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My Free Tax

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My free tax 2. My free tax   Source of Income Table of Contents Introduction Topics - This chapter discusses: Resident Aliens Nonresident AliensInterest Income Dividends Guarantee of Indebtedness Personal Services Transportation Income Scholarships, Grants, Prizes, and Awards Pensions and Annuities Rents or Royalties Real Property Personal Property Community Income Introduction After you have determined your alien status, you must determine the source of your income. My free tax This chapter will help you determine the source of different types of income you may receive during the tax year. My free tax This chapter also discusses special rules for married individuals who are domiciled in a country with community property laws. My free tax Topics - This chapter discusses: Income source rules, and Community income. My free tax Resident Aliens A resident alien's income is generally subject to tax in the same manner as a U. My free tax S. My free tax citizen. My free tax If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U. My free tax S. My free tax tax return. My free tax You must report these amounts from sources within and outside the United States. My free tax Nonresident Aliens A nonresident alien usually is subject to U. My free tax S. My free tax income tax only on U. My free tax S. My free tax source income. My free tax Under limited circumstances, certain foreign source income is subject to U. My free tax S. My free tax tax. My free tax See Foreign Income in chapter 4. My free tax The general rules for determining U. My free tax S. My free tax source income that apply to most nonresident aliens are shown in Table 2-1. My free tax The following discussions cover the general rules as well as the exceptions to these rules. My free tax Not all items of U. My free tax S. My free tax source income are taxable. My free tax See chapter 3. My free tax Interest Income Generally, U. My free tax S. My free tax source interest income includes the following items. My free tax Interest on bonds, notes, or other interest-bearing obligations of U. My free tax S. My free tax residents or domestic corporations. My free tax Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U. My free tax S. My free tax trade or business at any time during the tax year. My free tax Original issue discount. My free tax Interest from a state, the District of Columbia, or the U. My free tax S. My free tax Government. My free tax The place or manner of payment is immaterial in determining the source of the income. My free tax A substitute interest payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as the interest on the transferred security. My free tax Exceptions. My free tax   U. My free tax S. My free tax source interest income does not include the following items. My free tax Interest paid by a resident alien or a domestic corporation on obligations issued before August 10, 2010, if for the 3-year period ending with the close of the payer's tax year preceding the interest payment, at least 80% of the payer's total gross income: Is from sources outside the United States, and Is attributable to the active conduct of a trade or business by the individual or corporation in a foreign country or a U. My free tax S. My free tax possession. My free tax However, the interest will be considered U. My free tax S. My free tax source interest income if either of the following apply. My free tax The recipient of the interest is related to the resident alien or domestic corporation. My free tax See section 954(d)(3) for the definition of related person. My free tax The terms of the obligation are significantly modified after August 9, 2010. My free tax Any extension of the term of the obligation is considered a significant modification. My free tax Interest paid by a foreign branch of a domestic corporation or a domestic partnership on deposits or withdrawable accounts with mutual savings banks, cooperative banks, credit unions, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under federal or state law if the interest paid or credited can be deducted by the association. My free tax Interest on deposits with a foreign branch of a domestic corporation or domestic partnership, but only if the branch is in the commercial banking business. My free tax Dividends In most cases, dividend income received from domestic corporations is U. My free tax S. My free tax source income. My free tax Dividend income from foreign corporations is usually foreign source income. My free tax Exceptions to both of these rules are discussed below. My free tax A substitute dividend payment made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction is sourced in the same manner as a distribution on the transferred security. My free tax Dividend equivalent payments. My free tax   U. My free tax S. My free tax source dividends also include all dividend equivalent payments. My free tax Dividend equivalent payments include substitute dividends, payments made pursuant to a specified notional principal contract, and all similar payments that, directly or indirectly, are contingent on or determined by reference to, the payment of a dividend from U. My free tax S. My free tax sources. My free tax    The Internal Revenue Service has issued final regulations that would affect the treatment of dividend equivalent payments and specified notional principal contracts. My free tax You can view this regulation at www. My free tax irs. My free tax gov/irb/2013-52_IRB/ar08. My free tax html. My free tax First exception. My free tax   Dividends received from a domestic corporation are not U. My free tax S. My free tax source income if the corporation elects to take the American Samoa economic development credit. My free tax Second exception. My free tax   Part of the dividends received from a foreign corporation is U. My free tax S. My free tax source income if 25% or more of its total gross income for the 3-year period ending with the close of its tax year preceding the declaration of dividends was effectively connected with a trade or business in the United States. My free tax If the corporation was formed less than 3 years before the declaration, use its total gross income from the time it was formed. My free tax Determine the part that is U. My free tax S. My free tax source income by multiplying the dividend by the following fraction. My free tax   Foreign corporation's gross income connected with a U. My free tax S. My free tax trade or business for the 3-year period     Foreign corporation's gross income from all sources for that period   Guarantee of Indebtedness Certain amounts received directly or indirectly, for the provision of a guarantee of indebtedness issued after September 27, 2010, are U. My free tax S. My free tax source income. My free tax They must be paid by a noncorporate resident or U. My free tax S. My free tax corporation or by any foreign person if the amounts are effectively connected with the conduct of a U. My free tax S. My free tax trade or business. My free tax For more information, see Internal Revenue Code sections 861(a)(9) and 862(a)(9). My free tax Personal Services All wages and any other compensation for services performed in the United States are considered to be from sources in the United States. My free tax The only exceptions to this rule are discussed in chapter 3 under Employees of foreign persons, organizations, or offices, and under Crew members. My free tax If you are an employee and receive compensation for labor or personal services performed both inside and outside the United States, special rules apply in determining the source of the compensation. My free tax Compensation (other than certain fringe benefits) is sourced on a time basis. My free tax Certain fringe benefits (such as housing and education) are sourced on a geographical basis. My free tax Or, you may be permitted to use an alternative basis to determine the source of compensation. My free tax See Alternative Basis , later. My free tax Multi-level marketing. My free tax   Certain companies sell products through a multi-level marketing arrangement, such that an upper-tier distributor, who has sponsored a lower-tier distributor, is entitled to a payment from the company based on certain activities of that lower-tier distributor. My free tax Generally, depending on the facts, payments from such multi-level marketing companies to independent (non-employee) distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have sponsored (lower-tier distributors) constitute income for the performance of personal services in recruiting, training, and supporting the lower-tier distributors. My free tax The source of such income is generally based on where the services of the upper-tier distributor are performed, and may, depending on the facts, be considered multi-year compensation, with the source of income determined over the period to which such compensation is attributable. My free tax Self-employed individuals. My free tax   If you are self-employed, you determine the source of compensation for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. My free tax In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. My free tax Time Basis Use a time basis to figure your U. My free tax S. My free tax source compensation (other than the fringe benefits discussed later). My free tax Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed services in the United States during the year     Total number of days you performed services during the year   You can use a unit of time less than a day in the above fraction, if appropriate. My free tax The time period for which the compensation is made does not have to be a year. My free tax Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. My free tax Example 1. My free tax Christina Brooks, a resident of the Netherlands, worked 240 days for a U. My free tax S. My free tax company during the tax year. My free tax She received $80,000 in compensation. My free tax None of it was for fringe benefits. My free tax Christina performed services in the United States for 60 days and performed services in the Netherlands for 180 days. My free tax Using the time basis for determining the source of compensation, $20,000 ($80,000 × 60/240) is her U. My free tax S. My free tax source income. My free tax Example 2. My free tax Rob Waters, a resident of South Africa, is employed by a corporation. My free tax His annual salary is $100,000. My free tax None of it is for fringe benefits. My free tax During the first quarter of the year he worked entirely within the United States. My free tax On April 1, Rob was transferred to Singapore for the remainder of the year. My free tax Rob is able to establish that the first quarter of the year and the last 3 quarters of the year are two separate, distinct, and continuous periods of time. My free tax Accordingly, $25,000 of Rob's annual salary is attributable to the first quarter of the year (. My free tax 25 × $100,000). My free tax All of it is U. My free tax S. My free tax source income because he worked entirely within the United States during that quarter. My free tax The remaining $75,000 is attributable to the last three quarters of the year. My free tax During those quarters, he worked 150 days in Singapore and 30 days in the United States. My free tax His periodic performance of services in the United States did not result in distinct, separate, and continuous periods of time. My free tax Of this $75,000, $12,500 ($75,000 × 30/180) is U. My free tax S. My free tax source income. My free tax Multi-year compensation. My free tax   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. My free tax Multi-year compensation is compensation that is included in your income in one tax year but that is attributable to a period that includes two or more tax years. My free tax   You determine the period to which the compensation is attributable based on the facts and circumstances of your case. My free tax For example, an amount of compensation that specifically relates to a period of time that includes several calendar years is attributable to the entire multi-year period. My free tax   The amount of compensation treated as from U. My free tax S. My free tax sources is figured by multiplying the total multi-year compensation by a fraction. My free tax The numerator of the fraction is the number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in the United States in connection with the project. My free tax The denominator of the fraction is the total number of days (or unit of time less than a day, if appropriate) that you performed labor or personal services in connection with the project. My free tax Geographical Basis Compensation you receive as an employee in the form of the following fringe benefits is sourced on a geographical basis. My free tax Housing. My free tax Education. My free tax Local transportation. My free tax Tax reimbursement. My free tax Hazardous or hardship duty pay as defined in Regulations section 1. My free tax 861-4(b)(2)(ii)(D)(5). My free tax Moving expense reimbursement. My free tax The amount of fringe benefits must be reasonable and you must substantiate them by adequate records or by sufficient evidence. My free tax Principal place of work. My free tax   The above fringe benefits, except for tax reimbursement and hazardous or hardship duty pay, are sourced based on your principal place of work. My free tax Your principal place of work is usually the place where you spend most of your working time. My free tax This could be your office, plant, store, shop, or other location. My free tax If there is no one place where you spend most of your working time, your main job location is the place where your work is centered, such as where you report for work or are otherwise required to “base” your work. My free tax   If you have more than one job at any time, your main job location depends on the facts in each case. My free tax The more important factors to be considered are: The total time you spend at each place, The amount of work you do at each place, and How much money you earn at each place. My free tax Housing. My free tax   The source of a housing fringe benefit is determined based on the location of your principal place of work. My free tax A housing fringe benefit includes payments to you or on your behalf (and your family's if your family resides with you) only for the following. My free tax Rent. My free tax Utilities (except telephone charges). My free tax Real and personal property insurance. My free tax Occupancy taxes not deductible under section 164 or 216(a). My free tax Nonrefundable fees for securing a leasehold. My free tax Rental of furniture and accessories. My free tax Household repairs. My free tax Residential parking. My free tax Fair rental value of housing provided in kind by your employer. My free tax   A housing fringe benefit does not include: Deductible interest and taxes (including deductible interest and taxes of a tenant-stockholder in a cooperative housing corporation), The cost of buying property, including principal payments on a mortgage, The cost of domestic labor (maids, gardeners, etc. My free tax ), Pay television subscriptions, Improvements and other expenses that increase the value or appreciably prolong the life of property, Purchased furniture or accessories, Depreciation or amortization of property or improvements, The value of meals or lodging that you exclude from gross income, or The value of meals or lodging that you deduct as moving expenses. My free tax Education. My free tax   The source of an education fringe benefit for the education expenses of your dependents is determined based on the location of your principal place of work. My free tax An education fringe benefit includes payments only for the following expenses for education at an elementary or secondary school. My free tax Tuition, fees, academic tutoring, special needs services for a special needs student, books, supplies, and other equipment. My free tax Room and board and uniforms that are required or provided by the school in connection with enrollment or attendance. My free tax Local transportation. My free tax   The source of a local transportation fringe benefit is determined based on the location of your principal place of work. My free tax Your local transportation fringe benefit is the amount that you receive as compensation for local transportation for you or your spouse or dependents at the location of your principal place of work. My free tax The amount treated as a local transportation fringe benefit is limited to actual expenses incurred for local transportation and the fair rental value of any employer-provided vehicle used predominantly by you, your spouse, or your dependents for local transportation. My free tax Actual expenses do not include the cost (including interest) of any vehicle purchased by you or on your behalf. My free tax Tax reimbursement. My free tax   The source of a tax reimbursement fringe benefit is determined based on the location of the jurisdiction that imposed the tax for which you are reimbursed. My free tax Moving expense reimbursement. My free tax   The source of a moving expense reimbursement is generally based on the location of your new principal place of work. My free tax However, the source is determined based on the location of your former principal place of work if you provide sufficient evidence that such determination of source is more appropriate under the facts and circumstances of your case. My free tax Sufficient evidence generally requires an agreement between you and your employer, or a written statement of company policy, which is reduced to writing before the move and which is entered into or established to induce you or other employees to move to another country. My free tax The written statement or agreement must state that your employer will reimburse you for moving expenses that you incur to return to your former principal place of work regardless of whether you continue to work for your employer after returning to that location. My free tax It may contain certain conditions upon which the right to reimbursement is determined as long as those conditions set forth standards that are definitely ascertainable and can only be fulfilled prior to, or through completion of, your return move to your former principal place of work. My free tax Alternative Basis If you are an employee, you can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your compensation than the time or geographical basis. My free tax If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your compensation. My free tax Also, if your total compensation from all sources is $250,000 or more, check “Yes” to both questions on line K on page 5 of Form 1040NR, and attach a written statement to your tax return that sets forth all of the following. My free tax Your name and social security number (written across the top of the statement). My free tax The specific compensation income, or the specific fringe benefit, for which you are using the alternative basis. My free tax For each item in (2), the alternative basis of allocation of source used. My free tax For each item in (2), a computation showing how the alternative allocation was computed. My free tax A comparison of the dollar amount of the U. My free tax S. My free tax compensation and foreign compensation sourced under both the alternative basis and the time or geographical basis discussed earlier. My free tax Transportation Income Transportation income is income from the use of a vessel or aircraft or for the performance of services directly related to the use of any vessel or aircraft. My free tax This is true whether the vessel or aircraft is owned, hired, or leased. My free tax The term “vessel or aircraft” includes any container used in connection with a vessel or aircraft. My free tax All income from transportation that begins and ends in the United States is treated as derived from sources in the United States. My free tax If the transportation begins or ends in the United States, 50% of the transportation income is treated as derived from sources in the United States. My free tax For transportation income from personal services, 50% of the income is U. My free tax S. My free tax source income if the transportation is between the United States and a U. My free tax S. My free tax possession. My free tax For nonresident aliens, this only applies to income derived from, or in connection with, an aircraft. My free tax For information on how U. My free tax S. My free tax source transportation income is taxed, see chapter 4. My free tax Scholarships, Grants, Prizes, and Awards Generally, the source of scholarships, fellowship grants, grants, prizes, and awards is the residence of the payer regardless of who actually disburses the funds. My free tax However, see Activities to be performed outside the United States , later. My free tax For example, payments for research or study in the United States made by the United States, a noncorporate U. My free tax S. My free tax resident, or a domestic corporation, are from U. My free tax S. My free tax sources. My free tax Similar payments from a foreign government or foreign corporation are foreign source payments even though the funds may be disbursed through a U. My free tax S. My free tax agent. My free tax Payments made by an entity designated as a public international organization under the International Organizations Immunities Act are from foreign sources. My free tax Activities to be performed outside the United States. My free tax   Scholarships, fellowship grants, targeted grants, and achievement awards received by nonresident aliens for activities performed, or to be performed, outside the United States are not U. My free tax S. My free tax source income. My free tax    These rules do not apply to amounts paid as salary or other compensation for services. My free tax See Personal Services, earlier, for the source rules that apply. My free tax Pensions and Annuities If you receive a pension from a domestic trust for services performed both in and outside the United States, part of the pension payment is from U. My free tax S. My free tax sources. My free tax That part is the amount attributable to earnings of the pension plan and the employer contributions made for services performed in the United States. My free tax This applies whether the distribution is made under a qualified or nonqualified stock bonus, pension, profit-sharing, or annuity plan (whether or not funded). My free tax If you performed services as an employee of the United States, you may receive a distribution from the U. My free tax S. My free tax Government under a plan, such as the Civil Service Retirement System, that is treated as a qualified pension plan. My free tax Your U. My free tax S. My free tax source income is the otherwise taxable amount of the distribution that is attributable to your total U. My free tax S. My free tax Government basic pay other than tax-exempt pay for services performed outside the United States. My free tax Rents or Royalties Your U. My free tax S. My free tax source income includes rent and royalty income received during the tax year from property located in the United States or from any interest in that property. My free tax U. My free tax S. My free tax source income also includes rents or royalties for the use of, or for the privilege of using, in the United States, intangible property such as patents, copyrights, secret processes and formulas, goodwill, trademarks, franchises, and similar property. My free tax Real Property Real property is land and buildings and generally anything built on, growing on, or attached to land. My free tax Gross income from sources in the United States includes gains, profits, and income from the sale or other disposition of real property located in the United States. My free tax Natural resources. My free tax   The income from the sale of products of any farm, mine, oil or gas well, other natural deposit, or timber located in the United States and sold in a foreign country, or located in a foreign country and sold in the United States, is partly from sources in the United States. My free tax For information on determining that part, see section 1. My free tax 863-1(b) of the regulations. My free tax Table 2-1. My free tax Summary of Source Rules for Income of Nonresident Aliens Item of income Factor determining source Salaries, wages, other compensation Where services performed Business income:   Personal services Where services performed Sale of inventory—purchased Where sold Sale of inventory—produced Allocation Interest Residence of payer Dividends Whether a U. My free tax S. My free tax or foreign corporation* Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. My free tax Where property is used Sale of real property Location of property Sale of personal property Seller's tax home (but see Personal Property , later, for exceptions) Pension distributions attributable to contributions Where services were performed that earned the pension Investment earnings on pension contributions Location of pension trust Sale of natural resources Allocation based on fair market value of product at export terminal. My free tax For more information, see section 1. My free tax 863-1(b) of the regulations. My free tax *Exceptions include: a) Dividends paid by a U. My free tax S. My free tax corporation are foreign source if the corporation elects the  American Samoa economic development credit. My free tax  b) Part of a dividend paid by a foreign corporation is U. My free tax S. My free tax source if at least 25% of the  corporation's gross income is effectively connected with a U. My free tax S. My free tax trade or business for the  3 tax years before the year in which the dividends are declared. My free tax Personal Property Personal property is property, such as machinery, equipment, or furniture, that is not real property. My free tax Gain or loss from the sale or exchange of personal property generally has its source in the United States if you have a tax home in the United States. My free tax If you do not have a tax home in the United States, the gain or loss generally is considered to be from sources outside the United States. My free tax Tax home. My free tax   Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. My free tax Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. My free tax If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. My free tax If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. My free tax Inventory property. My free tax   Inventory property is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. My free tax Income from the sale of inventory that you purchased is sourced where the property is sold. My free tax Generally, this is where title to the property passes to the buyer. My free tax For example, income from the sale of inventory in the United States is U. My free tax S. My free tax source income, whether you purchased it in the United States or in a foreign country. My free tax   Income from the sale of inventory property that you produced in the United States and sold outside the United States (or vice versa) is partly from sources in the United States and partly from sources outside the United States. My free tax For information on making this allocation, see section 1. My free tax 863-3 of the regulations. My free tax   These rules apply even if your tax home is not in the United States. My free tax Depreciable property. My free tax   To determine the source of any gain from the sale of depreciable personal property, you must first figure the part of the gain that is not more than the total depreciation adjustments on the property. My free tax You allocate this part of the gain to sources in the United States based on the ratio of U. My free tax S. My free tax depreciation adjustments to total depreciation adjustments. My free tax The rest of this part of the gain is considered to be from sources outside the United States. My free tax   For this purpose, “U. My free tax S. My free tax depreciation adjustments” are the depreciation adjustments to the basis of the property that are allowable in figuring taxable income from U. My free tax S. My free tax sources. My free tax However, if the property is used predominantly in the United States during a tax year, all depreciation deductions allowable for that year are treated as U. My free tax S. My free tax depreciation adjustments. My free tax But there are some exceptions for certain transportation, communications, and other property used internationally. My free tax   Gain from the sale of depreciable property that is more than the total depreciation adjustments on the property is sourced as if the property were inventory property, as discussed above. My free tax   A loss is sourced in the same way as the depreciation deductions were sourced. My free tax However, if the property was used predominantly in the United States, the entire loss reduces U. My free tax S. My free tax source income. My free tax   The basis of property usually means the cost (money plus the fair market value of other property or services) of property you acquire. My free tax Depreciation is an amount deducted to recover the cost or other basis of a trade or business asset. My free tax The amount you can deduct depends on the property's cost, when you began using the property, how long it will take to recover your cost, and which depreciation method you use. My free tax A depreciation deduction is any deduction for depreciation or amortization or any other allowable deduction that treats a capital expenditure as a deductible expense. My free tax Intangible property. My free tax   Intangible property includes patents, copyrights, secret processes or formulas, goodwill, trademarks, trade names, or other like property. My free tax The gain from the sale of amortizable or depreciable intangible property, up to the previously allowable amortization or depreciation deductions, is sourced in the same way as the original deductions were sourced. My free tax This is the same as the source rule for gain from the sale of depreciable property. My free tax See Depreciable property , earlier, for details on how to apply this rule. My free tax   Gain in excess of the amortization or depreciation deductions is sourced in the country where the property is used if the income from the sale is contingent on the productivity, use, or disposition of that property. My free tax If the income is not contingent on the productivity, use, or disposition of the property, the income is sourced according to your tax home as discussed earlier. My free tax If payments for goodwill do not depend on its productivity, use, or disposition, their source is the country in which the goodwill was generated. My free tax Sales through offices or fixed places of business. My free tax   Despite any of the earlier rules, if you do not have a tax home in the United States, but you maintain an office or other fixed place of business in the United States, treat the income from any sale of personal property (including inventory property) that is attributable to that office or place of business as U. My free tax S. My free tax source income. My free tax However, this rule does not apply to sales of inventory property for use, disposition, or consumption outside the United States if your office or other fixed place of business outside the United States materially participated in the sale. My free tax   If you have a tax home in the United States but maintain an office or other fixed place of business outside the United States, income from sales of personal property, other than inventory, depreciable property, or intangibles, that is attributable to that foreign office or place of business may be treated as U. My free tax S. My free tax source income. My free tax The income is treated as U. My free tax S. My free tax source income if an income tax of less than 10% of the income from the sale is paid to a foreign country. My free tax This rule also applies to losses if the foreign country would have imposed an income tax of less than 10% had the sale resulted in a gain. My free tax Community Income If you are married and you or your spouse is subject to the community property laws of a foreign country, a U. My free tax S. My free tax state, or a U. My free tax S. My free tax possession, you generally must follow those laws to determine the income of yourself and your spouse for U. My free tax S. My free tax tax purposes. My free tax But you must disregard certain community property laws if: Both you and your spouse are nonresident aliens, or One of you is a nonresident alien and the other is a U. My free tax S. My free tax citizen or resident and you do not both choose to be treated as U. My free tax S. My free tax residents as explained in chapter 1. My free tax In these cases, you and your spouse must report community income as explained later. My free tax Earned income. My free tax   Earned income of a spouse, other than trade or business income and a partner's distributive share of partnership income, is treated as the income of the spouse whose services produced the income. My free tax That spouse must report all of it on his or her separate return. My free tax Trade or business income. My free tax   Trade or business income, other than a partner's distributive share of partnership income, is treated as the income of the spouse carrying on the trade or business. My free tax That spouse must report all of it on his or her separate return. My free tax Partnership income (or loss). My free tax   A partner's distributive share of partnership income (or loss) is treated as the income (or loss) of the partner. My free tax The partner must report all of it on his or her separate return. My free tax Separate property income. My free tax   Income derived from the separate property of one spouse (and which is not earned income, trade or business income, or partnership distributive share income) is treated as the income of that spouse. My free tax That spouse must report all of it on his or her separate return. My free tax Use the appropriate community property law to determine what is separate property. My free tax Other community income. My free tax   All other community income is treated as provided by the applicable community property laws. My free tax Prev  Up  Next   Home   More Online Publications
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My free tax Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. My free tax 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. My free tax If you are requesting relief for more than three tax years, you must file an additional Form 8857. My free tax The IRS will review your Form 8857 and let you know if you qualify. My free tax A completed Form 8857 is shown later. My free tax When to file Form 8857. My free tax   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. My free tax The following are some of the ways you may become aware of such a liability. My free tax The IRS is examining your tax return and proposing to increase your tax liability. My free tax The IRS sends you a notice. My free tax   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. My free tax (But see the exceptions below for different filing deadlines that apply. My free tax ) For this reason, do not delay filing because you do not have all the documentation. My free tax   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. My free tax 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. My free tax This includes the filing of a proof of claim in a bankruptcy proceeding. My free tax The filing of a suit by the United States against you to collect the joint liability. My free tax 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. My free tax The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. My free tax Exception for equitable relief. My free tax   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. My free tax irs. My free tax gov/irb/2011-32_IRB/ar11. My free tax html) expanding the amount of time to request equitable relief. My free tax 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. My free tax Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. My free tax In certain cases, the 10-year period is suspended. My free tax The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. My free tax See Pub. My free tax 594, The IRS Collection Process, for details. My free tax 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. My free tax 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. My free tax See Pub. My free tax 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. My free tax 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. My free tax Exception for relief based on community property laws. My free tax   If you are requesting relief based on community property laws, a different filing deadline applies. My free tax See Relief from liability arising from community property law discussed later under Community Property Laws . My free tax Form 8857 filed by or on behalf of a decedent. My free tax   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. My free tax An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. My free tax 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. My free tax Situations in which you are not entitled to relief. My free tax   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. My free tax 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. My free tax 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. My free tax You entered into an offer in compromise with the IRS. My free tax You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. My free tax Exception for agreements relating to TEFRA partnership proceedings. My free tax   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. My free tax (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. My free tax ) 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). My free tax Transferee liability not affected by innocent spouse relief provisions. My free tax   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. My free tax 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. My free tax Example. My free tax Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. My free tax Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. My free tax In August 2010, the IRS assessed a deficiency for the 2008 return. My free tax The items causing the deficiency belong to Herb. My free tax Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. My free tax However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. My free tax The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. My free tax There are no exceptions, even for victims of spousal abuse or domestic violence. My free tax We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. My free tax 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. My free tax 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. My free tax If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. My free tax 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. My free tax The IRS sends you a final determination letter regarding your request for relief. My free tax You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. My free tax 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. My free tax The United States Tax Court is an independent judicial body and is not part of the IRS. My free tax You must file a petition with the United States Tax Court in order for it to review your request for relief. My free tax You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. My free tax If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. My free tax 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. My free tax ustaxcourt. My free tax 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. My free tax Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. My free tax Generally, community property laws require you to allocate community income and expenses equally between both spouses. My free tax 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. My free tax 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. My free tax 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. My free tax You did not file a joint return for the tax year. My free tax You did not include the item of community income in gross income. My free tax 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. My free tax Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. My free tax Your spouse's (or former spouse's) distributive share of partnership income. My free tax Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). My free tax Use the appropriate community property law to determine what is separate property. My free tax Any other income that belongs to your spouse (or former spouse) under community property law. My free tax You establish that you did not know of, and had no reason to know of, that community income. My free tax See  Actual Knowledge or Reason To Know , below. My free tax Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. My free tax See Indications of unfairness for liability arising from community property law, later. My free tax Actual knowledge or reason to know. My free tax   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. My free tax Amount of community income unknown. My free tax   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. My free tax Not knowing the specific amount is not a basis for relief. My free tax Reason to know. My free tax   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. My free tax The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. My free tax The financial situation of you and your spouse (or former spouse). My free tax Your educational background and business experience. My free tax 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). My free tax Indications of unfairness for liability arising from community property law. My free tax   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. My free tax   The following are examples of factors the IRS will consider. My free tax Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). My free tax Whether your spouse (or former spouse) deserted you. My free tax Whether you and your spouse have been divorced or separated. My free tax  For other factors see Factors for Determining Whether To Grant Equitable Relief later. My free tax Benefit from omitted item of community income. My free tax   A benefit includes normal support, but does not include de minimis (small) amounts. My free tax 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. My free tax   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. My free tax 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). My free tax How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. My free tax Fill in Form 8857 according to the instructions. My free tax 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. My free tax 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. My free tax 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. My free tax 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. My free tax Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). My free tax However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. My free tax The IRS can collect these amounts from either you or your spouse (or former spouse). My free tax You must meet all of the following conditions to qualify for innocent spouse relief. My free tax You filed a joint return. My free tax There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). My free tax 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). My free tax See Actual Knowledge or Reason To Know, later. My free tax Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. My free tax See Indications of Unfairness for Innocent Spouse Relief , later. My free tax 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. My free tax A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. My free tax 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. My free tax Erroneous Items Erroneous items are either of the following. My free tax Unreported income. My free tax This is any gross income item received by your spouse (or former spouse) that is not reported. My free tax Incorrect deduction, credit, or basis. My free tax This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). My free tax The following are examples of erroneous items. My free tax The expense for which the deduction is taken was never paid or incurred. My free tax 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. My free tax The expense does not qualify as a deductible expense. My free tax For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. My free tax Fines are not deductible. My free tax No factual argument can be made to support the deductibility of the expense. My free tax 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. My free tax 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. My free tax Actual knowledge. My free tax   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. My free tax You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. My free tax For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. My free tax Reason to know. My free tax   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. My free tax You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. My free tax   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. My free tax The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. My free tax The financial situation of you and your spouse (or former spouse). My free tax Your educational background and business experience. My free tax The extent of your participation in the activity that resulted in the erroneous item. My free tax 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. My free tax 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). My free tax Partial relief when a portion of erroneous item is unknown. My free tax   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. My free tax You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. My free tax Example. My free tax At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. My free tax 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. My free tax 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. My free tax The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. My free tax The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. My free tax 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. My free tax The following are examples of factors the IRS will consider. My free tax Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. My free tax Whether your spouse (or former spouse) deserted you. My free tax Whether you and your spouse have been divorced or separated. My free tax Whether you received a benefit on the return from the understated tax. My free tax For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. My free tax Significant benefit. My free tax   A significant benefit is any benefit in excess of normal support. My free tax Normal support depends on your particular circumstances. My free tax 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. My free tax Example. My free tax You receive money from your spouse that is beyond normal support. My free tax The money can be traced to your spouse's lottery winnings that were not reported on your joint return. My free tax You will be considered to have received a significant benefit from that income. My free tax This is true even if your spouse gives you the money several years after he or she received it. My free tax 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). My free tax The understated tax allocated to you is generally the amount you are responsible for. My free tax This type of relief is available only for unpaid liabilities resulting from the understated tax. My free tax Refunds are not allowed. My free tax 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. My free tax 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. My free tax (Under this rule, you are no longer married if you are widowed. My free tax ) 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. My free tax Members of the same household. My free tax   You and your spouse are not members of the same household if you are living apart and are estranged. My free tax However, you and your spouse are considered members of the same household if any of the following conditions are met. My free tax You and your spouse reside in the same dwelling. My free tax 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. My free tax 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. My free tax Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. My free tax Burden of proof. My free tax   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). My free tax You must also establish the basis for allocating the erroneous items. My free tax Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. My free tax The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. My free tax A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. My free tax 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). My free tax For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. My free tax Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. My free tax See Transfers of Property To Avoid Tax , later. My free tax 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. My free tax You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. My free tax 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. My free tax You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. My free tax (This rule applies whether or not there was a receipt of cash. My free tax ) You knew of the facts that made an incorrect deduction or credit unallowable. My free tax 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. My free tax Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. My free tax Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. My free tax 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. My free tax 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. My free tax Neither is your actual knowledge of how the erroneous item was treated on the tax return. My free tax 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. My free tax Example. My free tax Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. My free tax The IRS audited their return and found that Bill did not report $20,000 of self-employment income. My free tax The additional income resulted in a $6,000 understated tax, plus interest and penalties. My free tax After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. My free tax The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. My free tax Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. My free tax 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. My free tax 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. My free tax Factors supporting actual knowledge. My free tax   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. My free tax The following are examples of factors the IRS may use. My free tax Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. My free tax Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. My free tax Exception for spousal abuse or domestic violence. My free tax   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. My free tax   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. My free tax However, you may be required to file a separate return for that tax year. My free tax For more information about duress, see the instructions for Form 8857. My free tax 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. My free tax The increase may not be more than the entire amount of the liability. My free tax 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. My free tax 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. My free tax 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. My free tax 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. My free tax 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. My free tax An underpaid tax is an amount of tax you properly reported on your return but you have not paid. My free tax For example, your joint 2009 return shows that you and your spouse owed $5,000. My free tax You paid $2,000 with the return. My free tax You have an underpaid tax of $3,000. My free tax Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. My free tax You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. My free tax You have an understated tax or an underpaid tax. My free tax You did not pay the tax. My free tax However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. My free tax 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. My free tax See Factors for Determining Whether To Grant Equitable Relief, later. My free tax You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. My free tax A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. My free tax Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. My free tax See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. My free tax You did not file or fail to file your return with the intent to commit fraud. My free tax 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. My free tax If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. My free tax If the item is titled in your name, the item is presumed to be attributable to you. My free tax However, you can rebut this presumption based on the facts and circumstances. My free tax 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. My free tax 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). My free tax 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. My free tax 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. My free tax 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. My free tax The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. My free tax The IRS will consider all factors and weigh them appropriately. My free tax Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. My free tax Whether you are separated (whether legally or not) or divorced from your spouse. My free tax A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. My free tax 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. My free tax Whether you would suffer a significant economic hardship if relief is not granted. My free tax (In other words, you would not be able to pay your reasonable basic living expenses. My free tax ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. My free tax 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. My free tax Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. My free tax (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. My free tax ) 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. My free tax 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. My free tax Knowledge or reason to know. My free tax   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. My free tax   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. My free tax Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. My free tax Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. My free tax This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. My free tax Reason to know. My free tax   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. My free tax Example. My free tax You and your spouse filed a joint 2009 return. My free tax That return showed you owed $10,000. My free tax You had $5,000 of your own money and you took out a loan to pay the other $5,000. My free tax You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. My free tax Without telling you, your spouse took the $5,000 loan and spent it on himself. My free tax You and your spouse were divorced in 2010. My free tax In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. My free tax These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. My free tax 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. My free tax 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. My free tax Whether your spouse (or former spouse) abused you. My free tax Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. My free tax Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . My free tax Not permitted under separation of liability relief. My free tax Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. My free tax Proof Required The IRS will only refund payments you made with your own money. My free tax However, you must provide proof that you made the payments with your own money. My free tax Examples of proof are a copy of your bank statement or a canceled check. My free tax 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. My free tax Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. My free tax Underpaid tax. My free tax   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. My free tax 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. My free tax For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. My free tax   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. My free tax Understated tax. My free tax   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. My free tax 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. My free tax Only installment payments made after the date you filed Form 8857 are eligible for a refund. My free tax   The amount of the refund is subject to the limit discussed next. My free tax Limit on Amount of Refund The amount of your refund is limited. My free tax Read the following chart to find out the limit. My free tax IF you file Form 8857. My free tax . My free tax . My free tax THEN the refund cannot be more than. My free tax . My free tax . My free tax 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. My free tax 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. My free tax Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. My free tax Janie and Joe Boulder filed a joint tax return for 2007. My free tax They claimed one dependency exemption for their son Michael. My free tax Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. My free tax Janie did not know about the award when the return was filed. My free tax They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). My free tax Janie and Joe were divorced on May 13, 2009. My free tax In February 2010, Janie filed her 2009 federal income tax return as head of household. My free tax She expected a refund of $1,203. My free tax 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. My free tax Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. My free tax Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. My free tax Janie believes she meets the third condition. My free tax 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. My free tax Janie believes she meets the fourth condition. My free tax She believes it would be unfair to be held liable for the tax because she did not benefit from the award. My free tax Joe spent it on personal items for his use only. My free tax 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. My free tax In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. My free tax Part I Line 1. My free tax   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. My free tax Line 2. My free tax   She checks the box because she wants a refund. My free tax Note. My free tax 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. My free tax Line 3. My free tax   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. My free tax Line 4. My free tax   She checks the “Yes” box because she filed a joint tax return for tax year 2007. My free tax Line 5. My free tax   She skips this line because she checked the “Yes” box on line 4. My free tax Part II Line 6. My free tax   She enters her name, address, social security number, county, and best daytime phone number. My free tax Part III Line 7. My free tax   She enters Joe's name, address, social security number, and best daytime phone number. My free tax Line 8. My free tax   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. My free tax ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. My free tax Line 9. My free tax   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. My free tax Line 10. My free tax   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. My free tax Line 11. My free tax   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. My free tax Line 12. My free tax   She checks the “Yes” box because she signed the 2007 joint tax return. My free tax Line 13. My free tax   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. My free tax Part IV Line 14. My free tax   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. My free tax ” Line 15. My free tax   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. My free tax She explains this in the space provided. My free tax Line 16. My free tax   She checks the box, “You knew that person had income” because she knew Joe had income from wages. My free tax She also lists Joe's income. My free tax Under “Type of Income” she enters “wages. My free tax ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. My free tax ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. My free tax ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. My free tax Line 17. My free tax   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. My free tax Line 18. My free tax   She checks the “No” box because, when the return was signed, she was not having financial problems. My free tax Line 19. My free tax   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. My free tax She provides additional information in the space provided. My free tax Line 20. My free tax   She checks the “No” box because Joe has never transferred money or property to her. My free tax Part V Line 21. My free tax   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. My free tax Line 22. My free tax   She enters her average monthly income for her entire household. My free tax Line 23. My free tax   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. My free tax Signing and mailing Form 8857. My free tax    Janie signs and dates the form. My free tax She attaches the copy of her divorce decree (not illustrated) required by line 8. My free tax Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. My free tax This image is too large to be displayed in the current screen. My free tax Please click the link to view the image. My free tax Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. My free tax Please click the link to view the image. My free tax Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. My free tax Please click the link to view the image. My free tax Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. My free tax Please click the link to view the image. My free tax Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. My free tax But do not rely on these flowcharts alone. My free tax Also read the earlier discussions. My free tax Figure A. My free tax Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. My free tax "Do You Qualify for Innocent Spouse Relief?" Figure B. My free tax Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. My free tax "Do You Qualify for Separation of Liability Relief?" Figure C. My free tax Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. My free tax Please click the link to view the image. My free tax "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications