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Form 1040ez 2012 Instructions

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Form 1040ez 2012 Instructions

Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Hybrid method. Form 1040ez 2012 instructions Cash Method Accrual Method Inventories Change in Accounting Method How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Form 1040ez 2012 instructions Accounting Periods You must use a tax year to figure your taxable income. Form 1040ez 2012 instructions A tax year is an annual accounting period for keeping records and reporting income and expenses. Form 1040ez 2012 instructions An annual accounting period does not include a short tax year (discussed later). Form 1040ez 2012 instructions You can use the following tax years: A calendar year; or A fiscal year (including a 52-53-week tax year). Form 1040ez 2012 instructions Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Form 1040ez 2012 instructions A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions This section discusses: A calendar year. Form 1040ez 2012 instructions A fiscal year (including a period of 52 or 53 weeks). Form 1040ez 2012 instructions A short tax year. Form 1040ez 2012 instructions An improper tax year. Form 1040ez 2012 instructions A change in tax year. Form 1040ez 2012 instructions Special situations that apply to individuals. Form 1040ez 2012 instructions Restrictions that apply to the accounting period of a partnership, S corporation, or personal service corporation. Form 1040ez 2012 instructions Special situations that apply to corporations. Form 1040ez 2012 instructions Calendar Year A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions See Change in Tax Year, later. Form 1040ez 2012 instructions Generally, anyone can adopt the calendar year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Fiscal Year A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions If you make this election, your 52-53-week tax year must always end on the same day of the week. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Election. Form 1040ez 2012 instructions   To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return. Form 1040ez 2012 instructions The month in which the new 52-53-week tax year ends. Form 1040ez 2012 instructions The day of the week on which the tax year always ends. Form 1040ez 2012 instructions The date the tax year ends. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions   When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Short Tax Year A short tax year is a tax year of less than 12 months. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Tax on a short period tax return is figured differently for each situation. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Example 1. Form 1040ez 2012 instructions XYZ Corporation was organized on July 1, 2012. Form 1040ez 2012 instructions It elected the calendar year as its tax year. Form 1040ez 2012 instructions Therefore, its first tax return was due March 15, 2013. Form 1040ez 2012 instructions This short period return will cover the period from July 1, 2012, through December 31, 2012. Form 1040ez 2012 instructions Example 2. Form 1040ez 2012 instructions A calendar year corporation dissolved on July 23, 2012. Form 1040ez 2012 instructions Its final return is due by October 15, 2012. Form 1040ez 2012 instructions It will cover the short period from January 1, 2012, through July 23, 2012. Form 1040ez 2012 instructions Death of individual. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions   Agnes Green was a single, calendar year taxpayer. Form 1040ez 2012 instructions She died on March 6, 2012. Form 1040ez 2012 instructions Her final income tax return must be filed by April 15, 2013. Form 1040ez 2012 instructions It will cover the short period from January 1, 2012, to March 6, 2012. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Figure tax for a short year under the general rule, explained below. Form 1040ez 2012 instructions You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid. Form 1040ez 2012 instructions General rule. Form 1040ez 2012 instructions   Income tax for a short tax year must be annualized. Form 1040ez 2012 instructions However, self-employment tax is figured on the actual self-employment income for the short period. Form 1040ez 2012 instructions Individuals. Form 1040ez 2012 instructions   An individual must figure income tax for the short tax year as follows. Form 1040ez 2012 instructions Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. Form 1040ez 2012 instructions You must itemize deductions when you file a short period tax return. Form 1040ez 2012 instructions Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Form 1040ez 2012 instructions Subtract the amount in (2) from the amount in (1). Form 1040ez 2012 instructions The result is your modified taxable income. Form 1040ez 2012 instructions Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. Form 1040ez 2012 instructions The result is your annualized income. Form 1040ez 2012 instructions Figure the total tax on your annualized income using the appropriate tax rate schedule. Form 1040ez 2012 instructions Multiply the total tax by the number of months in the short tax year and divide the result by 12. Form 1040ez 2012 instructions The result is your tax for the short tax year. Form 1040ez 2012 instructions Relief procedure. Form 1040ez 2012 instructions   Individuals and corporations can use a relief procedure to figure the tax for the short tax year. Form 1040ez 2012 instructions It may result in less tax. Form 1040ez 2012 instructions Under this procedure, the tax is figured by two separate methods. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions For more information, see section 443(b)(2) of the Internal Revenue Code. Form 1040ez 2012 instructions Alternative minimum tax. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Multiply the AMTI by 12. Form 1040ez 2012 instructions Divide the result by the number of months in the short tax year. Form 1040ez 2012 instructions Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. Form 1040ez 2012 instructions The result is the annualized AMT. Form 1040ez 2012 instructions Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12. Form 1040ez 2012 instructions   For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. Form 1040ez 2012 instructions For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations. Form 1040ez 2012 instructions Tax withheld from wages. Form 1040ez 2012 instructions   You can claim a credit against your income tax liability for federal income tax withheld from your wages. Form 1040ez 2012 instructions Federal income tax is withheld on a calendar year basis. Form 1040ez 2012 instructions The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year. Form 1040ez 2012 instructions Improper Tax Year Taxpayers that have adopted an improper tax year must change to a proper tax year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions See Accounting Periods, earlier, for a description of permissible tax years. Form 1040ez 2012 instructions To change to a proper tax year, you must do one of the following. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Attach a completed Form 1128 to the amended tax return. Form 1040ez 2012 instructions Write “FILED UNDER REV. Form 1040ez 2012 instructions PROC. Form 1040ez 2012 instructions 85-15” at the top of Form 1128 and file the forms with the Internal Revenue Service Center where you filed your original return. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Change in Tax Year Generally, you must file Form 1128 to request IRS approval to change your tax year. Form 1040ez 2012 instructions See the Instructions for Form 1128 for exceptions. Form 1040ez 2012 instructions If you qualify for an automatic approval request, a user fee is not required. Form 1040ez 2012 instructions Individuals Generally, individuals must adopt the calendar year as their tax year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Partnerships, S Corporations, and Personal Service Corporations (PSCs) Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. Form 1040ez 2012 instructions A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. Form 1040ez 2012 instructions 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). Form 1040ez 2012 instructions The following discussions provide the rules for partnerships, S corporations, and PSCs. Form 1040ez 2012 instructions Partnership A partnership must conform its tax year to its partners' tax years unless any of the following apply. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions The partnership can establish a business purpose for a different tax year. Form 1040ez 2012 instructions The rules for the required tax year for partnerships are as follows. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. Form 1040ez 2012 instructions A principal partner is one who has a 5% or more interest in the profits or capital of the partnership. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128. Form 1040ez 2012 instructions Least aggregate deferral of income. Form 1040ez 2012 instructions   The tax year that results in the least aggregate deferral of income is determined as follows. Form 1040ez 2012 instructions Figure the number of months of deferral for each partner using one partner's tax year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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). Form 1040ez 2012 instructions Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1). Form 1040ez 2012 instructions Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years. Form 1040ez 2012 instructions   The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. Form 1040ez 2012 instructions A uses the calendar year and B uses a fiscal year ending November 30. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Year End 12/31: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Form 1040ez 2012 instructions 5 -0- -0- B 11/30 0. Form 1040ez 2012 instructions 5 11 5. Form 1040ez 2012 instructions 5 Total Deferral 5. Form 1040ez 2012 instructions 5 Year End 11/30: Year End Profits Interest Months of Deferral Interest × Deferral A 12/31 0. Form 1040ez 2012 instructions 5 1 0. Form 1040ez 2012 instructions 5 B 11/30 0. Form 1040ez 2012 instructions 5 -0- -0- Total Deferral 0. Form 1040ez 2012 instructions 5 When determination is made. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. Form 1040ez 2012 instructions This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year. Form 1040ez 2012 instructions Short period return. Form 1040ez 2012 instructions   When a partnership changes its tax year, a short period return must be filed. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions The short period return must indicate at the top of page 1, “FILED UNDER SECTION 1. Form 1040ez 2012 instructions 706-1. Form 1040ez 2012 instructions ” More information. Form 1040ez 2012 instructions   For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128. Form 1040ez 2012 instructions S Corporation All S corporations, regardless of when they became an S corporation, must use a permitted tax year. Form 1040ez 2012 instructions A permitted tax year is any of the following. Form 1040ez 2012 instructions The calendar year. Form 1040ez 2012 instructions A tax year elected under section 444 of the Internal Revenue Code. Form 1040ez 2012 instructions See Section 444 Election, below for details. Form 1040ez 2012 instructions A 52-53-week tax year ending with reference to the calendar year or a tax year elected under section 444. Form 1040ez 2012 instructions Any other tax year for which the corporation establishes a business purpose. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128. Form 1040ez 2012 instructions Personal Service Corporation (PSC) A PSC must use a calendar tax year unless any of the following apply. Form 1040ez 2012 instructions The corporation makes an election under section 444 of the Internal Revenue Code. Form 1040ez 2012 instructions See Section 444 Election, below for details. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions The corporation establishes a business purpose for a fiscal year. Form 1040ez 2012 instructions See the Instructions for Form 1120 for general information about PSCs. Form 1040ez 2012 instructions For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Certain restrictions apply to the election. Form 1040ez 2012 instructions 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). Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements. Form 1040ez 2012 instructions It is not a member of a tiered structure (defined in section 1. Form 1040ez 2012 instructions 444-2T of the regulations). Form 1040ez 2012 instructions It has not previously had a section 444 election in effect. Form 1040ez 2012 instructions It elects a year that meets the deferral period requirement. Form 1040ez 2012 instructions Deferral period. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Retaining tax year. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year. Form 1040ez 2012 instructions Adopting or changing tax year. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions This is the tax year immediately preceding the year for which the partnership, S corporation, or PSC wishes to make the section 444 election. Form 1040ez 2012 instructions If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero. Form 1040ez 2012 instructions Example 1. Form 1040ez 2012 instructions BD Partnership uses a calendar year, which is also its required tax year. Form 1040ez 2012 instructions BD cannot make a section 444 election because the deferral period is zero. Form 1040ez 2012 instructions Example 2. Form 1040ez 2012 instructions E, a newly formed partnership, began operations on December 1. Form 1040ez 2012 instructions E is owned by calendar year partners. Form 1040ez 2012 instructions E wants to make a section 444 election to adopt a September 30 tax year. Form 1040ez 2012 instructions E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31. Form 1040ez 2012 instructions Making the election. Form 1040ez 2012 instructions   Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions For this purpose, count the month in which the tax year begins, even if it begins after the first day of that month. Form 1040ez 2012 instructions Note. Form 1040ez 2012 instructions If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Example 1. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Example 2. Form 1040ez 2012 instructions The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. Form 1040ez 2012 instructions AB must file Form 8716 by March 17, 2013. Form 1040ez 2012 instructions Example 3. Form 1040ez 2012 instructions B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. Form 1040ez 2012 instructions B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Note. Form 1040ez 2012 instructions The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday. Form 1040ez 2012 instructions Extension of time for filing. Form 1040ez 2012 instructions   There is an automatic extension of 12 months to make this election. Form 1040ez 2012 instructions See the Form 8716 instructions for more information. Form 1040ez 2012 instructions Terminating the election. Form 1040ez 2012 instructions   The section 444 election remains in effect until it is terminated. Form 1040ez 2012 instructions If the election is terminated, another section 444 election cannot be made for any tax year. Form 1040ez 2012 instructions   The election ends when any of the following applies to the partnership, S corporation, or PSC. Form 1040ez 2012 instructions The entity changes to its required tax year. Form 1040ez 2012 instructions The entity liquidates. Form 1040ez 2012 instructions The entity becomes a member of a tiered structure. Form 1040ez 2012 instructions The IRS determines that the entity willfully failed to comply with the required payments or distributions. Form 1040ez 2012 instructions   The election will also end if either of the following events occur. Form 1040ez 2012 instructions An S corporation's S election is terminated. Form 1040ez 2012 instructions However, if the S corporation immediately becomes a PSC, the PSC can continue the section 444 election of the S corporation. Form 1040ez 2012 instructions A PSC ceases to be a PSC. Form 1040ez 2012 instructions If the PSC elects to be an S corporation, the S corporation can continue the election of the PSC. Form 1040ez 2012 instructions Required payment for partnership or S corporation. Form 1040ez 2012 instructions   A partnership or an S corporation must make a required payment for any tax year: The section 444 election is in effect. Form 1040ez 2012 instructions The required payment for that year (or any preceding tax year) is more than $500. Form 1040ez 2012 instructions    This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Applicable election year. Form 1040ez 2012 instructions   Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Required distribution for PSC. Form 1040ez 2012 instructions   A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. Form 1040ez 2012 instructions If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. Form 1040ez 2012 instructions The amount deferred is treated as paid or incurred in the following tax year. Form 1040ez 2012 instructions   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). Form 1040ez 2012 instructions Back-up election. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies). Form 1040ez 2012 instructions Making back-up election. Form 1040ez 2012 instructions   The general rules for making a section 444 election, as discussed earlier, apply. Form 1040ez 2012 instructions When filing Form 8716, type or print “BACK-UP ELECTION” at the top of the form. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Activating election. Form 1040ez 2012 instructions   A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. Form 1040ez 2012 instructions The due date for filing Form 8752 and making the payment is the later of the following dates. Form 1040ez 2012 instructions May 15 of the calendar year following the calendar year in which the applicable election year begins. Form 1040ez 2012 instructions 60 days after the partnership or S corporation has been notified by the IRS that the business year request has been denied. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions ” 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). Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Business Purpose Tax Year A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. Form 1040ez 2012 instructions See the Instructions for Form 1128 for details. Form 1040ez 2012 instructions Corporations (Other Than S Corporations and PSCs) A new corporation establishes its tax year when it files its first tax return. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions See the Instructions for Form 1128 for details. Form 1040ez 2012 instructions Accounting Methods An accounting method is a set of rules used to determine when income and expenses are reported on your tax return. Form 1040ez 2012 instructions Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Form 1040ez 2012 instructions You choose an accounting method when you file your first tax return. Form 1040ez 2012 instructions If you later want to change your accounting method, you must get IRS approval. Form 1040ez 2012 instructions See Change in Accounting Method, later. Form 1040ez 2012 instructions No single accounting method is required of all taxpayers. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions In addition to your permanent accounting books, you must keep any other records necessary to support the entries on your books and tax returns. Form 1040ez 2012 instructions You must use the same accounting method from year to year. Form 1040ez 2012 instructions An accounting method clearly reflects income only if all items of gross income and expenses are treated the same from year to year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Methods you can use. Form 1040ez 2012 instructions   In general, you can compute your taxable income under any of the following accounting methods. Form 1040ez 2012 instructions Cash method. Form 1040ez 2012 instructions Accrual method. Form 1040ez 2012 instructions Special methods of accounting for certain items of income and expenses. Form 1040ez 2012 instructions A hybrid method which combines elements of two or more of the above accounting methods. Form 1040ez 2012 instructions The cash and accrual methods of accounting are explained later. Form 1040ez 2012 instructions Special methods. Form 1040ez 2012 instructions   This publication does not discuss special methods of accounting for certain items of income or expenses. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions The following publications also discuss special methods of reporting income or expenses. Form 1040ez 2012 instructions Publication 225, Farmer's Tax Guide. Form 1040ez 2012 instructions Publication 535, Business Expenses. Form 1040ez 2012 instructions Publication 537, Installment Sales. Form 1040ez 2012 instructions Publication 946, How To Depreciate Property. Form 1040ez 2012 instructions Hybrid method. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions However, the following restrictions apply. Form 1040ez 2012 instructions If an inventory is necessary to account for your income, you must use an accrual method for purchases and sales. Form 1040ez 2012 instructions See Exceptions under Inventories, later. Form 1040ez 2012 instructions Generally, you can use the cash method for all other items of income and expenses. Form 1040ez 2012 instructions See Inventories, later. Form 1040ez 2012 instructions If you use the cash method for reporting your income, you must use the cash method for reporting your expenses. Form 1040ez 2012 instructions If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Form 1040ez 2012 instructions Any combination that includes the cash method is treated as the cash method for purposes of section 448 of the Internal Revenue Code. Form 1040ez 2012 instructions Business and personal items. Form 1040ez 2012 instructions   You can account for business and personal items using different accounting methods. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Two or more businesses. Form 1040ez 2012 instructions   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Form 1040ez 2012 instructions No business is separate and distinct, unless a complete and separate set of books and records is maintained for each business. Form 1040ez 2012 instructions Note. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Cash Method Most individuals and many small businesses use the cash method of accounting. Form 1040ez 2012 instructions Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. Form 1040ez 2012 instructions See Inventories, later, for exceptions to this rule. Form 1040ez 2012 instructions Income Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. Form 1040ez 2012 instructions If you receive property and services, you must include their fair market value (FMV) in income. Form 1040ez 2012 instructions Constructive receipt. Form 1040ez 2012 instructions   Income is constructively received when an amount is credited to your account or made available to you without restriction. Form 1040ez 2012 instructions You need not have possession of it. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions You are a calendar year taxpayer. Form 1040ez 2012 instructions Your bank credited, and made available, interest to your bank account in December 2012. Form 1040ez 2012 instructions You did not withdraw it or enter it into your books until 2013. Form 1040ez 2012 instructions You must include the amount in gross income for 2012, the year you constructively received it. Form 1040ez 2012 instructions You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. Form 1040ez 2012 instructions You must report the income in the year the property is received or made available to you without restriction. Form 1040ez 2012 instructions Expenses Under the cash method, generally, you deduct expenses in the tax year in which you actually pay them. Form 1040ez 2012 instructions This includes business expenses for which you contest liability. Form 1040ez 2012 instructions However, you may not be able to deduct an expense paid in advance. Form 1040ez 2012 instructions Instead, you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Form 1040ez 2012 instructions Expense paid in advance. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions See Change in Accounting Method, later. Form 1040ez 2012 instructions Example 1. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Example 2. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions The 12-month rule applies. Form 1040ez 2012 instructions Therefore, the full $10,000 is deductible in 2012. Form 1040ez 2012 instructions Excluded Entities The following entities cannot use the cash method, including any combination of methods that includes the cash method. Form 1040ez 2012 instructions (See Special rules for farming businesses, later. Form 1040ez 2012 instructions ) A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million. Form 1040ez 2012 instructions See Gross receipts test, below. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions See Gross receipts test, below. Form 1040ez 2012 instructions A tax shelter. Form 1040ez 2012 instructions Exceptions The following entities are not prohibited from using the cash method of accounting. Form 1040ez 2012 instructions Any corporation or partnership, other than a tax shelter, that meets the gross receipts test for all tax years after 1985. Form 1040ez 2012 instructions A qualified personal service corporation (PSC). Form 1040ez 2012 instructions Gross receipts test. Form 1040ez 2012 instructions   A corporation or partnership, other than a tax shelter, that meets the gross receipts test can generally use the cash method. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions    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. Form 1040ez 2012 instructions See Gross receipts test for qualifying taxpayers, for more information. Form 1040ez 2012 instructions Generally, a partnership applies the test at the partnership level. Form 1040ez 2012 instructions Gross receipts for a short tax year are annualized. Form 1040ez 2012 instructions Aggregation rules. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Change to accrual method. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Special rules for farming businesses. Form 1040ez 2012 instructions   Generally, a taxpayer engaged in the trade or business of farming is allowed to use the cash method for its farming business. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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). Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions For family corporations engaged in farming, the exception applies if gross receipts were $25 million or less for each prior tax year after 1985. Form 1040ez 2012 instructions See chapter 2 of Publication 225, Farmer's Tax Guide, for more information. Form 1040ez 2012 instructions Qualified PSC. Form 1040ez 2012 instructions   A PSC that meets the following function and ownership tests can use the cash method. Form 1040ez 2012 instructions Function test. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Ownership test. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Employees performing services for the corporation in a field qualifying under the function test. Form 1040ez 2012 instructions Retired employees who had performed services in those fields. Form 1040ez 2012 instructions The estate of an employee described in (1) or (2). Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions   Indirect ownership is generally taken into account if the stock is owned indirectly through one or more partnerships, S corporations, or qualified PSCs. Form 1040ez 2012 instructions Stock owned by one of these entities is considered owned by the entity's owners in proportion to their ownership interest in that entity. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Change to accrual method. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions The purpose of an accrual method of accounting is to match income and expenses in the correct year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Under this rule, you report an amount in your gross income on the earliest of the following dates. Form 1040ez 2012 instructions When you receive payment. Form 1040ez 2012 instructions When the income amount is due to you. Form 1040ez 2012 instructions When you earn the income. Form 1040ez 2012 instructions When title has passed. Form 1040ez 2012 instructions Estimated income. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Change in payment schedule. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Continue this procedure until you complete the services, then account for the difference. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions However, you cannot postpone including any payment beyond that tax year. Form 1040ez 2012 instructions Service agreement. Form 1040ez 2012 instructions   You can postpone reporting income from an advance payment you receive for a service agreement on property you sell, lease, build, install, or construct. Form 1040ez 2012 instructions This includes an agreement providing for incidental replacement of parts or materials. Form 1040ez 2012 instructions However, this applies only if you offer the property without a service agreement in the normal course of business. Form 1040ez 2012 instructions Postponement not allowed. Form 1040ez 2012 instructions   Generally, one cannot postpone including an advance payment in income for services if either of the following applies. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Examples. Form 1040ez 2012 instructions   In each of the following examples, assume the tax year is a calendar year and that the accrual method of accounting is used. Form 1040ez 2012 instructions Example 1. Form 1040ez 2012 instructions You manufacture, sell, and service computers. Form 1040ez 2012 instructions You received payment in 2012 for a one-year contingent service contract on a computer you sold. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Example 2. Form 1040ez 2012 instructions You are in the television repair business. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions You include the payments in gross income as you earn them. Form 1040ez 2012 instructions Example 3. Form 1040ez 2012 instructions You own a dance studio. Form 1040ez 2012 instructions On October 1, 2012, you receive payment for a one-year contract for 48 one-hour lessons beginning on that date. Form 1040ez 2012 instructions You give eight lessons in 2012. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Example 4. Form 1040ez 2012 instructions Assume the same facts as in Example 3, except the payment is for a two-year contract for 96 lessons. Form 1040ez 2012 instructions You must include the entire payment in income in 2012 since part of the services may be performed after the following year. Form 1040ez 2012 instructions Guarantee or warranty. Form 1040ez 2012 instructions   Generally, you cannot postpone reporting income you receive under a guarantee or warranty contract. Form 1040ez 2012 instructions Prepaid rent. Form 1040ez 2012 instructions   You cannot postpone reporting income from prepaid rent. Form 1040ez 2012 instructions Prepaid rent does not include payment for the use of a room or other space when significant service is also provided for the occupant. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Books and records. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Form 1040ez 2012 instructions IRS approval. Form 1040ez 2012 instructions   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payment for services. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions An agreement includes a gift certificate that can be redeemed for goods. Form 1040ez 2012 instructions Amounts due and payable are considered received. Form 1040ez 2012 instructions How to report payments. Form 1040ez 2012 instructions   Generally, include an advance payment in income in the year in which you receive it. Form 1040ez 2012 instructions However, you can use the alternative method, discussed next. Form 1040ez 2012 instructions Alternative method of reporting. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Financial reports include reports to shareholders, partners, beneficiaries, and other proprietors for credit purposes and consolidated financial statements. Form 1040ez 2012 instructions Example 1. Form 1040ez 2012 instructions You are a retailer. Form 1040ez 2012 instructions You use an accrual method of accounting and account for the sale of goods when you ship the goods. Form 1040ez 2012 instructions You use this method for both tax and financial reporting purposes. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions However, see Exception for inventory goods, later. Form 1040ez 2012 instructions Example 2. Form 1040ez 2012 instructions You are a calendar year taxpayer. Form 1040ez 2012 instructions You manufacture household furniture and use an accrual method of accounting. Form 1040ez 2012 instructions Under this method, you accrue income for your financial reports when you ship the furniture. Form 1040ez 2012 instructions For tax purposes, you do not accrue income until the furniture has been delivered and accepted. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions You shipped the furniture to the customer in December 2012, but it was not delivered and accepted until January 2013. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Information schedule. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Total advance payments received in the current tax year. Form 1040ez 2012 instructions Total advance payments received in earlier tax years and not included in income before the current tax year. Form 1040ez 2012 instructions Total payments received in earlier tax years included in income for the current tax year. Form 1040ez 2012 instructions Exception for inventory goods. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions You account for the advance payment under the alternative method (discussed earlier). Form 1040ez 2012 instructions You have received a substantial advance payment on the agreement (discussed next). Form 1040ez 2012 instructions You have enough substantially similar goods on hand, or available through your normal source of supply, to satisfy the agreement. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions You must also deduct in that second year all actual or estimated costs for the goods required to satisfy the agreement. Form 1040ez 2012 instructions If you estimated the cost, you must take into account any difference between the estimate and the actual cost when the goods are delivered. Form 1040ez 2012 instructions Note. Form 1040ez 2012 instructions You must report any advance payments you receive after the second year in the year received. Form 1040ez 2012 instructions No further deferral is allowed. Form 1040ez 2012 instructions Substantial advance payments. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions You are a calendar year, accrual method taxpayer who accounts for advance payments under the alternative method. Form 1040ez 2012 instructions In 2008, you entered into a contract for the sale of goods properly includible in your inventory. Form 1040ez 2012 instructions The total contract price is $50,000 and you estimate that your total inventoriable costs for the goods will be $25,000. Form 1040ez 2012 instructions You receive the following advance payments under the contract. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions In your 2010 closing inventory, you had on hand enough of the type of goods specified in the contract to satisfy the contract. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions If no such goods are on hand, then estimate the cost necessary to satisfy the contract. Form 1040ez 2012 instructions   No further deferral is allowed. Form 1040ez 2012 instructions You must include in gross income the advance payment you receive each remaining year of the contract. Form 1040ez 2012 instructions Take into account the difference between any estimated cost of goods sold and the actual cost when you deliver the goods in 2015. Form 1040ez 2012 instructions IRS approval. Form 1040ez 2012 instructions   You must file Form 3115 to obtain IRS approval to change your method of accounting for advance payments for sales. Form 1040ez 2012 instructions Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Form 1040ez 2012 instructions The all-events test has been met. Form 1040ez 2012 instructions The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Form 1040ez 2012 instructions Economic performance has occurred. Form 1040ez 2012 instructions Economic Performance Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions You are a calendar year taxpayer. Form 1040ez 2012 instructions You buy office supplies in December 2012. Form 1040ez 2012 instructions You receive the supplies and the bill in December, but you pay the bill in January 2013. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Your office supplies may qualify as a recurring item, discussed later. Form 1040ez 2012 instructions If so, you can deduct them in 2012, even if the supplies are not delivered until 2013 (when economic performance occurs). Form 1040ez 2012 instructions Workers' compensation and tort liability. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Taxes. Form 1040ez 2012 instructions   Economic performance generally occurs as estimated income tax, property taxes, employment taxes, etc. Form 1040ez 2012 instructions are paid. Form 1040ez 2012 instructions However, you can elect to treat taxes as a recurring item, discussed later. Form 1040ez 2012 instructions You can also elect to ratably accrue real estate taxes. Form 1040ez 2012 instructions See chapter 5 of Publication 535 for information about real estate taxes. Form 1040ez 2012 instructions Other liabilities. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Interest. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions Compensation for services. Form 1040ez 2012 instructions   Generally, economic performance occurs as an employee renders service to the employer. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions For information on employee benefit programs, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Form 1040ez 2012 instructions Vacation pay. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions If you pay it later than this, you must deduct it in the year actually paid. Form 1040ez 2012 instructions An amount is vested if your right to it cannot be nullified or cancelled. Form 1040ez 2012 instructions Exception for recurring items. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions The exception applies if all the following requirements are met. Form 1040ez 2012 instructions The all-events test, discussed earlier, is met. Form 1040ez 2012 instructions Economic performance occurs by the earlier of the following dates. Form 1040ez 2012 instructions 8½ months after the close of the year. Form 1040ez 2012 instructions The date you file a timely return (including extensions) for the year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions This exception does not apply to workers' compensation or tort liabilities. Form 1040ez 2012 instructions Amended return. Form 1040ez 2012 instructions   You may be able to file an amended return and treat a liability as incurred under the recurring item exception. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Recurrence and consistency. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Materiality. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions   An item considered material for financial statement purposes is also considered material for tax purposes. Form 1040ez 2012 instructions However, in certain situations an immaterial item for financial accounting purposes is treated as material for purposes of economic performance. Form 1040ez 2012 instructions Matching expenses with income. Form 1040ez 2012 instructions   Costs directly associated with the revenue of a period are properly allocable to that period. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions fasab. Form 1040ez 2012 instructions gov/accepted. Form 1040ez 2012 instructions html) are an important factor. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions However, the matching requirement is considered met for certain types of expenses. Form 1040ez 2012 instructions These expenses include taxes, payments under insurance, warranty, and service contracts, rebates, refunds, awards, prizes, and jackpots. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions 12 months after the right or benefit begins, or The end of the tax year after the tax year in which payment is made. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions See Change in Accounting Method, later, for information on how to get IRS approval. Form 1040ez 2012 instructions See Expense paid in advance under Cash Method, earlier, for examples illustrating the application of the general and 12-month rules. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Form 1040ez 2012 instructions See section 267 of the Internal Revenue Code and Publication 542, Corporations, for the definition of related person. Form 1040ez 2012 instructions Inventories An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Form 1040ez 2012 instructions If you must account for an inventory in your business, you must use an accrual method of accounting for your purchases and sales. Form 1040ez 2012 instructions However, see Exceptions, next. Form 1040ez 2012 instructions See also Accrual Method, earlier. Form 1040ez 2012 instructions To figure taxable income, you must value your inventory at the beginning and end of each tax year. Form 1040ez 2012 instructions To determine the value, you need a method for identifying the items in your inventory and a method for valuing these items. Form 1040ez 2012 instructions See Identifying Cost and Valuing Inventory, later. Form 1040ez 2012 instructions The rules for valuing inventory are not the same for all businesses. Form 1040ez 2012 instructions The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Form 1040ez 2012 instructions Your inventory practices must be consistent from year to year. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Exceptions The following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Form 1040ez 2012 instructions These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Form 1040ez 2012 instructions A qualifying taxpayer under Revenue Procedure 2001-10 on page 272 of Internal Revenue Bulletin 2001-2, available at www. Form 1040ez 2012 instructions irs. Form 1040ez 2012 instructions gov/pub/irs-irbs/irb01–02. Form 1040ez 2012 instructions pdf. Form 1040ez 2012 instructions A qualifying small business taxpayer under Revenue Procedure 2002-28, on page 815 of Internal Revenue Bulletin 2002-18, available at www. Form 1040ez 2012 instructions irs. Form 1040ez 2012 instructions gov/pub/irs-irbs/irb02–18. Form 1040ez 2012 instructions pdf. Form 1040ez 2012 instructions 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). Form 1040ez 2012 instructions Qualifying taxpayer. Form 1040ez 2012 instructions   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). Form 1040ez 2012 instructions Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $1 million or less. Form 1040ez 2012 instructions You are not a tax shelter as defined under section 448(d)(3) of the Internal Revenue Code. Form 1040ez 2012 instructions Gross receipts test for qualifying taxpayers. Form 1040ez 2012 instructions   To determine if you meet the gross receipts test for qualifying taxpayers, use the following steps: Step 1. Form 1040ez 2012 instructions List each of the test years. Form 1040ez 2012 instructions For qualifying taxpayers under Revenue Procedure 2001-10, the test years are each prior tax year ending on or after December 17, 1998. Form 1040ez 2012 instructions Step 2. Form 1040ez 2012 instructions Determine your average annual gross receipts for each test year listed in Step 1. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Step 3. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Qualifying small business taxpayer. Form 1040ez 2012 instructions   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). Form 1040ez 2012 instructions Your average annual gross receipts for each test year (explained in Step 1, listed next) must be $10 million or less. Form 1040ez 2012 instructions You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Form 1040ez 2012 instructions Your principle business activity is an eligible business. Form 1040ez 2012 instructions See Eligible business, later. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Note. Form 1040ez 2012 instructions Revenue Procedure 2002-28 does not apply to a farming business of a qualifying small business taxpayer. Form 1040ez 2012 instructions A taxpayer engaged in the trade or business of farming generally is allowed to use the cash method for any farming business. Form 1040ez 2012 instructions See Special rules for farming businesses under Cash Method, earlier. Form 1040ez 2012 instructions Gross receipts test for qualifying small business taxpayers. Form 1040ez 2012 instructions   To determine if you meet the gross receipts test for qualifying small business taxpayers, use the following steps: Step 1. Form 1040ez 2012 instructions List each of the test years. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Step 2. Form 1040ez 2012 instructions Determine your average annual gross receipts for each test year listed in Step 1. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Step 3. Form 1040ez 2012 instructions 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. Form 1040ez 2012 instructions Eligible business. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions You have an eligible business if you meet any of the following requirements. Form 1040ez 2012 instructions 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). Form 1040ez 2012 instructions NAICS codes 31-33 (manufacturing). Form 1040ez 2012 instructions NAICS code 42 (wholesale trade). Form 1040ez 2012 instructions NAICS codes 44-45 (retail trade). Form 1040ez 2012 instructions NAICS codes 5111 and 5122 (information industries). Form 1040ez 2012 instructions Your principal business activity is the provision of services, including the provision of property incident to those services. Form 1040ez 2012 instructions Your principal business activity is the fabrication or modification of tangible personal property upon demand in accordance with customer design or specifications. Form 1040ez 2012 instructions   Information about the NAICS codes can be found at http://www. Form 1040ez 2012 instructions census. Form 1040ez 2012 instructions gov/naics or in the instructions for your federal income tax return. Form 1040ez 2012 instructions Gross receipts. Form 1040ez 2012 instructions   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. Form 1040ez 2012 instructions See the definit
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Understanding your CP259D Notice

We sent you this notice because our records indicate you did not file a required Form 990-T, Exempt Organization Business Income Tax Return.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 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).
 


What you need to do

  • Disregard this notice if you have filed the return within the last four weeks using the same name and EIN listed on the notice.
  • Otherwise, file your required Form 990-T immediately according to the instructions on the notice.
    • If you don't think you need to file, complete the Response form enclosed with your notice and mail it to us using the envelope provided.
    • If you filed more than four weeks ago or used a different name or EIN, complete the Response form enclosed with your notice and mail it to us in the envelope provided along with a signed and dated copy of the return.

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Answers to Common Questions

Who must file a Form 990-T?
Form 990-T must be filed by any organization that is tax-exempt under section 501(a) or section 529(a), if it has gross unrelated business income of $1,000 or more for a given tax year. A list of other entities who must file Form 990-T is shown in the Who Must File section of the General Instructions of Form 990-T.

When is the Form 990-T due?
For an employees' trust defined in section 401(a), an IRA (including SEPs and SIMPLEs), a Roth IRA, a Coverdell ESA, or an Archer MSA, the Form 990-T is due by the 15th day of the 4th month after the end of its tax year. All other organizations must file Form 990-T by the 15th day of the 5th month after the end of their tax year. If any due date falls on a Saturday, Sunday, or legal holiday, the organization can file the return on the next business day.

Can I get help over the phone?
If you have questions and/or need help completing this form, please call 1-877-829-5500. Personal assistance is available Monday through Friday, 7:00 a.m. to 7:00 p.m. CT.

Where can I go for more information about tax-exempt organizations?
For more information on tax-exempt organizations see Tax Information for Charities & Other Non-Profits.


Tips for next year

Review the tax-exempt organization resources at Form 990 Resources and Tools for Exempt Organizations.


Understanding your notice

Reading your notice
Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

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Page Last Reviewed or Updated: 29-Mar-2014

The Form 1040ez 2012 Instructions

Form 1040ez 2012 instructions Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. Form 1040ez 2012 instructions The IRS Must Contact Your Spouse or Former Spouse Tax Court Review of Request Community Property LawsRelief for Married Persons Who Did Not File Joint Returns Innocent Spouse ReliefUnderstated Tax Erroneous Items Actual Knowledge or Reason To Know Indications of Unfairness for Innocent Spouse Relief Separation of Liability ReliefLimitations on Relief Equitable ReliefConditions for Getting Equitable Relief Factors for Determining Whether To Grant Equitable Relief RefundsProof Required Refunds Under Equitable Relief Limit on Amount of Refund Filled-in Form 8857 Flowcharts How To Request Relief File Form 8857 to ask the IRS for the types of relief discussed in this publication. Form 1040ez 2012 instructions If you are requesting relief for more than three tax years, you must file an additional Form 8857. Form 1040ez 2012 instructions The IRS will review your Form 8857 and let you know if you qualify. Form 1040ez 2012 instructions A completed Form 8857 is shown later. Form 1040ez 2012 instructions When to file Form 8857. Form 1040ez 2012 instructions   You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. Form 1040ez 2012 instructions The following are some of the ways you may become aware of such a liability. Form 1040ez 2012 instructions The IRS is examining your tax return and proposing to increase your tax liability. Form 1040ez 2012 instructions The IRS sends you a notice. Form 1040ez 2012 instructions   You must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you that occurs after July 22, 1998. Form 1040ez 2012 instructions (But see the exceptions below for different filing deadlines that apply. Form 1040ez 2012 instructions ) For this reason, do not delay filing because you do not have all the documentation. Form 1040ez 2012 instructions   Collection activities that may start the 2-year period are: The IRS offset your income tax refund against an amount you owed on a joint return for another year and the IRS informed you about your right to file Form 8857. Form 1040ez 2012 instructions The filing of a claim by the IRS in a court proceeding in which you were a party or the filing of a claim in a proceeding that involves your property. Form 1040ez 2012 instructions This includes the filing of a proof of claim in a bankruptcy proceeding. Form 1040ez 2012 instructions The filing of a suit by the United States against you to collect the joint liability. Form 1040ez 2012 instructions The issuance of a section 6330 notice, which notifies you of the IRS' intent to levy and your right to a collection due process (CDP) hearing. Form 1040ez 2012 instructions The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. Form 1040ez 2012 instructions Exception for equitable relief. Form 1040ez 2012 instructions   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. Form 1040ez 2012 instructions irs. Form 1040ez 2012 instructions gov/irb/2011-32_IRB/ar11. Form 1040ez 2012 instructions html) expanding the amount of time to request equitable relief. Form 1040ez 2012 instructions The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both: Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. Form 1040ez 2012 instructions Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. Form 1040ez 2012 instructions In certain cases, the 10-year period is suspended. Form 1040ez 2012 instructions The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. Form 1040ez 2012 instructions See Pub. Form 1040ez 2012 instructions 594, The IRS Collection Process, for details. Form 1040ez 2012 instructions Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Form 1040ez 2012 instructions But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. Form 1040ez 2012 instructions See Pub. Form 1040ez 2012 instructions 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. Form 1040ez 2012 instructions Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability. Form 1040ez 2012 instructions Exception for relief based on community property laws. Form 1040ez 2012 instructions   If you are requesting relief based on community property laws, a different filing deadline applies. Form 1040ez 2012 instructions See Relief from liability arising from community property law discussed later under Community Property Laws . Form 1040ez 2012 instructions Form 8857 filed by or on behalf of a decedent. Form 1040ez 2012 instructions   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. Form 1040ez 2012 instructions An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. Form 1040ez 2012 instructions For purposes of separation of liability relief (discussed later), the decedent's marital status is determined on the earlier of the date relief was requested or the date of death. Form 1040ez 2012 instructions Situations in which you are not entitled to relief. Form 1040ez 2012 instructions   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. Form 1040ez 2012 instructions In a final decision dated after July 22, 1998, a court considered whether to grant you relief from joint liability and decided not to do so. Form 1040ez 2012 instructions In a final decision dated after July 22, 1998, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief. Form 1040ez 2012 instructions You entered into an offer in compromise with the IRS. Form 1040ez 2012 instructions You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. Form 1040ez 2012 instructions Exception for agreements relating to TEFRA partnership proceedings. Form 1040ez 2012 instructions   You may be entitled to relief, discussed in (4) earlier, if you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending TEFRA partnership proceeding. Form 1040ez 2012 instructions (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. Form 1040ez 2012 instructions ) You are not entitled to relief for the nonpartnership items, but you will be entitled to relief for the partnership items (if you otherwise qualify). Form 1040ez 2012 instructions Transferee liability not affected by innocent spouse relief provisions. Form 1040ez 2012 instructions   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. Form 1040ez 2012 instructions Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by these laws. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. Form 1040ez 2012 instructions Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. Form 1040ez 2012 instructions In August 2010, the IRS assessed a deficiency for the 2008 return. Form 1040ez 2012 instructions The items causing the deficiency belong to Herb. Form 1040ez 2012 instructions Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. Form 1040ez 2012 instructions However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. Form 1040ez 2012 instructions The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. Form 1040ez 2012 instructions There are no exceptions, even for victims of spousal abuse or domestic violence. Form 1040ez 2012 instructions We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. Form 1040ez 2012 instructions If you are requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding your request for relief. Form 1040ez 2012 instructions However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability. Form 1040ez 2012 instructions If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. Form 1040ez 2012 instructions Tax Court Review of Request After you file Form 8857, you may be able to petition (ask) the United States Tax Court to review your request for relief in the following two situations. Form 1040ez 2012 instructions The IRS sends you a final determination letter regarding your request for relief. Form 1040ez 2012 instructions You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. Form 1040ez 2012 instructions If you seek equitable relief for an underpaid tax, you will be able to get a Tax Court review of your request only if the tax arose or remained unpaid on or after December 20, 2006. Form 1040ez 2012 instructions The United States Tax Court is an independent judicial body and is not part of the IRS. Form 1040ez 2012 instructions You must file a petition with the United States Tax Court in order for it to review your request for relief. Form 1040ez 2012 instructions You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. Form 1040ez 2012 instructions If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. Form 1040ez 2012 instructions You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address:    United States Tax Court 400 Second Street, NW Washington, DC 20217 Or you can visit the Tax Court's website at www. Form 1040ez 2012 instructions ustaxcourt. Form 1040ez 2012 instructions gov Community Property Laws You must generally follow community property laws when filing a tax return if you are married and live in a community property state. Form 1040ez 2012 instructions Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Form 1040ez 2012 instructions Generally, community property laws require you to allocate community income and expenses equally between both spouses. Form 1040ez 2012 instructions However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Form 1040ez 2012 instructions Relief for Married Persons Who Did Not File Joint Returns Married persons who live in community property states, but who did not file joint returns, have two ways to get relief. Form 1040ez 2012 instructions Relief From Liability Arising From Community Property Law You are not responsible for the tax relating to an item of community income if all the following conditions exist. Form 1040ez 2012 instructions You did not file a joint return for the tax year. Form 1040ez 2012 instructions You did not include the item of community income in gross income. Form 1040ez 2012 instructions The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. Form 1040ez 2012 instructions Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. Form 1040ez 2012 instructions Your spouse's (or former spouse's) distributive share of partnership income. Form 1040ez 2012 instructions Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Form 1040ez 2012 instructions Use the appropriate community property law to determine what is separate property. Form 1040ez 2012 instructions Any other income that belongs to your spouse (or former spouse) under community property law. Form 1040ez 2012 instructions You establish that you did not know of, and had no reason to know of, that community income. Form 1040ez 2012 instructions See  Actual Knowledge or Reason To Know , below. Form 1040ez 2012 instructions Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. Form 1040ez 2012 instructions See Indications of unfairness for liability arising from community property law, later. Form 1040ez 2012 instructions Actual knowledge or reason to know. Form 1040ez 2012 instructions   You knew or had reason to know of an item of community income if: You actually knew of the item of community income, or A reasonable person in similar circumstances would have known of the item of community income. Form 1040ez 2012 instructions Amount of community income unknown. Form 1040ez 2012 instructions   If you are aware of the source of the item of community income or the income-producing activity, but are unaware of the specific amount, you are considered to know or have reason to know of the item of community income. Form 1040ez 2012 instructions Not knowing the specific amount is not a basis for relief. Form 1040ez 2012 instructions Reason to know. Form 1040ez 2012 instructions   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. Form 1040ez 2012 instructions The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. Form 1040ez 2012 instructions The financial situation of you and your spouse (or former spouse). Form 1040ez 2012 instructions Your educational background and business experience. Form 1040ez 2012 instructions Whether the item of community income represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Form 1040ez 2012 instructions Indications of unfairness for liability arising from community property law. Form 1040ez 2012 instructions   The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax due to the item of community income. Form 1040ez 2012 instructions   The following are examples of factors the IRS will consider. Form 1040ez 2012 instructions Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). Form 1040ez 2012 instructions Whether your spouse (or former spouse) deserted you. Form 1040ez 2012 instructions Whether you and your spouse have been divorced or separated. Form 1040ez 2012 instructions  For other factors see Factors for Determining Whether To Grant Equitable Relief later. Form 1040ez 2012 instructions Benefit from omitted item of community income. Form 1040ez 2012 instructions   A benefit includes normal support, but does not include de minimis (small) amounts. Form 1040ez 2012 instructions Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. Form 1040ez 2012 instructions   For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the property is traceable to omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from those omitted items of community income. Form 1040ez 2012 instructions Equitable Relief If you do not qualify for the relief described above and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief (discussed later). Form 1040ez 2012 instructions How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. Form 1040ez 2012 instructions Fill in Form 8857 according to the instructions. Form 1040ez 2012 instructions For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief. Form 1040ez 2012 instructions However, if the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days after the date the IRS' initial contact letter to you. Form 1040ez 2012 instructions The period of limitation on assessment is the amount of time, generally three years, that the IRS has from the date you filed the return to assess taxes that you owe. Form 1040ez 2012 instructions Innocent Spouse Relief By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Form 1040ez 2012 instructions Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). Form 1040ez 2012 instructions However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. Form 1040ez 2012 instructions The IRS can collect these amounts from either you or your spouse (or former spouse). Form 1040ez 2012 instructions You must meet all of the following conditions to qualify for innocent spouse relief. Form 1040ez 2012 instructions You filed a joint return. Form 1040ez 2012 instructions There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). Form 1040ez 2012 instructions You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed). Form 1040ez 2012 instructions See Actual Knowledge or Reason To Know, later. Form 1040ez 2012 instructions Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. Form 1040ez 2012 instructions See Indications of Unfairness for Innocent Spouse Relief , later. Form 1040ez 2012 instructions Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. Form 1040ez 2012 instructions A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Form 1040ez 2012 instructions Understated Tax You have an understated tax if the IRS determined that your total tax should be more than the amount that was actually shown on your return. Form 1040ez 2012 instructions Erroneous Items Erroneous items are either of the following. Form 1040ez 2012 instructions Unreported income. Form 1040ez 2012 instructions This is any gross income item received by your spouse (or former spouse) that is not reported. Form 1040ez 2012 instructions Incorrect deduction, credit, or basis. Form 1040ez 2012 instructions This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). Form 1040ez 2012 instructions The following are examples of erroneous items. Form 1040ez 2012 instructions The expense for which the deduction is taken was never paid or incurred. Form 1040ez 2012 instructions For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising. Form 1040ez 2012 instructions The expense does not qualify as a deductible expense. Form 1040ez 2012 instructions For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Form 1040ez 2012 instructions Fines are not deductible. Form 1040ez 2012 instructions No factual argument can be made to support the deductibility of the expense. Form 1040ez 2012 instructions For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. Form 1040ez 2012 instructions Actual Knowledge or Reason To Know You knew or had reason to know of an understated tax if: You actually knew of the understated tax, or A reasonable person in similar circumstances would have known of the understated tax. Form 1040ez 2012 instructions Actual knowledge. Form 1040ez 2012 instructions   If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Form 1040ez 2012 instructions You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Form 1040ez 2012 instructions For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. Form 1040ez 2012 instructions Reason to know. Form 1040ez 2012 instructions   If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Form 1040ez 2012 instructions You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Form 1040ez 2012 instructions   The IRS will consider all facts and circumstances in determining whether you had reason to know of an understated tax due to an erroneous item. Form 1040ez 2012 instructions The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. Form 1040ez 2012 instructions The financial situation of you and your spouse (or former spouse). Form 1040ez 2012 instructions Your educational background and business experience. Form 1040ez 2012 instructions The extent of your participation in the activity that resulted in the erroneous item. Form 1040ez 2012 instructions Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. Form 1040ez 2012 instructions Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Form 1040ez 2012 instructions Partial relief when a portion of erroneous item is unknown. Form 1040ez 2012 instructions   You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. Form 1040ez 2012 instructions You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. Form 1040ez 2012 instructions The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. Form 1040ez 2012 instructions You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. Form 1040ez 2012 instructions The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. Form 1040ez 2012 instructions The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. Form 1040ez 2012 instructions Indications of Unfairness for Innocent Spouse Relief The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax. Form 1040ez 2012 instructions The following are examples of factors the IRS will consider. Form 1040ez 2012 instructions Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. Form 1040ez 2012 instructions Whether your spouse (or former spouse) deserted you. Form 1040ez 2012 instructions Whether you and your spouse have been divorced or separated. Form 1040ez 2012 instructions Whether you received a benefit on the return from the understated tax. Form 1040ez 2012 instructions For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. Form 1040ez 2012 instructions Significant benefit. Form 1040ez 2012 instructions   A significant benefit is any benefit in excess of normal support. Form 1040ez 2012 instructions Normal support depends on your particular circumstances. Form 1040ez 2012 instructions Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions You receive money from your spouse that is beyond normal support. Form 1040ez 2012 instructions The money can be traced to your spouse's lottery winnings that were not reported on your joint return. Form 1040ez 2012 instructions You will be considered to have received a significant benefit from that income. Form 1040ez 2012 instructions This is true even if your spouse gives you the money several years after he or she received it. Form 1040ez 2012 instructions Separation of Liability Relief Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). Form 1040ez 2012 instructions The understated tax allocated to you is generally the amount you are responsible for. Form 1040ez 2012 instructions This type of relief is available only for unpaid liabilities resulting from the understated tax. Form 1040ez 2012 instructions Refunds are not allowed. Form 1040ez 2012 instructions To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Form 1040ez 2012 instructions You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Form 1040ez 2012 instructions (Under this rule, you are no longer married if you are widowed. Form 1040ez 2012 instructions ) You were not a member of the same household (explained below) as the spouse with whom you filed the joint return at any time during the 12-month per- iod ending on the date you file Form 8857. Form 1040ez 2012 instructions Members of the same household. Form 1040ez 2012 instructions   You and your spouse are not members of the same household if you are living apart and are estranged. Form 1040ez 2012 instructions However, you and your spouse are considered members of the same household if any of the following conditions are met. Form 1040ez 2012 instructions You and your spouse reside in the same dwelling. Form 1040ez 2012 instructions You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below. Form 1040ez 2012 instructions Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Form 1040ez 2012 instructions Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. Form 1040ez 2012 instructions Burden of proof. Form 1040ez 2012 instructions   You must be able to prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). Form 1040ez 2012 instructions You must also establish the basis for allocating the erroneous items. Form 1040ez 2012 instructions Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. Form 1040ez 2012 instructions The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Form 1040ez 2012 instructions A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Form 1040ez 2012 instructions The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). Form 1040ez 2012 instructions For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. Form 1040ez 2012 instructions Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Form 1040ez 2012 instructions See Transfers of Property To Avoid Tax , later. Form 1040ez 2012 instructions Actual Knowledge The relief discussed here does not apply to any part of the understated tax due to your spouse's (or former spouse's) erroneous items of which you had actual knowledge. Form 1040ez 2012 instructions You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. Form 1040ez 2012 instructions If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. Form 1040ez 2012 instructions You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. Form 1040ez 2012 instructions (This rule applies whether or not there was a receipt of cash. Form 1040ez 2012 instructions ) You knew of the facts that made an incorrect deduction or credit unallowable. Form 1040ez 2012 instructions For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return. Form 1040ez 2012 instructions Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Form 1040ez 2012 instructions Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Form 1040ez 2012 instructions Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself. Form 1040ez 2012 instructions Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Form 1040ez 2012 instructions Neither is your actual knowledge of how the erroneous item was treated on the tax return. Form 1040ez 2012 instructions For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. Form 1040ez 2012 instructions The IRS audited their return and found that Bill did not report $20,000 of self-employment income. Form 1040ez 2012 instructions The additional income resulted in a $6,000 understated tax, plus interest and penalties. Form 1040ez 2012 instructions After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. Form 1040ez 2012 instructions The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Form 1040ez 2012 instructions Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. Form 1040ez 2012 instructions Karen is also liable for the understated tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. Form 1040ez 2012 instructions The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it. Form 1040ez 2012 instructions Factors supporting actual knowledge. Form 1040ez 2012 instructions   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. Form 1040ez 2012 instructions The following are examples of factors the IRS may use. Form 1040ez 2012 instructions Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. Form 1040ez 2012 instructions Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. Form 1040ez 2012 instructions Exception for spousal abuse or domestic violence. Form 1040ez 2012 instructions   Even if you had actual knowledge, you may still qualify for relief if you establish that: You were the victim of spousal abuse or domestic violence before signing the return, and Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you. Form 1040ez 2012 instructions   If you establish that you signed your joint return under duress (threat of harm or other form of coercion), then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. Form 1040ez 2012 instructions However, you may be required to file a separate return for that tax year. Form 1040ez 2012 instructions For more information about duress, see the instructions for Form 8857. Form 1040ez 2012 instructions Transfers of Property To Avoid Tax If your spouse (or former spouse) transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. Form 1040ez 2012 instructions The increase may not be more than the entire amount of the liability. Form 1040ez 2012 instructions A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. Form 1040ez 2012 instructions This presumption will not apply if: The transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement, or You establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax. Form 1040ez 2012 instructions If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above. Form 1040ez 2012 instructions Equitable Relief If you do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. Form 1040ez 2012 instructions Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax (defined earlier under Innocent Spouse Relief ) or an underpaid tax. Form 1040ez 2012 instructions An underpaid tax is an amount of tax you properly reported on your return but you have not paid. Form 1040ez 2012 instructions For example, your joint 2009 return shows that you and your spouse owed $5,000. Form 1040ez 2012 instructions You paid $2,000 with the return. Form 1040ez 2012 instructions You have an underpaid tax of $3,000. Form 1040ez 2012 instructions Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. Form 1040ez 2012 instructions You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Form 1040ez 2012 instructions You have an understated tax or an underpaid tax. Form 1040ez 2012 instructions You did not pay the tax. Form 1040ez 2012 instructions However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. Form 1040ez 2012 instructions You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax. Form 1040ez 2012 instructions See Factors for Determining Whether To Grant Equitable Relief, later. Form 1040ez 2012 instructions You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Form 1040ez 2012 instructions A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Form 1040ez 2012 instructions Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Form 1040ez 2012 instructions See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. Form 1040ez 2012 instructions You did not file or fail to file your return with the intent to commit fraud. Form 1040ez 2012 instructions The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies: The item is attributable or partially attributable to you solely due to the operation of community property law. Form 1040ez 2012 instructions If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. Form 1040ez 2012 instructions If the item is titled in your name, the item is presumed to be attributable to you. Form 1040ez 2012 instructions However, you can rebut this presumption based on the facts and circumstances. Form 1040ez 2012 instructions You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. Form 1040ez 2012 instructions If you meet this exception, the IRS will consider granting equitable relief although the underpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse). Form 1040ez 2012 instructions You establish that you were the victim of spousal abuse or domestic violence before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's (or former spouse's) retaliation. Form 1040ez 2012 instructions If you meet this exception, relief will be considered although the understated tax or underpaid tax may be attributable in part or in full to your item. Form 1040ez 2012 instructions Factors for Determining Whether To Grant Equitable Relief The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understated or underpaid tax. Form 1040ez 2012 instructions The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. Form 1040ez 2012 instructions The IRS will consider all factors and weigh them appropriately. Form 1040ez 2012 instructions Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. Form 1040ez 2012 instructions Whether you are separated (whether legally or not) or divorced from your spouse. Form 1040ez 2012 instructions A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. Form 1040ez 2012 instructions A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Form 1040ez 2012 instructions Whether you would suffer a significant economic hardship if relief is not granted. Form 1040ez 2012 instructions (In other words, you would not be able to pay your reasonable basic living expenses. Form 1040ez 2012 instructions ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. Form 1040ez 2012 instructions This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. Form 1040ez 2012 instructions Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. Form 1040ez 2012 instructions (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. Form 1040ez 2012 instructions ) Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. Form 1040ez 2012 instructions Whether you knew or had reason to know about the items causing the understated tax or that the tax would not be paid, as explained next. Form 1040ez 2012 instructions Knowledge or reason to know. Form 1040ez 2012 instructions   In the case of an underpaid tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. Form 1040ez 2012 instructions   In the case of an income tax liability that arose from an understated tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understated tax. Form 1040ez 2012 instructions Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. Form 1040ez 2012 instructions Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. Form 1040ez 2012 instructions This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. Form 1040ez 2012 instructions Reason to know. Form 1040ez 2012 instructions   In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels. Form 1040ez 2012 instructions Example. Form 1040ez 2012 instructions You and your spouse filed a joint 2009 return. Form 1040ez 2012 instructions That return showed you owed $10,000. Form 1040ez 2012 instructions You had $5,000 of your own money and you took out a loan to pay the other $5,000. Form 1040ez 2012 instructions You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Form 1040ez 2012 instructions Without telling you, your spouse took the $5,000 loan and spent it on himself. Form 1040ez 2012 instructions You and your spouse were divorced in 2010. Form 1040ez 2012 instructions In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Form 1040ez 2012 instructions These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. Form 1040ez 2012 instructions The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpaid tax. Form 1040ez 2012 instructions Factors Weighing in Favor of Equitable Relief The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief. Form 1040ez 2012 instructions Whether your spouse (or former spouse) abused you. Form 1040ez 2012 instructions Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. Form 1040ez 2012 instructions Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . Form 1040ez 2012 instructions Not permitted under separation of liability relief. Form 1040ez 2012 instructions Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. Form 1040ez 2012 instructions Proof Required The IRS will only refund payments you made with your own money. Form 1040ez 2012 instructions However, you must provide proof that you made the payments with your own money. Form 1040ez 2012 instructions Examples of proof are a copy of your bank statement or a canceled check. Form 1040ez 2012 instructions No proof is required if your individual refund was used by the IRS to pay a tax you owed on a joint tax return for another year. Form 1040ez 2012 instructions Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. Form 1040ez 2012 instructions Underpaid tax. Form 1040ez 2012 instructions   If you are granted relief for an underpaid tax, you are eligible for a refund of separate payments that you made after July 22, 1998. Form 1040ez 2012 instructions However, you are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. Form 1040ez 2012 instructions For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. Form 1040ez 2012 instructions   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. Form 1040ez 2012 instructions Understated tax. Form 1040ez 2012 instructions   If you are granted relief for an understated tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. Form 1040ez 2012 instructions You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement. Form 1040ez 2012 instructions Only installment payments made after the date you filed Form 8857 are eligible for a refund. Form 1040ez 2012 instructions   The amount of the refund is subject to the limit discussed next. Form 1040ez 2012 instructions Limit on Amount of Refund The amount of your refund is limited. Form 1040ez 2012 instructions Read the following chart to find out the limit. Form 1040ez 2012 instructions IF you file Form 8857. Form 1040ez 2012 instructions . Form 1040ez 2012 instructions . Form 1040ez 2012 instructions THEN the refund cannot be more than. Form 1040ez 2012 instructions . Form 1040ez 2012 instructions . Form 1040ez 2012 instructions Within 3 years after filing your return The part of the tax paid within 3 years (plus any extension of time for filing your return) before you filed Form 8857. Form 1040ez 2012 instructions After the 3-year period, but within 2 years from the time you paid the tax The tax you paid within 2 years immediately before you filed Form 8857. Form 1040ez 2012 instructions Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. Form 1040ez 2012 instructions Janie and Joe Boulder filed a joint tax return for 2007. Form 1040ez 2012 instructions They claimed one dependency exemption for their son Michael. Form 1040ez 2012 instructions Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. Form 1040ez 2012 instructions Janie did not know about the award when the return was filed. Form 1040ez 2012 instructions They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). Form 1040ez 2012 instructions Janie and Joe were divorced on May 13, 2009. Form 1040ez 2012 instructions In February 2010, Janie filed her 2009 federal income tax return as head of household. Form 1040ez 2012 instructions She expected a refund of $1,203. Form 1040ez 2012 instructions In May 2010, she received a notice informing her that the IRS had offset her refund against the $815 owed on her joint 2007 income tax return and that she had a right to file Form 8857. Form 1040ez 2012 instructions Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. Form 1040ez 2012 instructions Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. Form 1040ez 2012 instructions Janie believes she meets the third condition. Form 1040ez 2012 instructions She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs. Form 1040ez 2012 instructions Janie believes she meets the fourth condition. Form 1040ez 2012 instructions She believes it would be unfair to be held liable for the tax because she did not benefit from the award. Form 1040ez 2012 instructions Joe spent it on personal items for his use only. Form 1040ez 2012 instructions Because Janie believes she qualifies for innocent spouse relief, she first completes Part I of Form 8857 to determine if she should file the form. Form 1040ez 2012 instructions In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. Form 1040ez 2012 instructions Part I Line 1. Form 1040ez 2012 instructions   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. Form 1040ez 2012 instructions Line 2. Form 1040ez 2012 instructions   She checks the box because she wants a refund. Form 1040ez 2012 instructions Note. Form 1040ez 2012 instructions Because the IRS used her individual refund to pay the tax owed on the joint tax return, she does not need to provide proof of payment. Form 1040ez 2012 instructions Line 3. Form 1040ez 2012 instructions   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. Form 1040ez 2012 instructions Line 4. Form 1040ez 2012 instructions   She checks the “Yes” box because she filed a joint tax return for tax year 2007. Form 1040ez 2012 instructions Line 5. Form 1040ez 2012 instructions   She skips this line because she checked the “Yes” box on line 4. Form 1040ez 2012 instructions Part II Line 6. Form 1040ez 2012 instructions   She enters her name, address, social security number, county, and best daytime phone number. Form 1040ez 2012 instructions Part III Line 7. Form 1040ez 2012 instructions   She enters Joe's name, address, social security number, and best daytime phone number. Form 1040ez 2012 instructions Line 8. Form 1040ez 2012 instructions   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. Form 1040ez 2012 instructions ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. Form 1040ez 2012 instructions Line 9. Form 1040ez 2012 instructions   She checks the box for “High school diploma, equivalent, or less,” because she had completed high school when her 2007 joint tax return was filed. Form 1040ez 2012 instructions Line 10. Form 1040ez 2012 instructions   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. Form 1040ez 2012 instructions Line 11. Form 1040ez 2012 instructions   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. Form 1040ez 2012 instructions Line 12. Form 1040ez 2012 instructions   She checks the “Yes” box because she signed the 2007 joint tax return. Form 1040ez 2012 instructions Line 13. Form 1040ez 2012 instructions   She checks the “No” box because she did not have a mental or physical condition when the return was filed and does not have one now. Form 1040ez 2012 instructions Part IV Line 14. Form 1040ez 2012 instructions   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. Form 1040ez 2012 instructions ” Line 15. Form 1040ez 2012 instructions   She checks the box, “You did not know anything was incorrect or missing” because she did not know that Joe had received a $5,000 award. Form 1040ez 2012 instructions She explains this in the space provided. Form 1040ez 2012 instructions Line 16. Form 1040ez 2012 instructions   She checks the box, “You knew that person had income” because she knew Joe had income from wages. Form 1040ez 2012 instructions She also lists Joe's income. Form 1040ez 2012 instructions Under “Type of Income” she enters “wages. Form 1040ez 2012 instructions ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. Form 1040ez 2012 instructions ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. Form 1040ez 2012 instructions ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. Form 1040ez 2012 instructions Line 17. Form 1040ez 2012 instructions   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. Form 1040ez 2012 instructions Line 18. Form 1040ez 2012 instructions   She checks the “No” box because, when the return was signed, she was not having financial problems. Form 1040ez 2012 instructions Line 19. Form 1040ez 2012 instructions   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. Form 1040ez 2012 instructions She provides additional information in the space provided. Form 1040ez 2012 instructions Line 20. Form 1040ez 2012 instructions   She checks the “No” box because Joe has never transferred money or property to her. Form 1040ez 2012 instructions Part V Line 21. Form 1040ez 2012 instructions   She enters the number “1” on both the line for “Adults” and the line for “Children” because her current household consists of herself and her son. Form 1040ez 2012 instructions Line 22. Form 1040ez 2012 instructions   She enters her average monthly income for her entire household. Form 1040ez 2012 instructions Line 23. Form 1040ez 2012 instructions   She lists her assets, which are $500 for the fair market value of a car, $450 in her checking account, and $100 in her savings account. Form 1040ez 2012 instructions Signing and mailing Form 8857. Form 1040ez 2012 instructions    Janie signs and dates the form. Form 1040ez 2012 instructions She attaches the copy of her divorce decree (not illustrated) required by line 8. Form 1040ez 2012 instructions Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. Form 1040ez 2012 instructions This image is too large to be displayed in the current screen. Form 1040ez 2012 instructions Please click the link to view the image. Form 1040ez 2012 instructions Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. Form 1040ez 2012 instructions Please click the link to view the image. Form 1040ez 2012 instructions Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. Form 1040ez 2012 instructions Please click the link to view the image. Form 1040ez 2012 instructions Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. Form 1040ez 2012 instructions Please click the link to view the image. Form 1040ez 2012 instructions Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. Form 1040ez 2012 instructions But do not rely on these flowcharts alone. Form 1040ez 2012 instructions Also read the earlier discussions. Form 1040ez 2012 instructions Figure A. Form 1040ez 2012 instructions Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. Form 1040ez 2012 instructions "Do You Qualify for Innocent Spouse Relief?" Figure B. Form 1040ez 2012 instructions Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. Form 1040ez 2012 instructions "Do You Qualify for Separation of Liability Relief?" Figure C. Form 1040ez 2012 instructions Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. Form 1040ez 2012 instructions Please click the link to view the image. Form 1040ez 2012 instructions "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications