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Irs free state filing 2. Irs free state filing   Electing the Section 179 Deduction Table of Contents Introduction Useful Items - You may want to see: What Property Qualifies?Eligible Property Property Acquired for Business Use Property Acquired by Purchase What Property Does Not Qualify?Land and Improvements Excepted Property How Much Can You Deduct?Dollar Limits Business Income Limit Partnerships and Partners S Corporations Other Corporations How Do You Elect the Deduction? When Must You Recapture the Deduction? Introduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Irs free state filing This is the section 179 deduction. Irs free state filing You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions. Irs free state filing Estates and trusts cannot elect the section 179 deduction. Irs free state filing This chapter explains what property does and does not qualify for the section 179 deduction, what limits apply to the deduction (including special rules for partnerships and corporations), and how to elect it. Irs free state filing It also explains when and how to recapture the deduction. Irs free state filing Useful Items - You may want to see: Publication 537 Installment Sales 544 Sales and Other Dispositions of Assets 954 Tax Incentives for Distressed Communities Form (and Instructions) 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 6 for information about getting publications and forms. Irs free state filing What Property Qualifies? To qualify for the section 179 deduction, your property must meet all the following requirements. Irs free state filing It must be eligible property. Irs free state filing It must be acquired for business use. Irs free state filing It must have been acquired by purchase. Irs free state filing It must not be property described later under What Property Does Not Qualify . Irs free state filing The following discussions provide information about these requirements and exceptions. Irs free state filing Eligible Property To qualify for the section 179 deduction, your property must be one of the following types of depreciable property. Irs free state filing Tangible personal property. Irs free state filing Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services, A research facility used in connection with any of the activities in (a) above, or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Irs free state filing Single purpose agricultural (livestock) or horticultural structures. Irs free state filing See chapter 7 of Publication 225 for definitions and information regarding the use requirements that apply to these structures. Irs free state filing Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Irs free state filing Off-the-shelf computer software. Irs free state filing Qualified real property (described below). Irs free state filing Tangible personal property. Irs free state filing   Tangible personal property is any tangible property that is not real property. Irs free state filing It includes the following property. Irs free state filing Machinery and equipment. Irs free state filing Property contained in or attached to a building (other than structural components), such as refrigerators, grocery store counters, office equipment, printing presses, testing equipment, and signs. Irs free state filing Gasoline storage tanks and pumps at retail service stations. Irs free state filing Livestock, including horses, cattle, hogs, sheep, goats, and mink and other furbearing animals. Irs free state filing   The treatment of property as tangible personal property for the section 179 deduction is not controlled by its treatment under local law. Irs free state filing For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law. Irs free state filing Off-the-shelf computer software. Irs free state filing   Off-the-shelf computer software placed in service during the tax year is qualifying property for purposes of the section 179 deduction. Irs free state filing This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Irs free state filing It includes any program designed to cause a computer to perform a desired function. Irs free state filing However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. Irs free state filing Qualified real property. Irs free state filing   You can elect to treat certain qualified real property you placed in service as section 179 property for tax years beginning in 2013. Irs free state filing If this election is made, the term “section 179 property” will include any qualified real property that is: Qualified leasehold improvement property, Qualified restaurant property, or Qualified retail improvement property. Irs free state filing The maximum section 179 expense deduction that can be elected for qualified section 179 real property is $250,000 of the maximum section 179 deduction of $500,000 in 2013. Irs free state filing For more information, see Special rules for qualified section 179 real property, later. Irs free state filing Also, see Election for certain qualified section 179 real property, later, for information on how to make this election. Irs free state filing Qualified leasehold improvement property. Irs free state filing   Generally, this is any improvement to an interior part of a building (placed in service before January 1, 2014) that is nonresidential real property, provided all of the requirements discussed in chapter 3 under Qualified leasehold improvement property are met. Irs free state filing   In addition, an improvement made by the lessor does not qualify as qualified leasehold improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Irs free state filing A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Irs free state filing Examples include the following. Irs free state filing A complete liquidation of a subsidiary. Irs free state filing A transfer to a corporation controlled by the transferor. Irs free state filing An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Irs free state filing Qualified restaurant property. Irs free state filing   Qualified restaurant property is any section 1250 property that is a building or an improvement to a building placed in service after December 31, 2008, and before January 1, 2014. Irs free state filing Also, more than 50% of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals. Irs free state filing Qualified retail improvement property. Irs free state filing   Generally, this is any improvement (placed in service after December 31, 2008, and before January 1, 2014) to an interior portion of nonresidential real property if it meets the following requirements. Irs free state filing The portion is open to the general public and is used in the retail trade or business of selling tangible property to the general public. Irs free state filing The improvement is placed in service more than 3 years after the date the building was first placed in service. Irs free state filing The expenses are not for the enlargement of the building, any elevator or escalator, any structural components benefiting a common area, or the internal structural framework of the building. Irs free state filing In addition, an improvement made by the lessor does not qualify as qualified retail improvement property to any subsequent owner unless it is acquired from the original lessor by reason of the lessor’s death or in any of the following types of transactions. Irs free state filing A transaction to which section 381(a) applies, A mere change in the form of conducting the trade or business so long as the property is retained in the trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in the trade or business, A like-kind exchange, involuntary conversion, or re-acquisition of real property to the extent that the basis in the property represents the carryover basis, or Certain nonrecognition transactions to the extent that your basis in the property is determined by reference to the transferor’s or distributor’s basis in the property. Irs free state filing Examples include the following. Irs free state filing A complete liquidation of a subsidiary. Irs free state filing A transfer to a corporation controlled by the transferor. Irs free state filing An exchange of property by a corporation solely for stock or securities in another corporation in a reorganization. Irs free state filing Property Acquired for Business Use To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. Irs free state filing Property you acquire only for the production of income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify. Irs free state filing Partial business use. Irs free state filing   When you use property for both business and nonbusiness purposes, you can elect the section 179 deduction only if you use the property more than 50% for business in the year you place it in service. Irs free state filing If you use the property more than 50% for business, multiply the cost of the property by the percentage of business use. Irs free state filing Use the resulting business cost to figure your section 179 deduction. Irs free state filing Example. Irs free state filing May Oak bought and placed in service an item of section 179 property costing $11,000. Irs free state filing She used the property 80% for her business and 20% for personal purposes. Irs free state filing The business part of the cost of the property is $8,800 (80% × $11,000). Irs free state filing Property Acquired by Purchase To qualify for the section 179 deduction, your property must have been acquired by purchase. Irs free state filing For example, property acquired by gift or inheritance does not qualify. Irs free state filing Property is not considered acquired by purchase in the following situations. Irs free state filing It is acquired by one component member of a controlled group from another component member of the same group. Irs free state filing Its basis is determined either— In whole or in part by its adjusted basis in the hands of the person from whom it was acquired, or Under the stepped-up basis rules for property acquired from a decedent. Irs free state filing It is acquired from a related person. Irs free state filing Related persons. Irs free state filing   Related persons are described under Related persons earlier. Irs free state filing However, to determine whether property qualifies for the section 179 deduction, treat as an individual's family only his or her spouse, ancestors, and lineal descendants and substitute "50%" for "10%" each place it appears. Irs free state filing Example. Irs free state filing Ken Larch is a tailor. Irs free state filing He bought two industrial sewing machines from his father. Irs free state filing He placed both machines in service in the same year he bought them. Irs free state filing They do not qualify as section 179 property because Ken and his father are related persons. Irs free state filing He cannot claim a section 179 deduction for the cost of these machines. Irs free state filing What Property Does Not Qualify? Certain property does not qualify for the section 179 deduction. Irs free state filing This includes the following. Irs free state filing Land and Improvements Land and land improvements do not qualify as section 179 property. Irs free state filing Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences. Irs free state filing Excepted Property Even if the requirements explained earlier under What Property Qualifies are met, you cannot elect the section 179 deduction for the following property. Irs free state filing Certain property you lease to others (if you are a noncorporate lessor). Irs free state filing Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Irs free state filing Air conditioning or heating units. Irs free state filing Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code. Irs free state filing Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income. Irs free state filing Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months. Irs free state filing Leased property. Irs free state filing   Generally, you cannot claim a section 179 deduction based on the cost of property you lease to someone else. Irs free state filing This rule does not apply to corporations. Irs free state filing However, you can claim a section 179 deduction for the cost of the following property. Irs free state filing Property you manufacture or produce and lease to others. Irs free state filing Property you purchase and lease to others if both the following tests are met. Irs free state filing The term of the lease (including options to renew) is less than 50% of the property's class life. Irs free state filing For the first 12 months after the property is transferred to the lessee, the total business deductions you are allowed on the property (other than rents and reimbursed amounts) are more than 15% of the rental income from the property. Irs free state filing Property used for lodging. Irs free state filing   Generally, you cannot claim a section 179 deduction for property used predominantly to furnish lodging or in connection with the furnishing of lodging. Irs free state filing However, this does not apply to the following types of property. Irs free state filing Nonlodging commercial facilities that are available to those not using the lodging facilities on the same basis as they are available to those using the lodging facilities. Irs free state filing Property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients. Irs free state filing Any certified historic structure to the extent its basis is due to qualified rehabilitation expenditures. Irs free state filing Any energy property. Irs free state filing Energy property. Irs free state filing   Energy property is property that meets the following requirements. Irs free state filing It is one of the following types of property. Irs free state filing Equipment that uses solar energy to generate electricity, to heat or cool a structure, to provide hot water for use in a structure, or to provide solar process heat, except for equipment used to generate energy to heat a swimming pool. Irs free state filing Equipment placed in service after December 31, 2005, and before January 1, 2017, that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Irs free state filing Equipment used to produce, distribute, or use energy derived from a geothermal deposit. Irs free state filing For electricity generated by geothermal power, this includes equipment up to (but not including) the electrical transmission stage. Irs free state filing Qualified fuel cell property or qualified microturbine property placed in service after December 31, 2005, and before January 1, 2017. Irs free state filing The construction, reconstruction, or erection of the property must be completed by you. Irs free state filing For property you acquire, the original use of the property must begin with you. Irs free state filing The property must meet the performance and quality standards, if any, prescribed by Income Tax Regulations in effect at the time you get the property. Irs free state filing   For periods before February 14, 2008, energy property does not include any property that is public utility property as defined by section 46(f)(5) of the Internal Revenue Code (as in effect on November 4, 1990). Irs free state filing How Much Can You Deduct? Your section 179 deduction is generally the cost of the qualifying property. Irs free state filing However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Irs free state filing These limits apply to each taxpayer, not to each business. Irs free state filing However, see Married Individuals under Dollar Limits , later. Irs free state filing For a passenger automobile, the total section 179 deduction and depreciation deduction are limited. Irs free state filing See Do the Passenger Automobile Limits Apply in chapter 5 . Irs free state filing If you deduct only part of the cost of qualifying property as a section 179 deduction, you can generally depreciate the cost you do not deduct. Irs free state filing Trade-in of other property. Irs free state filing   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 deduction includes only the cash you paid. Irs free state filing Example. Irs free state filing Silver Leaf, a retail bakery, traded two ovens having a total adjusted basis of $680 for a new oven costing $1,320. Irs free state filing They received an $800 trade-in allowance for the old ovens and paid $520 in cash for the new oven. Irs free state filing The bakery also traded a used van with an adjusted basis of $4,500 for a new van costing $9,000. Irs free state filing They received a $4,800 trade-in allowance on the used van and paid $4,200 in cash for the new van. Irs free state filing Only the portion of the new property's basis paid by cash qualifies for the section 179 deduction. Irs free state filing Therefore, Silver Leaf's qualifying costs for the section 179 deduction are $4,720 ($520 + $4,200). Irs free state filing Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 generally cannot be more than $500,000. Irs free state filing If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 deduction among the items in any way, as long as the total deduction is not more than $500,000. Irs free state filing You do not have to claim the full $500,000. Irs free state filing Qualified real property (described earlier) that you elected to treat as section 179 real property is limited to $250,000 of the maximum deduction of $500,000 for 2013. Irs free state filing The amount you can elect to deduct is not affected if you place qualifying property in service in a short tax year or if you place qualifying property in service for only a part of a 12-month tax year. Irs free state filing After you apply the dollar limit to determine a tentative deduction, you must apply the business income limit (described later) to determine your actual section 179 deduction. Irs free state filing Example. Irs free state filing In 2013, you bought and placed in service $500,000 in machinery and a $25,000 circular saw for your business. Irs free state filing You elect to deduct $475,000 for the machinery and the entire $25,000 for the saw, a total of $500,000. Irs free state filing This is the maximum amount you can deduct. Irs free state filing Your $25,000 deduction for the saw completely recovered its cost. Irs free state filing Your basis for depreciation is zero. Irs free state filing The basis for depreciation of your machinery is $25,000. Irs free state filing You figure this by subtracting your $475,000 section 179 deduction for the machinery from the $500,000 cost of the machinery. Irs free state filing Situations affecting dollar limit. Irs free state filing   Under certain circumstances, the general dollar limits on the section 179 deduction may be reduced or increased or there may be additional dollar limits. Irs free state filing The general dollar limit is affected by any of the following situations. Irs free state filing The cost of your section 179 property placed in service exceeds $2,000,000. Irs free state filing Your business is an enterprise zone business. Irs free state filing You placed in service a sport utility or certain other vehicles. Irs free state filing You are married filing a joint or separate return. Irs free state filing Costs exceeding $2,000,000 If the cost of your qualifying section 179 property placed in service in a year is more than $2,000,000, you generally must reduce the dollar limit (but not below zero) by the amount of cost over $2,000,000. Irs free state filing If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 deduction. Irs free state filing Example. Irs free state filing In 2013, Jane Ash placed in service machinery costing $2,100,000. Irs free state filing This cost is $100,000 more than $2,000,000, so she must reduce her dollar limit to $400,000 ($500,000 − $100,000). Irs free state filing Enterprise Zone Businesses An increased section 179 deduction is available to enterprise zone businesses for qualified zone property placed in service during the tax year, in an empowerment zone. Irs free state filing For more information including the definitions of “enterprise zone business” and “qualified zone property,” see sections 1397A, 1397C, and 1397D of the Internal Revenue Code. Irs free state filing The dollar limit on the section 179 deduction is increased by the smaller of: $35,000, or The cost of section 179 property that is also qualified zone property placed in service before January 1, 2014 (including such property placed in service by your spouse, even if you are filing a separate return). Irs free state filing Note. Irs free state filing   You take into account only 50% (instead of 100%) of the cost of qualified zone property placed in service in a year when figuring the reduced dollar limit for costs exceeding $2,000,000 (explained earlier). Irs free state filing Sport Utility and Certain Other Vehicles You cannot elect to expense more than $25,000 of the cost of any heavy sport utility vehicle (SUV) and certain other vehicles placed in service during the tax year. Irs free state filing This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, or highways, that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Irs free state filing However, the $25,000 limit does not apply to any vehicle: Designed to seat more than nine passengers behind the driver's seat, Equipped with a cargo area (either open or enclosed by a cap) of at least six feet in interior length that is not readily accessible from the passenger compartment, or That has an integral enclosure fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield. Irs free state filing Married Individuals If you are married, how you figure your section 179 deduction depends on whether you file jointly or separately. Irs free state filing If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Irs free state filing If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2,000,000. Irs free state filing You must allocate the dollar limit (after any reduction) between you equally, unless you both elect a different allocation. Irs free state filing If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Irs free state filing Example. Irs free state filing Jack Elm is married. Irs free state filing He and his wife file separate returns. Irs free state filing Jack bought and placed in service $2,000,000 of qualified farm machinery in 2013. Irs free state filing His wife has her own business, and she bought and placed in service $30,000 of qualified business equipment. Irs free state filing Their combined dollar limit is $470,000. Irs free state filing This is because they must figure the limit as if they were one taxpayer. Irs free state filing They reduce the $500,000 dollar limit by the $30,000 excess of their costs over $2,000,000. Irs free state filing They elect to allocate the $470,000 dollar limit as follows. Irs free state filing $446,500 ($470,000 x 95%) to Mr. Irs free state filing Elm's machinery. Irs free state filing $23,500 ($470,000 x 5%) to Mrs. Irs free state filing Elm's equipment. Irs free state filing If they did not make an election to allocate their costs in this way, they would have to allocate $235,000 ($470,000 × 50%) to each of them. Irs free state filing Joint return after filing separate returns. Irs free state filing   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Irs free state filing The dollar limit (after reduction for any cost of section 179 property over $2,000,000). Irs free state filing The total cost of section 179 property you and your spouse elected to expense on your separate returns. Irs free state filing Example. Irs free state filing The facts are the same as in the previous example except that Jack elected to deduct $30,000 of the cost of section 179 property on his separate return and his wife elected to deduct $2,000. Irs free state filing After the due date of their returns, they file a joint return. Irs free state filing Their dollar limit for the section 179 deduction is $32,000. Irs free state filing This is the lesser of the following amounts. Irs free state filing $470,000—The dollar limit less the cost of section 179 property over $2,000,000. Irs free state filing $32,000—The total they elected to expense on their separate returns. Irs free state filing Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Irs free state filing Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Irs free state filing Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Irs free state filing Special rules apply to a 2013 deduction of qualified section 179 real property that is disallowed because of the business income limit. Irs free state filing See Special rules for qualified section 179 property under Carryover of disallowed deduction, later. Irs free state filing Taxable income. Irs free state filing   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Irs free state filing Net income or loss from a trade or business includes the following items. Irs free state filing Section 1231 gains (or losses). Irs free state filing Interest from working capital of your trade or business. Irs free state filing Wages, salaries, tips, or other pay earned as an employee. Irs free state filing For information about section 1231 gains and losses, see chapter 3 in Publication 544. Irs free state filing   In addition, figure taxable income without regard to any of the following. Irs free state filing The section 179 deduction. Irs free state filing The self-employment tax deduction. Irs free state filing Any net operating loss carryback or carryforward. Irs free state filing Any unreimbursed employee business expenses. Irs free state filing Two different taxable income limits. Irs free state filing   In addition to the business income limit for your section 179 deduction, you may have a taxable income limit for some other deduction. Irs free state filing You may have to figure the limit for this other deduction taking into account the section 179 deduction. Irs free state filing If so, complete the following steps. Irs free state filing Step Action 1 Figure taxable income without the section 179 deduction or the other deduction. Irs free state filing 2 Figure a hypothetical section 179 deduction using the taxable income figured in Step 1. Irs free state filing 3 Subtract the hypothetical section 179 deduction figured in Step 2 from the taxable income figured in Step 1. Irs free state filing 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Irs free state filing 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in Step 1. Irs free state filing 6 Figure your actual section 179 deduction using the taxable income figured in Step 5. Irs free state filing 7 Subtract your actual section 179 deduction figured in Step 6 from the taxable income figured in Step 1. Irs free state filing 8 Figure your actual other deduction using the taxable income figured in Step 7. Irs free state filing Example. Irs free state filing On February 1, 2013, the XYZ corporation purchased and placed in service qualifying section 179 property that cost $500,000. Irs free state filing It elects to expense the entire $500,000 cost under section 179. Irs free state filing In June, the corporation gave a charitable contribution of $10,000. Irs free state filing A corporation's limit on charitable contributions is figured after subtracting any section 179 deduction. Irs free state filing The business income limit for the section 179 deduction is figured after subtracting any allowable charitable contributions. Irs free state filing XYZ's taxable income figured without the section 179 deduction or the deduction for charitable contributions is $520,000. Irs free state filing XYZ figures its section 179 deduction and its deduction for charitable contributions as follows. Irs free state filing Step 1– Taxable income figured without either deduction is $520,000. Irs free state filing Step 2– Using $520,000 as taxable income, XYZ's hypothetical section 179 deduction is $500,000. Irs free state filing Step 3– $20,000 ($520,000 − $500,000). Irs free state filing Step 4– Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Irs free state filing Step 5– $518,000 ($520,000 − $2,000). Irs free state filing Step 6– Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 deduction. Irs free state filing Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 deduction. Irs free state filing Step 7– $20,000 ($520,000 − $500,000). Irs free state filing Step 8– Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Irs free state filing Carryover of disallowed deduction. Irs free state filing   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Irs free state filing This disallowed deduction amount is shown on line 13 of Form 4562. Irs free state filing You use the amount you carry over to determine your section 179 deduction in the next year. Irs free state filing Enter that amount on line 10 of your Form 4562 for the next year. Irs free state filing   If you place more than one property in service in a year, you can select the properties for which all or a part of the costs will be carried forward. Irs free state filing Your selections must be shown in your books and records. Irs free state filing For this purpose, treat section 179 costs allocated from a partnership or an S corporation as one item of section 179 property. Irs free state filing If you do not make a selection, the total carryover will be allocated equally among the properties you elected to expense for the year. Irs free state filing   If costs from more than one year are carried forward to a subsequent year in which only part of the total carryover can be deducted, you must deduct the costs being carried forward from the earliest year first. Irs free state filing Special rules for qualified section 179 real property. Irs free state filing   You can carry over to 2013 a 2012 deduction attributable to qualified section 179 real property that you elected to expense but were unable to take because of the business income limitation. Irs free state filing Any such 2012 carryover amounts that are not deducted in 2013, plus any 2013 disallowed section 179 expense deductions attributable to qualified real property, are not carried over to 2014. Irs free state filing Instead these amounts are treated as property placed in service on the first day of 2013 for purposes of computing depreciation (including the special depreciation allowance, if applicable). Irs free state filing See section 179(f) of the Internal Revenue Code and Notice 2013-59 for more information. Irs free state filing If there is a sale or other disposition of your property (including a transfer at death) before you can use the full amount of any outstanding carryover of your disallowed section 179 deduction, neither you nor the new owner can deduct any of the unused amount. Irs free state filing Instead, you must add it back to the property's basis. Irs free state filing Partnerships and Partners The section 179 deduction limits apply both to the partnership and to each partner. Irs free state filing The partnership determines its section 179 deduction subject to the limits. Irs free state filing It then allocates the deduction among its partners. Irs free state filing Each partner adds the amount allocated from partnerships (shown on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Irs free state filing ) to his or her nonpartnership section 179 costs and then applies the dollar limit to this total. Irs free state filing To determine any reduction in the dollar limit for costs over $2,000,000, the partner does not include any of the cost of section 179 property placed in service by the partnership. Irs free state filing After the dollar limit (reduced for any nonpartnership section 179 costs over $2,000,000) is applied, any remaining cost of the partnership and nonpartnership section 179 property is subject to the business income limit. Irs free state filing Partnership's taxable income. Irs free state filing   For purposes of the business income limit, figure the partnership's taxable income by adding together the net income and losses from all trades or businesses actively conducted by the partnership during the year. Irs free state filing See the Instructions for Form 1065 for information on how to figure partnership net income (or loss). Irs free state filing However, figure taxable income without regard to credits, tax-exempt income, the section 179 deduction, and guaranteed payments under section 707(c) of the Internal Revenue Code. Irs free state filing Partner's share of partnership's taxable income. Irs free state filing   For purposes of the business income limit, the taxable income of a partner engaged in the active conduct of one or more of a partnership's trades or businesses includes his or her allocable share of taxable income derived from the partnership's active conduct of any trade or business. Irs free state filing Example. Irs free state filing In 2013, Beech Partnership placed in service section 179 property with a total cost of $2,025,000. Irs free state filing The partnership must reduce its dollar limit by $25,000 ($2,025,000 − $2,000,000). Irs free state filing Its maximum section 179 deduction is $475,000 ($500,000 − $25,000), and it elects to expense that amount. Irs free state filing The partnership's taxable income from the active conduct of all its trades or businesses for the year was $600,000, so it can deduct the full $475,000. Irs free state filing It allocates $40,000 of its section 179 deduction and $50,000 of its taxable income to Dean, one of its partners. Irs free state filing In addition to being a partner in Beech Partnership, Dean is also a partner in the Cedar Partnership, which allocated to him a $30,000 section 179 deduction and $35,000 of its taxable income from the active conduct of its business. Irs free state filing He also conducts a business as a sole proprietor and, in 2013, placed in service in that business qualifying section 179 property costing $55,000. Irs free state filing He had a net loss of $5,000 from that business for the year. Irs free state filing Dean does not have to include section 179 partnership costs to figure any reduction in his dollar limit, so his total section 179 costs for the year are not more than $2,000,000 and his dollar limit is not reduced. Irs free state filing His maximum section 179 deduction is $500,000. Irs free state filing He elects to expense all of the $70,000 in section 179 deductions allocated from the partnerships ($40,000 from Beech Partnership plus $30,000 from Cedar Partnership), plus $55,000 of his sole proprietorship's section 179 costs, and notes that information in his books and records. Irs free state filing However, his deduction is limited to his business taxable income of $80,000 ($50,000 from Beech Partnership, plus $35,000 from Cedar Partnership minus $5,000 loss from his sole proprietorship). Irs free state filing He carries over $45,000 ($125,000 − $80,000) of the elected section 179 costs to 2014. Irs free state filing He allocates the carryover amount to the cost of section 179 property placed in service in his sole proprietorship, and notes that allocation in his books and records. Irs free state filing Different tax years. Irs free state filing   For purposes of the business income limit, if the partner's tax year and that of the partnership differ, the partner's share of the partnership's taxable income for a tax year is generally the partner's distributive share for the partnership tax year that ends with or within the partner's tax year. Irs free state filing Example. Irs free state filing John and James Oak are equal partners in Oak Partnership. Irs free state filing Oak Partnership uses a tax year ending January 31. Irs free state filing John and James both use a tax year ending December 31. Irs free state filing For its tax year ending January 31, 2013, Oak Partnership's taxable income from the active conduct of its business is $80,000, of which $70,000 was earned during 2012. Irs free state filing John and James each include $40,000 (each partner's entire share) of partnership taxable income in computing their business income limit for the 2013 tax year. Irs free state filing Adjustment of partner's basis in partnership. Irs free state filing   A partner must reduce the basis of his or her partnership interest by the total amount of section 179 expenses allocated from the partnership even if the partner cannot currently deduct the total amount. Irs free state filing If the partner disposes of his or her partnership interest, the partner's basis for determining gain or loss is increased by any outstanding carryover of disallowed section 179 expenses allocated from the partnership. Irs free state filing Adjustment of partnership's basis in section 179 property. Irs free state filing   The basis of a partnership's section 179 property must be reduced by the section 179 deduction elected by the partnership. Irs free state filing This reduction of basis must be made even if a partner cannot deduct all or part of the section 179 deduction allocated to that partner by the partnership because of the limits. Irs free state filing S Corporations Generally, the rules that apply to a partnership and its partners also apply to an S corporation and its shareholders. Irs free state filing The deduction limits apply to an S corporation and to each shareholder. Irs free state filing The S corporation allocates its deduction to the shareholders who then take their section 179 deduction subject to the limits. Irs free state filing Figuring taxable income for an S corporation. Irs free state filing   To figure taxable income (or loss) from the active conduct by an S corporation of any trade or business, you total the net income and losses from all trades or businesses actively conducted by the S corporation during the year. Irs free state filing   To figure the net income (or loss) from a trade or business actively conducted by an S corporation, you take into account the items from that trade or business that are passed through to the shareholders and used in determining each shareholder's tax liability. Irs free state filing However, you do not take into account any credits, tax-exempt income, the section 179 deduction, and deductions for compensation paid to shareholder-employees. Irs free state filing For purposes of determining the total amount of S corporation items, treat deductions and losses as negative income. Irs free state filing In figuring the taxable income of an S corporation, disregard any limits on the amount of an S corporation item that must be taken into account when figuring a shareholder's taxable income. Irs free state filing Other Corporations A corporation's taxable income from its active conduct of any trade or business is its taxable income figured with the following changes. Irs free state filing It is figured before deducting the section 179 deduction, any net operating loss deduction, and special deductions (as reported on the corporation's income tax return). Irs free state filing It is adjusted for items of income or deduction included in the amount figured in 1, above, not derived from a trade or business actively conducted by the corporation during the tax year. Irs free state filing How Do You Elect the Deduction? You elect to take the section 179 deduction by completing Part I of Form 4562. Irs free state filing If you elect the deduction for listed property (described in chapter 5), complete Part V of Form 4562 before completing Part I. Irs free state filing For property placed in service in 2013, file Form 4562 with either of the following. Irs free state filing Your original 2013 tax return, whether or not you file it timely. Irs free state filing An amended return for 2013 filed within the time prescribed by law. Irs free state filing An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Irs free state filing The amended return must also include any resulting adjustments to taxable income. Irs free state filing You must keep records that show the specific identification of each piece of qualifying section 179 property. Irs free state filing These records must show how you acquired the property, the person you acquired it from, and when you placed it in service. Irs free state filing Election for certain qualified section 179 real property. Irs free state filing   You can elect to expense certain qualified real property that you placed in service as section 179 property for tax years beginning in 2013. Irs free state filing If you elect to treat this property as section 179 property, you must elect the application of the special rules for qualified real property described in section 179(f) of the Internal Revenue Code. Irs free state filing   To make the election, attach a statement indicating you are “electing the application of section 179(f) of the Internal Revenue Code” with either of the following. Irs free state filing Your original 2013 tax return, whether or not you file it timely. Irs free state filing An amended return for 2013 filed within the time prescribed by law. Irs free state filing The amended return must also include any adjustments to taxable income. Irs free state filing   The statement should indicate your election to expense certain qualified real property under section 179(f) on your return. Irs free state filing It must specify one or more of the three types of qualified property (described under Qualified real property ) to which the election applies, the cost of each such type, and the portion of the cost of each such property to be taken into account. Irs free state filing Also, report this on line 6 of Form 4562. Irs free state filing    The maximum section 179 expense deduction that can be taken for qualified section 179 real property is limited to $250,000. Irs free state filing Revoking an election. Irs free state filing   An election (or any specification made in the election) to take a section 179 deduction for 2013 can be revoked without IRS approval by filing an amended return. Irs free state filing The amended return must be filed within the time prescribed by law. Irs free state filing The amended return must also include any resulting adjustments to taxable income. Irs free state filing Once made, the revocation is irrevocable. Irs free state filing When Must You Recapture the Deduction? You may have to recapture the section 179 deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Irs free state filing In the year the business use drops to 50% or less, you include the recapture amount as ordinary income in Part IV of Form 4797. Irs free state filing You also increase the basis of the property by the recapture amount. Irs free state filing Recovery periods for property are discussed under Which Recovery Period Applies in chapter 4 . Irs free state filing If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Irs free state filing Instead, use the rules for recapturing depreciation explained in chapter 3 of Publication 544 under Section 1245 Property. Irs free state filing For qualified real property (described earlier), see Notice 2013-59 for determining the portion of the gain that is attributable to section 1245 property upon the sale or other disposition of qualified real property. Irs free state filing If the property is listed property (described in chapter 5 ), do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Irs free state filing Instead, use the rules for recapturing excess depreciation in chapter 5 under What Is the Business-Use Requirement. Irs free state filing Figuring the recapture amount. Irs free state filing   To figure the amount to recapture, take the following steps. Irs free state filing Figure the depreciation that would have been allowable on the section 179 deduction you claimed. Irs free state filing Begin with the year you placed the property in service and include the year of recapture. Irs free state filing Subtract the depreciation figured in (1) from the section 179 deduction you claimed. Irs free state filing The result is the amount you must recapture. Irs free state filing Example. Irs free state filing In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Irs free state filing The property is not listed property. Irs free state filing The property is 3-year property. Irs free state filing He elected a $5,000 section 179 deduction for the property and also elected not to claim a special depreciation allowance. Irs free state filing He used the property only for business in 2011 and 2012. Irs free state filing In 2013, he used the property 40% for business and 60% for personal use. Irs free state filing He figures his recapture amount as follows. Irs free state filing Section 179 deduction claimed (2011) $5,000. Irs free state filing 00 Minus: Allowable depreciation using Table A-1 (instead of section 179 deduction):   2011 $1,666. Irs free state filing 50   2012 2,222. Irs free state filing 50   2013 ($740. Irs free state filing 50 × 40% (business)) 296. Irs free state filing 20 4,185. Irs free state filing 20 2013 — Recapture amount $ 814. Irs free state filing 80 Paul must include $814. Irs free state filing 80 in income for 2013. Irs free state filing If any qualified zone property placed in service during the year ceases to be used in an empowerment zone by an enterprise zone business in a later year, the benefit of the increased section 179 deduction must be reported as other income on your return. Irs free state filing Prev  Up  Next   Home   More Online Publications
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IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

IR-2014-16, Feb. 19, 2014

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

"Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2014:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Pervasive Telephone Scams

The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.

These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov.  Please add "IRS Telephone Scam" to the comments of your complaint.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.

False Promises of “Free Money” from Inflated Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.

The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, view IRS Fact Sheet 2014-5, IRS Offers Advice on How to Choose a Tax Preparer.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False Income, Expenses or Exemptions

Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

Those who promote or adopt frivolous positions risk a variety of penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty.  The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.   

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.  Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

Falsely Claiming Zero Wages or Using False Form 1099

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers).  Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability.  The promoters of abusive tax schemes often employ financial instruments in their schemes.  However, the instruments are used for improper purposes including the facilitation of tax evasion.

The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?

Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.

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Page Last Reviewed or Updated: 21-Feb-2014

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