxes for 2010   If you use the accrual method of accounting, you generally report income as you earn it. File taxes for 2010 You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. File taxes for 2010   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. File taxes for 2010 Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. File taxes for 2010 Cash method. File taxes for 2010   If you use the cash method of accounting, you generally report income when you receive payment. File taxes for 2010 You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. File taxes for 2010 For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. File taxes for 2010 Debts from a former business. File taxes for 2010   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. File taxes for 2010 If any of these receivables subsequently become worthless, the loss is still a business bad debt. File taxes for 2010 Debt acquired from a decedent. File taxes for 2010   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. File taxes for 2010 The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. File taxes for 2010 Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. File taxes for 2010 Liquidation. File taxes for 2010   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. File taxes for 2010 Types of Business Bad Debts Business bad debts may result from the following. File taxes for 2010 Loans to clients and suppliers. File taxes for 2010   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. File taxes for 2010 Debts owed by political parties. File taxes for 2010   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. File taxes for 2010 You use the accrual method of accounting. File taxes for 2010 The debt arose from the sale of goods or services in the ordinary course of your trade or business. File taxes for 2010 More than 30% of your receivables accrued in the year of the sale were from sales to political parties. File taxes for 2010 You made substantial and continuing efforts to collect on the debt. File taxes for 2010 Loan or capital contribution. File taxes for 2010   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. File taxes for 2010 Debts of an insolvent partner. File taxes for 2010   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. File taxes for 2010 If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. File taxes for 2010 Business loan guarantee. File taxes for 2010   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. File taxes for 2010 You made the guarantee in the course of your trade or business. File taxes for 2010 You have a legal duty to pay the debt. File taxes for 2010 You made the guarantee before the debt became worthless. File taxes for 2010 You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. File taxes for 2010 You received reasonable consideration for making the guarantee. File taxes for 2010 You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. File taxes for 2010 Example. File taxes for 2010 Jane Zayne owns the Zayne Dress Company. File taxes for 2010 She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. File taxes for 2010 Elegant Fashions is one of Zayne's largest clients. File taxes for 2010 Elegant Fashions later defaulted on the loan. File taxes for 2010 As a result, Ms. File taxes for 2010 Zayne paid the remaining balance of the loan in full to the bank. File taxes for 2010 She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. File taxes for 2010 She was motivated by the desire to retain one of her better clients and keep a sales outlet. File taxes for 2010 Deductible in the year paid. File taxes for 2010   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. File taxes for 2010 Rights against a borrower. File taxes for 2010   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. File taxes for 2010 The debt is then owed to you. File taxes for 2010 If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. File taxes for 2010 Joint debtor. File taxes for 2010   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. File taxes for 2010 Sale of mortgaged property. File taxes for 2010   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. File taxes for 2010 When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. File taxes for 2010 This may occur when the debt is due or prior to that date. File taxes for 2010 To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. File taxes for 2010 It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. File taxes for 2010 Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. File taxes for 2010 Property received for debt. File taxes for 2010   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. File taxes for 2010 You can deduct the remaining debt as a bad debt if and when it becomes worthless. File taxes for 2010   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. File taxes for 2010 It is not a recovery of a bad debt. File taxes for 2010 For information on the sale of an asset, see Publication 544. File taxes for 2010 How To Claim a Business Bad Debt There are two methods to claim a business bad debt. File taxes for 2010 The specific charge-off method. File taxes for 2010 The nonaccrual-experience method. File taxes for 2010 Generally, you must use the specific charge-off method. File taxes for 2010 However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . File taxes for 2010 Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. File taxes for 2010 However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. File taxes for 2010 Partly worthless debts. File taxes for 2010   You can deduct specific bad debts that become partly uncollectible during the tax year. File taxes for 2010 Your tax deduction is limited to the amount you charge off on your books during the year. File taxes for 2010 You do not have to charge off and deduct your partly worthless debts annually. File taxes for 2010 You can delay the charge off until a later year. File taxes for 2010 However, you cannot deduct any part of a debt after the year it becomes totally worthless. File taxes for 2010 Significantly modified debt. File taxes for 2010   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. File taxes for 2010 For more information, see Regulations section 1. File taxes for 2010 166-3(a)(3). File taxes for 2010 Deduction disallowed. File taxes for 2010   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. File taxes for 2010 If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. File taxes for 2010 The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. File taxes for 2010 Totally worthless debts. File taxes for 2010   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. File taxes for 2010   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. File taxes for 2010 However, you may want to do so. File taxes for 2010 If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. File taxes for 2010 See Partly worthless debts, earlier. File taxes for 2010 Filing a claim for refund. File taxes for 2010   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. File taxes for 2010 If the bad debt was totally worthless, you must file the claim by the later of the following dates. File taxes for 2010 7 years from the date your original return was due (not including extensions). File taxes for 2010 2 years from the date you paid the tax. File taxes for 2010   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. File taxes for 2010 3 years from the date you filed your original return. File taxes for 2010 2 years from the date you paid the tax. File taxes for 2010 You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. File taxes for 2010 Such an impairment requires proof of existence. File taxes for 2010   For details and more information about filing a claim, see Publication 556. File taxes for 2010 Use one of the following forms to file a claim. File taxes for 2010 For more information, see the instructions for the applicable form. File taxes for 2010 Table 10-1. File taxes for 2010 Forms Used To File a Claim IF you filed as a. File taxes for 2010 . File taxes for 2010 . File taxes for 2010 THEN file. File taxes for 2010 . File taxes for 2010 . File taxes for 2010 Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. File taxes for 2010 Under this method, you do not accrue service related income you expect to be uncollectible. File taxes for 2010 Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. File taxes for 2010 Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. File taxes for 2010 Service related income. File taxes for 2010   You can use the nonaccrual-experience method only for amounts earned by performing services. File taxes for 2010 You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. File taxes for 2010 Gross receipts test. File taxes for 2010   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. File taxes for 2010 If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. File taxes for 2010   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. File taxes for 2010 For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. File taxes for 2010 Interest or penalty charged. File taxes for 2010   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. File taxes for 2010 However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. File taxes for 2010 You otherwise accrue the full amount due as gross income at the time you provide the services. File taxes for 2010 You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. File taxes for 2010 Change in accounting method. File taxes for 2010   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. File taxes for 2010 See Form 3115 and the Instructions for Form 3115 for more information. File taxes for 2010 Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. File taxes for 2010 The amount you include is limited to the amount you actually deducted. File taxes for 2010 However, you can exclude the amount deducted that did not reduce your tax. File taxes for 2010 Report the recovery as “Other income” on the appropriate business form or schedule. File taxes for 2010 See Recoveries in Publication 525 for more information. File taxes for 2010 Net operating loss (NOL) carryover. File taxes for 2010   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. File taxes for 2010 A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. File taxes for 2010 For more information about NOLs, see Publication 536. File taxes for 2010 Also, see the Instructions for Form 1045, and the Instructions for Form 1139. File taxes for 2010 Prev  Up  Next   Home   More Online Publications