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Where Do I Get State Tax Forms

Where do i get state tax forms Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Where do i get state tax forms General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Where do i get state tax forms Several assets. Where do i get state tax forms Special situations. Where do i get state tax forms Schedule D (Form 1040). Where do i get state tax forms Form 4797. Where do i get state tax forms How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Where do i get state tax forms The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Where do i get state tax forms The installment sales method cannot be used for the following. Where do i get state tax forms Sale of inventory. Where do i get state tax forms   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Where do i get state tax forms See Sale of a Business under Other Rules, later. Where do i get state tax forms Dealer sales. Where do i get state tax forms   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Where do i get state tax forms This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Where do i get state tax forms However, the rule does not apply to an installment sale of property used or produced in farming. Where do i get state tax forms Special rule. Where do i get state tax forms   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Where do i get state tax forms For more information, see section 453(l). Where do i get state tax forms Stock or securities. Where do i get state tax forms   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Where do i get state tax forms You must report the entire gain on the sale in the year in which the trade date falls. Where do i get state tax forms Installment obligation. Where do i get state tax forms   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Where do i get state tax forms General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Where do i get state tax forms See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Where do i get state tax forms Sale at a loss. Where do i get state tax forms   If your sale results in a loss, you cannot use the installment method. Where do i get state tax forms If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Where do i get state tax forms Unstated interest. Where do i get state tax forms   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Where do i get state tax forms See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Where do i get state tax forms Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Where do i get state tax forms Each payment on an installment sale usually consists of the following three parts. Where do i get state tax forms Interest income. Where do i get state tax forms Return of your adjusted basis in the property. Where do i get state tax forms Gain on the sale. Where do i get state tax forms In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Where do i get state tax forms You do not include in income the part that is the return of your basis in the property. Where do i get state tax forms Basis is the amount of your investment in the property for installment sale purposes. Where do i get state tax forms Interest Income You must report interest as ordinary income. Where do i get state tax forms Interest is generally not included in a down payment. Where do i get state tax forms However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Where do i get state tax forms Interest provided in the agreement is called stated interest. Where do i get state tax forms If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Where do i get state tax forms See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Where do i get state tax forms Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Where do i get state tax forms A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Where do i get state tax forms Figuring adjusted basis for installment sale purposes. Where do i get state tax forms   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Where do i get state tax forms When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Where do i get state tax forms Worksheet A. Where do i get state tax forms Figuring Adjusted Basis and Gross Profit Percentage 1. Where do i get state tax forms Enter the selling price for the property   2. Where do i get state tax forms Enter your adjusted basis for the property     3. Where do i get state tax forms Enter your selling expenses     4. Where do i get state tax forms Enter any depreciation recapture     5. Where do i get state tax forms Add lines 2, 3, and 4. Where do i get state tax forms  This is your adjusted basis for installment sale purposes   6. Where do i get state tax forms Subtract line 5 from line 1. Where do i get state tax forms If zero or less, enter -0-. Where do i get state tax forms  This is your gross profit     If the amount entered on line 6 is zero, stop here. Where do i get state tax forms You cannot use the installment method. Where do i get state tax forms   7. Where do i get state tax forms Enter the contract price for the property   8. Where do i get state tax forms Divide line 6 by line 7. Where do i get state tax forms This is your gross profit percentage   Selling price. Where do i get state tax forms   The selling price is the total cost of the property to the buyer and includes any of the following. Where do i get state tax forms Any money you are to receive. Where do i get state tax forms The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Where do i get state tax forms Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Where do i get state tax forms Any of your selling expenses the buyer pays. Where do i get state tax forms   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Where do i get state tax forms Adjusted basis for installment sale purposes. Where do i get state tax forms   Your adjusted basis is the total of the following three items. Where do i get state tax forms Adjusted basis. Where do i get state tax forms Selling expenses. Where do i get state tax forms Depreciation recapture. Where do i get state tax forms Adjusted basis. Where do i get state tax forms   Basis is your investment in the property for installment sale purposes. Where do i get state tax forms The way you figure basis depends on how you acquire the property. Where do i get state tax forms The basis of property you buy is generally its cost. Where do i get state tax forms The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Where do i get state tax forms   While you own property, various events may change your original basis. Where do i get state tax forms Some events, such as adding rooms or making permanent improvements, increase basis. Where do i get state tax forms Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Where do i get state tax forms The result is adjusted basis. Where do i get state tax forms   For more information on how to figure basis and adjusted basis, see Publication 551. Where do i get state tax forms For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Where do i get state tax forms Selling expenses. Where do i get state tax forms   Selling expenses relate to the sale of the property. Where do i get state tax forms They include commissions, attorney fees, and any other expenses paid on the sale. Where do i get state tax forms Selling expenses are added to the basis of the sold property. Where do i get state tax forms Depreciation recapture. Where do i get state tax forms   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Where do i get state tax forms See Depreciation Recapture Income under Other Rules, later. Where do i get state tax forms Gross profit. Where do i get state tax forms   Gross profit is the total gain you report on the installment method. Where do i get state tax forms   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Where do i get state tax forms If the property you sold was your home, subtract from the gross profit any gain you can exclude. Where do i get state tax forms See Sale of Your Home , later, under Reporting Installment Sale Income. Where do i get state tax forms Contract price. Where do i get state tax forms   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Where do i get state tax forms Gross profit percentage. Where do i get state tax forms   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Where do i get state tax forms This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Where do i get state tax forms   The gross profit percentage generally remains the same for each payment you receive. Where do i get state tax forms However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Where do i get state tax forms Example. Where do i get state tax forms You sell property at a contract price of $6,000 and your gross profit is $1,500. Where do i get state tax forms Your gross profit percentage is 25% ($1,500 ÷ $6,000). Where do i get state tax forms After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Where do i get state tax forms The remainder (balance) of each payment is the tax-free return of your adjusted basis. Where do i get state tax forms Amount to report as installment sale income. Where do i get state tax forms   Multiply the payments you receive each year (less interest) by the gross profit percentage. Where do i get state tax forms The result is your installment sale income for the tax year. Where do i get state tax forms In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Where do i get state tax forms A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Where do i get state tax forms For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Where do i get state tax forms Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Where do i get state tax forms You then must refigure the gross profit percentage for the remaining payments. Where do i get state tax forms Refigure your gross profit using Worksheet B. Where do i get state tax forms You will spread any remaining gain over future installments. Where do i get state tax forms Worksheet B. Where do i get state tax forms New Gross Profit Percentage — Selling Price Reduced 1. Where do i get state tax forms Enter the reduced selling  price for the property   2. Where do i get state tax forms Enter your adjusted  basis for the  property     3. Where do i get state tax forms Enter your selling  expenses     4. Where do i get state tax forms Enter any depreciation  recapture     5. Where do i get state tax forms Add lines 2, 3, and 4. Where do i get state tax forms   6. Where do i get state tax forms Subtract line 5 from line 1. Where do i get state tax forms  This is your adjusted  gross profit   7. Where do i get state tax forms Enter any installment sale  income reported in  prior year(s)   8. Where do i get state tax forms Subtract line 7 from line 6   9. Where do i get state tax forms Future installments   10. Where do i get state tax forms Divide line 8 by line 9. Where do i get state tax forms  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Where do i get state tax forms Example. Where do i get state tax forms In 2011, you sold land with a basis of $40,000 for $100,000. Where do i get state tax forms Your gross profit was $60,000. Where do i get state tax forms You received a $20,000 down payment and the buyer's note for $80,000. Where do i get state tax forms The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Where do i get state tax forms Your gross profit percentage is 60%. Where do i get state tax forms You reported a gain of $12,000 on each payment received in 2011 and 2012. Where do i get state tax forms In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Where do i get state tax forms The new gross profit percentage, 46. Where do i get state tax forms 67%, is figured on Example—Worksheet B. Where do i get state tax forms You will report a gain of $7,000 (46. Where do i get state tax forms 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Where do i get state tax forms Example — Worksheet B. Where do i get state tax forms New Gross Profit Percentage — Selling Price Reduced 1. Where do i get state tax forms Enter the reduced selling  price for the property 85,000 2. Where do i get state tax forms Enter your adjusted  basis for the  property 40,000   3. Where do i get state tax forms Enter your selling  expenses -0-   4. Where do i get state tax forms Enter any depreciation  recapture -0-   5. Where do i get state tax forms Add lines 2, 3, and 4. Where do i get state tax forms 40,000 6. Where do i get state tax forms Subtract line 5 from line 1. Where do i get state tax forms  This is your adjusted  gross profit 45,000 7. Where do i get state tax forms Enter any installment sale  income reported in  prior year(s) 24,000 8. Where do i get state tax forms Subtract line 7 from line 6 21,000 9. Where do i get state tax forms Future installments 45,000 10. Where do i get state tax forms Divide line 8 by line 9. Where do i get state tax forms  This is your new gross profit percentage* 46. Where do i get state tax forms 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Where do i get state tax forms Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Where do i get state tax forms You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Where do i get state tax forms See Schedule D (Form 1040) and Form 4797 , later. Where do i get state tax forms If the property was your main home, you may be able to exclude part or all of the gain. Where do i get state tax forms See Sale of Your Home , later. Where do i get state tax forms Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Where do i get state tax forms Attach it to your tax return for each year. Where do i get state tax forms Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Where do i get state tax forms Which parts to complete. Where do i get state tax forms   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Where do i get state tax forms Year of sale. Where do i get state tax forms   Complete lines 1 through 4, Part I, and Part II. Where do i get state tax forms If you sold property to a related party during the year, also complete Part III. Where do i get state tax forms Later years. Where do i get state tax forms   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Where do i get state tax forms   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Where do i get state tax forms (After December 31, 1986, the installment method is not available for the sale of marketable securities. Where do i get state tax forms ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Where do i get state tax forms Complete Part III unless you received the final payment during the tax year. Where do i get state tax forms   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Where do i get state tax forms Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Where do i get state tax forms Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Where do i get state tax forms Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Where do i get state tax forms If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Where do i get state tax forms Your gain is long-term if you owned the property for more than 1 year when you sold it. Where do i get state tax forms Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Where do i get state tax forms All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Where do i get state tax forms For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Where do i get state tax forms If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Where do i get state tax forms ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Where do i get state tax forms See Publication 523 for information about excluding the gain. Where do i get state tax forms If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Where do i get state tax forms Seller-financed mortgage. Where do i get state tax forms   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Where do i get state tax forms   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Where do i get state tax forms   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Where do i get state tax forms   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Where do i get state tax forms Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Where do i get state tax forms The following topics are discussed. Where do i get state tax forms Electing out of the installment method. Where do i get state tax forms Payments received or considered received. Where do i get state tax forms Escrow account. Where do i get state tax forms Depreciation recapture income. Where do i get state tax forms Sale to a related person. Where do i get state tax forms Like-kind exchange. Where do i get state tax forms Contingent payment sale. Where do i get state tax forms Single sale of several assets. Where do i get state tax forms Sale of a business. Where do i get state tax forms Unstated interest and original issue discount. Where do i get state tax forms Disposition of an installment obligation. Where do i get state tax forms Repossession. Where do i get state tax forms Interest on deferred tax. Where do i get state tax forms Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Where do i get state tax forms To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Where do i get state tax forms Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Where do i get state tax forms You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Where do i get state tax forms If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Where do i get state tax forms Example. Where do i get state tax forms You sold a parcel of land for $50,000. Where do i get state tax forms You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Where do i get state tax forms The buyer gave you a note for $40,000. Where do i get state tax forms The note had an FMV of $40,000. Where do i get state tax forms You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Where do i get state tax forms The land cost $25,000, and you owned it for more than one year. Where do i get state tax forms You decide to elect out of the installment method and report the entire gain in the year of sale. Where do i get state tax forms Gain realized:     Selling price $50,000 Minus: Property's adj. Where do i get state tax forms basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Where do i get state tax forms basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Where do i get state tax forms You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Where do i get state tax forms The interest on the note is ordinary income and is reported as interest income each year. Where do i get state tax forms How to elect out. Where do i get state tax forms   To make this election, do not report your sale on Form 6252. Where do i get state tax forms Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Where do i get state tax forms When to elect out. Where do i get state tax forms   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Where do i get state tax forms Automatic six-month extension. Where do i get state tax forms   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Where do i get state tax forms Write “Filed pursuant to section 301. Where do i get state tax forms 9100-2” at the top of the amended return and file it where the original return was filed. Where do i get state tax forms Revoking the election. Where do i get state tax forms   Once made, the election can be revoked only with IRS approval. Where do i get state tax forms A revocation is retroactive. Where do i get state tax forms You will not be allowed to revoke the election if either of the following applies. Where do i get state tax forms One of the purposes is to avoid federal income tax. Where do i get state tax forms The tax year in which any payment was received has closed. Where do i get state tax forms Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Where do i get state tax forms In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Where do i get state tax forms These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Where do i get state tax forms However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Where do i get state tax forms Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Where do i get state tax forms Include these expenses in the selling and contract prices when figuring the gross profit percentage. Where do i get state tax forms Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Where do i get state tax forms Mortgage not more than basis. Where do i get state tax forms   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Where do i get state tax forms It is considered a recovery of your basis. Where do i get state tax forms The contract price is the selling price minus the mortgage. Where do i get state tax forms Example. Where do i get state tax forms You sell property with an adjusted basis of $19,000. Where do i get state tax forms You have selling expenses of $1,000. Where do i get state tax forms The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Where do i get state tax forms The selling price is $25,000 ($15,000 + $10,000). Where do i get state tax forms Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Where do i get state tax forms The contract price is $10,000 ($25,000 − $15,000 mortgage). Where do i get state tax forms Your gross profit percentage is 50% ($5,000 ÷ $10,000). Where do i get state tax forms You report half of each $2,000 payment received as gain from the sale. Where do i get state tax forms You also report all interest you receive as ordinary income. Where do i get state tax forms Mortgage more than basis. Where do i get state tax forms   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Where do i get state tax forms The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Where do i get state tax forms   To figure the contract price, subtract the mortgage from the selling price. Where do i get state tax forms This is the total amount (other than interest) you will receive directly from the buyer. Where do i get state tax forms Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Where do i get state tax forms The contract price is then the same as your gross profit from the sale. Where do i get state tax forms    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Where do i get state tax forms Example. Where do i get state tax forms The selling price for your property is $9,000. Where do i get state tax forms The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Where do i get state tax forms Your adjusted basis in the property is $4,400. Where do i get state tax forms You have selling expenses of $600, for a total installment sale basis of $5,000. Where do i get state tax forms The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Where do i get state tax forms This amount is included in the contract price and treated as a payment received in the year of sale. Where do i get state tax forms The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Where do i get state tax forms Report 100% of each payment (less interest) as gain from the sale. Where do i get state tax forms Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Where do i get state tax forms Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Where do i get state tax forms You are considered to receive a payment equal to the outstanding canceled debt. Where do i get state tax forms Example. Where do i get state tax forms Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Where do i get state tax forms On April 4, 2013, she bought the land for $70,000. Where do i get state tax forms At that time, $30,000 of her loan to you was outstanding. Where do i get state tax forms She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Where do i get state tax forms She did not assume an existing mortgage. Where do i get state tax forms She canceled the $30,000 debt you owed her. Where do i get state tax forms You are considered to have received a $30,000 payment at the time of the sale. Where do i get state tax forms Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Where do i get state tax forms If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Where do i get state tax forms Compare the debt to your installment sale basis in the property being sold. Where do i get state tax forms If the debt is less than your installment sale basis, none of it is treated as a payment. Where do i get state tax forms If it is more, only the difference is treated as a payment. Where do i get state tax forms If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Where do i get state tax forms These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Where do i get state tax forms However, they apply only to the following types of debt the buyer assumes. Where do i get state tax forms Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Where do i get state tax forms Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Where do i get state tax forms If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Where do i get state tax forms The value of the assumed debt is then considered a payment to you in the year of sale. Where do i get state tax forms Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Where do i get state tax forms However, see Like-Kind Exchange , later. Where do i get state tax forms Generally, the amount of the payment is the property's FMV on the date you receive it. Where do i get state tax forms Exception. Where do i get state tax forms   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Where do i get state tax forms See Unstated Interest and Original Issue Discount (OID) , later. Where do i get state tax forms Debt not payable on demand. Where do i get state tax forms   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Where do i get state tax forms This is true even if the debt is guaranteed by a third party, including a government agency. Where do i get state tax forms Fair market value (FMV). Where do i get state tax forms   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Where do i get state tax forms Third-party note. Where do i get state tax forms   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Where do i get state tax forms Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Where do i get state tax forms The excess of the note's face value over its FMV is interest. Where do i get state tax forms Exclude this interest in determining the selling price of the property. Where do i get state tax forms However, see Exception under Property Used As a Payment, earlier. Where do i get state tax forms Example. Where do i get state tax forms You sold real estate in an installment sale. Where do i get state tax forms As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Where do i get state tax forms The FMV of the third-party note at the time of the sale was $30,000. Where do i get state tax forms This amount, not $50,000, is a payment to you in the year of sale. Where do i get state tax forms The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Where do i get state tax forms The remaining 40% is interest taxed as ordinary income. Where do i get state tax forms Bond. Where do i get state tax forms   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Where do i get state tax forms For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Where do i get state tax forms    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Where do i get state tax forms However, see Exception under Property Used As a Payment, earlier. Where do i get state tax forms Buyer's note. Where do i get state tax forms   The buyer's note (unless payable on demand) is not considered payment on the sale. Where do i get state tax forms However, its full face value is included when figuring the selling price and the contract price. Where do i get state tax forms Payments you receive on the note are used to figure your gain in the year received. Where do i get state tax forms Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Where do i get state tax forms This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Where do i get state tax forms It does not apply to the following dispositions. Where do i get state tax forms Sales of property used or produced in farming. Where do i get state tax forms Sales of personal-use property. Where do i get state tax forms Qualifying sales of time-shares and residential lots. Where do i get state tax forms The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Where do i get state tax forms The amount treated as a payment is considered received on the later of the following dates. Where do i get state tax forms The date the debt becomes secured. Where do i get state tax forms The date you receive the debt proceeds. Where do i get state tax forms A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Where do i get state tax forms For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Where do i get state tax forms Limit. Where do i get state tax forms   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Where do i get state tax forms The total contract price on the installment sale. Where do i get state tax forms Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Where do i get state tax forms Installment payments. Where do i get state tax forms   The pledge rule accelerates the reporting of the installment obligation payments. Where do i get state tax forms Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Where do i get state tax forms Exception. Where do i get state tax forms   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Where do i get state tax forms The debt was outstanding on December 17, 1987. Where do i get state tax forms The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Where do i get state tax forms   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Where do i get state tax forms   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Where do i get state tax forms Any excess is treated as a payment on the installment obligation. Where do i get state tax forms Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Where do i get state tax forms These sales cannot be reported on the installment method. Where do i get state tax forms The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Where do i get state tax forms When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Where do i get state tax forms Example. Where do i get state tax forms You sell property for $100,000. Where do i get state tax forms The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Where do i get state tax forms You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Where do i get state tax forms You report the entire gain in the year of sale. Where do i get state tax forms Escrow established in a later year. Where do i get state tax forms   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Where do i get state tax forms Substantial restriction. Where do i get state tax forms   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Where do i get state tax forms For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Where do i get state tax forms Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Where do i get state tax forms Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Where do i get state tax forms Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Where do i get state tax forms The recapture income is also included in Part I of Form 6252. Where do i get state tax forms However, the gain equal to the recapture income is reported in full in the year of the sale. Where do i get state tax forms Only the gain greater than the recapture income is reported on the installment method. Where do i get state tax forms For more information on depreciation recapture, see chapter 3 in Publication 544. Where do i get state tax forms The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Where do i get state tax forms Determining gross profit is discussed under General Rules , earlier. Where do i get state tax forms Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Where do i get state tax forms If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Where do i get state tax forms These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Where do i get state tax forms Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Where do i get state tax forms Instead, all payments to be received are considered received in the year of sale. Where do i get state tax forms However, see Exception , below. Where do i get state tax forms Depreciable property for this rule is any property the purchaser can depreciate. Where do i get state tax forms Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Where do i get state tax forms In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Where do i get state tax forms The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Where do i get state tax forms Exception. Where do i get state tax forms   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Where do i get state tax forms You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Where do i get state tax forms Related person. Where do i get state tax forms   Related persons include the following. Where do i get state tax forms A person and all controlled entities with respect to that person. Where do i get state tax forms A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Where do i get state tax forms Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Where do i get state tax forms Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Where do i get state tax forms   For information about which entities are controlled entities, see section 1239(c). Where do i get state tax forms Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Where do i get state tax forms The related person makes the second disposition before making all payments on the first disposition. Where do i get state tax forms The related person disposes of the property within 2 years of the first disposition. Where do i get state tax forms This rule does not apply if the property involved is marketable securities. Where do i get state tax forms Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Where do i get state tax forms See Exception , later. Where do i get state tax forms Related person. Where do i get state tax forms   Related persons include the following. Where do i get state tax forms Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Where do i get state tax forms A partnership or estate and a partner or beneficiary. Where do i get state tax forms A trust (other than a section 401(a) employees trust) and a beneficiary. Where do i get state tax forms A trust and an owner of the trust. Where do i get state tax forms Two corporations that are members of the same controlled group as defined in section 267(f). Where do i get state tax forms The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Where do i get state tax forms A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Where do i get state tax forms An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Where do i get state tax forms A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Where do i get state tax forms The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Where do i get state tax forms Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Where do i get state tax forms An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Where do i get state tax forms A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Where do i get state tax forms An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Where do i get state tax forms Example 1. Where do i get state tax forms In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Where do i get state tax forms His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Where do i get state tax forms His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Where do i get state tax forms He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Where do i get state tax forms 50). Where do i get state tax forms Bob made no improvements to the property and sold it to Alfalfa Inc. Where do i get state tax forms , in 2013 for $600,000 after making the payment for that year. Where do i get state tax forms The amount realized from the second disposition is $600,000. Where do i get state tax forms Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Where do i get state tax forms 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Where do i get state tax forms Example 2. Where do i get state tax forms Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Where do i get state tax forms The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Where do i get state tax forms 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Where do i get state tax forms They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Where do i get state tax forms In 2016, he receives the final $100,000 payment. Where do i get state tax forms He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Where do i get state tax forms 50 Installment sale income for 2016 $ 50,000 Exception. Where do i get state tax forms   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Where do i get state tax forms Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Where do i get state tax forms   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Where do i get state tax forms However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Where do i get state tax forms   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Where do i get state tax forms An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Where do i get state tax forms A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Where do i get state tax forms Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Where do i get state tax forms These trades are known as like-kind exchanges. Where do i get state tax forms The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Where do i get state tax forms You do not have to report any part of your gain if you receive only like-kind property. Where do i get state tax forms However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Where do i get state tax forms For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Where do i get state tax forms Installment payments. Where do i get state tax forms   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Where do i get state tax forms The contract price is reduced by the FMV of the like-kind property received in the trade. Where do i get state tax forms The gross profit is reduced by any gain on the trade that can be postponed. Where do i get state tax forms Like-kind property received in the trade is not considered payment on the installment obligation. Where do i get state tax forms Example. Where do i get state tax forms In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Where do i get state tax forms He also receives an installment note for $800,000 in the trade. Where do i get state tax forms Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Where do i get state tax forms George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Where do i get state tax forms His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Where do i get state tax forms The contract price is $800,000 ($1,000,000 − $200,000). Where do i get state tax forms The gross profit percentage is 75% ($600,000 ÷ $800,000). Where do i get state tax forms He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Where do i get state tax forms He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Where do i get state tax forms Deferred exchanges. Where do i get state tax forms   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Where do i get state tax forms Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Where do i get state tax forms If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Where do i get state tax forms See Regulations section 1. Where do i get state tax forms 1031(k)-1(j)(2) for these rules. Where do i get state tax forms Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Where do i get state tax forms This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Where do i get state tax forms If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Where do i get state tax forms For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Where do i get state tax forms 453-1(c). Where do i get state tax forms Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Where do i get state tax forms You also have to allocate part of the selling price to each asset. Where do i get state tax forms If you sell assets that constitute a trade or business, see Sale of a Business , later. Where do i get state tax forms Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Where do i get state tax forms If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Where do i get state tax forms This becomes the net FMV. Where do i get state tax forms A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Where do i get state tax forms However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Where do i get state tax forms It must be reported separately. Where do i get state tax forms The remaining assets sold at a gain are reported together. Where do i get state tax forms Example. Where do i get state tax forms You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Where do i get state tax forms The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Where do i get state tax forms Your installment sale basis for each parcel was $15,000. Where do i get state tax forms Your net gain was $85,000 ($130,000 − $45,000). Where do i get state tax forms You report the gain on the installment method. Where do i get state tax forms The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Where do i get state tax forms The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Where do i get state tax forms The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Where do i get state tax forms You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Where do i get state tax forms Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Where do i get state tax forms You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Where do i get state tax forms The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Where do i get state tax forms You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Where do i get state tax forms However, if parcel C was held for personal use, the loss is not deductible. Where do i get state tax forms You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Where do i get state tax forms Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Where do i get state tax forms Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Where do i get state tax forms Assets sold at a loss. Where do i get state tax forms Real and personal property eligible for the installment method. Where do i get state tax forms Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Where do i get state tax forms Inventory. Where do i get state tax forms   The sale of inventories of personal property cannot be reported on the installment method. Where do i get state tax forms All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Where do i get state tax forms   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Where do i get state tax forms If you do not, each payment must be allocated between the inventory and the other assets sold. Where do i get state tax forms   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Where do i get state tax forms Use your basis in the inventory to figure the cost of goods sold. Where do i get state tax forms Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Where do i get state tax forms Residual method. Where do i get state tax forms   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Where do i get state tax forms This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Where do i get state tax forms   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Where do i get state tax forms This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Where do i get state tax forms   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Where do i get state tax forms   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Where do i get state tax forms The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Where do i get state tax forms   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Where do i get state tax forms Certificates of deposit, U. Where do i get state tax forms S. Where do i get state tax forms Government securities, foreign currency, and actively traded personal property, including stock and securities. Where do i get state tax forms Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Where do i get state tax forms However, see Regulations section 1. Where do i get state tax forms 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Where do i get state tax forms Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Where do i get state tax forms All other assets except section 197 intangibles. Where do i get state tax forms Section 197 intangibles except goodwill and going concern value. Where do i get state tax forms Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Where do i get state tax forms   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Where do i get state tax forms For example, if an asset is described in both (4) and (6), include it in (4). Where do i get state tax forms Agreement. Where do i get state tax forms   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Where do i get state tax forms This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Where do i get state tax forms Reporting requirement. Where do i get state tax forms   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Where do i get state tax forms Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Where do i get state tax forms The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Where do i get state tax forms Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Where do i get state tax forms The sale of a partnership interest is treated as the sale of a single capital asset. Where do i get state tax forms The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Where do i get state tax forms (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Where do i get state tax forms ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Where do i get state tax forms The gain allocated to the other assets can be reported under the installment method. Where do i get state tax forms For more information on the treatment of unrealized receivables and inventory, see Publication 541. Where do i get state tax forms Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Where do i get state tax forms You received a $100,000 down payment and the buyer's note for $120,000. Where do i get state tax forms The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Where do i get state tax forms The total selling price is $220,000. Where do i get state tax forms Your selling expenses are $11,000. Where do i get state tax forms The selling expenses are divided among all the assets sold, including inventory. Where do i get state tax forms Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Where do i get state tax forms The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Where do i get state tax forms Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Where do i get state tax forms The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Where do i get state tax forms The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Where do i get state tax forms   Sale  Price Sale   Exp. Where do i get state tax forms Adj. Where do i get state tax forms   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Where do i get state tax forms A 71,000 3,550 63,800 3,650 Mch. Where do i get state tax forms B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Where do i get state tax forms There is no depreciation recapture income because the building was depreciated using the straight line method. Where do i get state tax forms All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Where do i get state tax forms Figure depreciation recapture in Part III of Form 4797. Where do i get state tax forms The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Where do i get state tax forms This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Where do i get state tax forms These gains are reported in full in the year of sale and are not included in the installment sale computation. Where do i get state tax forms Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Where do i get state tax forms The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Where do i get state tax forms The selling price equals the contract price for the installment sale ($108,500). Where do i get state tax forms The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Where do i get state tax forms   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Where do i get state tax forms The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Where do i get state tax forms 95 Building— $9,600 ÷ $108,500 8. Where do i get state tax forms 85 Goodwill— $17,575 ÷ $108,500 16. Where do i get state tax forms 20 Total 48. Where do i get state tax forms 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Where do i get state tax forms The selling price for the installment sale is $108,500. Where do i get state tax forms This is 49. Where do i get state tax forms 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Where do i get state tax forms The selling price of assets not reported on the installment method is $111,500. Where do i get state tax forms This is 50. Where do i get state tax forms 7% ($111,500 ÷ $220,000) of the total selling price. Where do i get state tax forms Multiply principal payments by 49. Where do i get state tax forms 3% to determine the part of the payment for the installment sale. Where do i get state tax forms The balance, 50. Where do i get state tax forms 7%, is for the part reported in the year of the sale. Where do i get state tax forms The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Where do i get state tax forms When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Where do i get state tax forms Only the part for the installment sale (49. Where do i get state tax forms 3%) is used in the installment sale computation. Where do i get state tax forms The only payment received in 2013 is the down payment of $100,000. Where do i get state tax forms The part of the payment for the installment sale is $49,300 ($100,000 × 49. Where do i get state tax forms 3%). Where do i get state tax forms This amount is used in the installment sale computation. Where do i get state tax forms Installment income for 2013. Where do i get state tax forms   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Where do i get state tax forms Income Land—22. Where do i get state tax forms 95% of $49,300 $11,314 Building—8. Where do i get state tax forms 85% of $49,300 4,363 Goodwill—16. Where do i get state tax forms 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Where do i get state tax forms   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Where do i get state tax forms 3% of the total payments you receive on the buyer's note during the year. Where do i get state tax forms Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Where do i get state tax forms Interest provided in the contract is called stated interest. Where do i get state tax forms If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Where do i get state tax forms If section 483 applies to the contract, this interest is called unstated interest. Where do i get state tax forms If section 1274 applies to the contract, this interest is called original issue discount (OID). Where do i get state tax forms An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Where do i get state tax forms Treatment of unstated interest and OID. Where do i get state tax forms   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Where do i get state tax forms As a result, the buyer cannot deduct the unstated interest. Where do i get state tax forms The seller must report the unstated interest as income. Where do i get state tax forms   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Where do i get state tax forms   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Where do i get state tax forms Rules for the seller. Where do i get state tax forms   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Where do i get state tax forms If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Where do i get state tax forms   Include the unstated interest in income based on your regular method of accounting. Where do i get state tax forms Include OID in income over the term of the contract. Where do i get state tax forms   The OID includible in income each year is based on the constant yield method described in section 1272. Where do i get state tax forms (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Where do i get state tax forms )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Where do i get state tax forms Reduce the selling price by any stated principal treated as interest to determine the gain. Where do i get state tax forms   Report unstated interest or OID on your tax return, in addition to stated interest. Where do i get state tax forms Rules for the buyer. Where do i get state tax forms   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Where do i get state tax forms These rules do not apply to personal-use property (for example, property not used in a trade or business). Where do i get state tax forms Adequate stated interest. Where do i get state tax forms   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Where do i get state tax forms The present value of a payment is determined based on the test rate of interest, defined next. Where do i get state tax forms (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Where do i get state tax forms ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Where do i get state tax forms Test rate of interest. Where do i get state tax forms   The test rate of interest for a contract is the 3-month rate. Where do i get state tax forms The 3-month rate is the lower of the following applicable federal rates (AFRs). Where do i get state tax forms The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Where do i get state tax forms The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Where do i get state tax forms Applicable federal rate (AFR). Where do i get state tax forms   The AFR depends on the month the binding
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Where do i get state tax forms Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. Where do i get state tax forms 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. Where do i get state tax forms If you are requesting relief for more than three tax years, you must file an additional Form 8857. Where do i get state tax forms The IRS will review your Form 8857 and let you know if you qualify. Where do i get state tax forms A completed Form 8857 is shown later. Where do i get state tax forms When to file Form 8857. Where do i get state tax forms   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. Where do i get state tax forms The following are some of the ways you may become aware of such a liability. Where do i get state tax forms The IRS is examining your tax return and proposing to increase your tax liability. Where do i get state tax forms The IRS sends you a notice. Where do i get state tax forms   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. Where do i get state tax forms (But see the exceptions below for different filing deadlines that apply. Where do i get state tax forms ) For this reason, do not delay filing because you do not have all the documentation. Where do i get state tax forms   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. Where do i get state tax forms 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. Where do i get state tax forms This includes the filing of a proof of claim in a bankruptcy proceeding. Where do i get state tax forms The filing of a suit by the United States against you to collect the joint liability. Where do i get state tax forms 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. Where do i get state tax forms The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. Where do i get state tax forms Exception for equitable relief. Where do i get state tax forms   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. Where do i get state tax forms irs. Where do i get state tax forms gov/irb/2011-32_IRB/ar11. Where do i get state tax forms html) expanding the amount of time to request equitable relief. Where do i get state tax forms 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. Where do i get state tax forms Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. Where do i get state tax forms In certain cases, the 10-year period is suspended. Where do i get state tax forms The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. Where do i get state tax forms See Pub. Where do i get state tax forms 594, The IRS Collection Process, for details. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms See Pub. Where do i get state tax forms 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. Where do i get state tax forms 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. Where do i get state tax forms Exception for relief based on community property laws. Where do i get state tax forms   If you are requesting relief based on community property laws, a different filing deadline applies. Where do i get state tax forms See Relief from liability arising from community property law discussed later under Community Property Laws . Where do i get state tax forms Form 8857 filed by or on behalf of a decedent. Where do i get state tax forms   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. Where do i get state tax forms An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. Where do i get state tax forms 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. Where do i get state tax forms Situations in which you are not entitled to relief. Where do i get state tax forms   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms You entered into an offer in compromise with the IRS. Where do i get state tax forms You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. Where do i get state tax forms Exception for agreements relating to TEFRA partnership proceedings. Where do i get state tax forms   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. Where do i get state tax forms (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. Where do i get state tax forms ) 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). Where do i get state tax forms Transferee liability not affected by innocent spouse relief provisions. Where do i get state tax forms   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. Where do i get state tax forms 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. Where do i get state tax forms Example. Where do i get state tax forms Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. Where do i get state tax forms Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. Where do i get state tax forms In August 2010, the IRS assessed a deficiency for the 2008 return. Where do i get state tax forms The items causing the deficiency belong to Herb. Where do i get state tax forms Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. Where do i get state tax forms However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. Where do i get state tax forms The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. Where do i get state tax forms There are no exceptions, even for victims of spousal abuse or domestic violence. Where do i get state tax forms We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. Where do i get state tax forms 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. Where do i get state tax forms The IRS sends you a final determination letter regarding your request for relief. Where do i get state tax forms You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. Where do i get state tax forms 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. Where do i get state tax forms The United States Tax Court is an independent judicial body and is not part of the IRS. Where do i get state tax forms You must file a petition with the United States Tax Court in order for it to review your request for relief. Where do i get state tax forms You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. Where do i get state tax forms If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. Where do i get state tax forms 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. Where do i get state tax forms ustaxcourt. Where do i get state tax forms 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. Where do i get state tax forms Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Where do i get state tax forms Generally, community property laws require you to allocate community income and expenses equally between both spouses. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms You did not file a joint return for the tax year. Where do i get state tax forms You did not include the item of community income in gross income. Where do i get state tax forms 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. Where do i get state tax forms Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. Where do i get state tax forms Your spouse's (or former spouse's) distributive share of partnership income. Where do i get state tax forms Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Where do i get state tax forms Use the appropriate community property law to determine what is separate property. Where do i get state tax forms Any other income that belongs to your spouse (or former spouse) under community property law. Where do i get state tax forms You establish that you did not know of, and had no reason to know of, that community income. Where do i get state tax forms See  Actual Knowledge or Reason To Know , below. Where do i get state tax forms Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. Where do i get state tax forms See Indications of unfairness for liability arising from community property law, later. Where do i get state tax forms Actual knowledge or reason to know. Where do i get state tax forms   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. Where do i get state tax forms Amount of community income unknown. Where do i get state tax forms   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. Where do i get state tax forms Not knowing the specific amount is not a basis for relief. Where do i get state tax forms Reason to know. Where do i get state tax forms   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. Where do i get state tax forms The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. Where do i get state tax forms The financial situation of you and your spouse (or former spouse). Where do i get state tax forms Your educational background and business experience. Where do i get state tax forms 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). Where do i get state tax forms Indications of unfairness for liability arising from community property law. Where do i get state tax forms   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. Where do i get state tax forms   The following are examples of factors the IRS will consider. Where do i get state tax forms Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). Where do i get state tax forms Whether your spouse (or former spouse) deserted you. Where do i get state tax forms Whether you and your spouse have been divorced or separated. Where do i get state tax forms  For other factors see Factors for Determining Whether To Grant Equitable Relief later. Where do i get state tax forms Benefit from omitted item of community income. Where do i get state tax forms   A benefit includes normal support, but does not include de minimis (small) amounts. Where do i get state tax forms 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. Where do i get state tax forms   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. Where do i get state tax forms 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). Where do i get state tax forms How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. Where do i get state tax forms Fill in Form 8857 according to the instructions. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). Where do i get state tax forms However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. Where do i get state tax forms The IRS can collect these amounts from either you or your spouse (or former spouse). Where do i get state tax forms You must meet all of the following conditions to qualify for innocent spouse relief. Where do i get state tax forms You filed a joint return. Where do i get state tax forms There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). Where do i get state tax forms 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). Where do i get state tax forms See Actual Knowledge or Reason To Know, later. Where do i get state tax forms Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. Where do i get state tax forms See Indications of Unfairness for Innocent Spouse Relief , later. Where do i get state tax forms 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. Where do i get state tax forms A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Where do i get state tax forms 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. Where do i get state tax forms Erroneous Items Erroneous items are either of the following. Where do i get state tax forms Unreported income. Where do i get state tax forms This is any gross income item received by your spouse (or former spouse) that is not reported. Where do i get state tax forms Incorrect deduction, credit, or basis. Where do i get state tax forms This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). Where do i get state tax forms The following are examples of erroneous items. Where do i get state tax forms The expense for which the deduction is taken was never paid or incurred. Where do i get state tax forms 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. Where do i get state tax forms The expense does not qualify as a deductible expense. Where do i get state tax forms For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Where do i get state tax forms Fines are not deductible. Where do i get state tax forms No factual argument can be made to support the deductibility of the expense. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Actual knowledge. Where do i get state tax forms   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. Where do i get state tax forms You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Where do i get state tax forms For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. Where do i get state tax forms Reason to know. Where do i get state tax forms   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. Where do i get state tax forms You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Where do i get state tax forms   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. Where do i get state tax forms The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. Where do i get state tax forms The financial situation of you and your spouse (or former spouse). Where do i get state tax forms Your educational background and business experience. Where do i get state tax forms The extent of your participation in the activity that resulted in the erroneous item. Where do i get state tax forms 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. Where do i get state tax forms 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). Where do i get state tax forms Partial relief when a portion of erroneous item is unknown. Where do i get state tax forms   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. Where do i get state tax forms You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. Where do i get state tax forms Example. Where do i get state tax forms At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. Where do i get state tax forms The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. Where do i get state tax forms 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. Where do i get state tax forms The following are examples of factors the IRS will consider. Where do i get state tax forms Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. Where do i get state tax forms Whether your spouse (or former spouse) deserted you. Where do i get state tax forms Whether you and your spouse have been divorced or separated. Where do i get state tax forms Whether you received a benefit on the return from the understated tax. Where do i get state tax forms For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. Where do i get state tax forms Significant benefit. Where do i get state tax forms   A significant benefit is any benefit in excess of normal support. Where do i get state tax forms Normal support depends on your particular circumstances. Where do i get state tax forms 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. Where do i get state tax forms Example. Where do i get state tax forms You receive money from your spouse that is beyond normal support. Where do i get state tax forms The money can be traced to your spouse's lottery winnings that were not reported on your joint return. Where do i get state tax forms You will be considered to have received a significant benefit from that income. Where do i get state tax forms This is true even if your spouse gives you the money several years after he or she received it. Where do i get state tax forms 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). Where do i get state tax forms The understated tax allocated to you is generally the amount you are responsible for. Where do i get state tax forms This type of relief is available only for unpaid liabilities resulting from the understated tax. Where do i get state tax forms Refunds are not allowed. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms (Under this rule, you are no longer married if you are widowed. Where do i get state tax forms ) 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. Where do i get state tax forms Members of the same household. Where do i get state tax forms   You and your spouse are not members of the same household if you are living apart and are estranged. Where do i get state tax forms However, you and your spouse are considered members of the same household if any of the following conditions are met. Where do i get state tax forms You and your spouse reside in the same dwelling. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. Where do i get state tax forms Burden of proof. Where do i get state tax forms   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). Where do i get state tax forms You must also establish the basis for allocating the erroneous items. Where do i get state tax forms Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. Where do i get state tax forms The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Where do i get state tax forms A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Where do i get state tax forms 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). Where do i get state tax forms For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. Where do i get state tax forms Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Where do i get state tax forms See Transfers of Property To Avoid Tax , later. Where do i get state tax forms 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. Where do i get state tax forms You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. Where do i get state tax forms 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. Where do i get state tax forms You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. Where do i get state tax forms (This rule applies whether or not there was a receipt of cash. Where do i get state tax forms ) You knew of the facts that made an incorrect deduction or credit unallowable. Where do i get state tax forms 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. Where do i get state tax forms Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Where do i get state tax forms Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Neither is your actual knowledge of how the erroneous item was treated on the tax return. Where do i get state tax forms 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. Where do i get state tax forms Example. Where do i get state tax forms Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. Where do i get state tax forms The IRS audited their return and found that Bill did not report $20,000 of self-employment income. Where do i get state tax forms The additional income resulted in a $6,000 understated tax, plus interest and penalties. Where do i get state tax forms After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. Where do i get state tax forms The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Where do i get state tax forms Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Factors supporting actual knowledge. Where do i get state tax forms   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. Where do i get state tax forms The following are examples of factors the IRS may use. Where do i get state tax forms Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. Where do i get state tax forms Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. Where do i get state tax forms Exception for spousal abuse or domestic violence. Where do i get state tax forms   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. Where do i get state tax forms   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. Where do i get state tax forms However, you may be required to file a separate return for that tax year. Where do i get state tax forms For more information about duress, see the instructions for Form 8857. Where do i get state tax forms 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. Where do i get state tax forms The increase may not be more than the entire amount of the liability. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms An underpaid tax is an amount of tax you properly reported on your return but you have not paid. Where do i get state tax forms For example, your joint 2009 return shows that you and your spouse owed $5,000. Where do i get state tax forms You paid $2,000 with the return. Where do i get state tax forms You have an underpaid tax of $3,000. Where do i get state tax forms Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. Where do i get state tax forms You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Where do i get state tax forms You have an understated tax or an underpaid tax. Where do i get state tax forms You did not pay the tax. Where do i get state tax forms However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. Where do i get state tax forms 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. Where do i get state tax forms See Factors for Determining Whether To Grant Equitable Relief, later. Where do i get state tax forms You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Where do i get state tax forms A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Where do i get state tax forms Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Where do i get state tax forms See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. Where do i get state tax forms You did not file or fail to file your return with the intent to commit fraud. Where do i get state tax forms 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. Where do i get state tax forms If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. Where do i get state tax forms If the item is titled in your name, the item is presumed to be attributable to you. Where do i get state tax forms However, you can rebut this presumption based on the facts and circumstances. Where do i get state tax forms 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. Where do i get state tax forms 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). Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. Where do i get state tax forms The IRS will consider all factors and weigh them appropriately. Where do i get state tax forms Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. Where do i get state tax forms Whether you are separated (whether legally or not) or divorced from your spouse. Where do i get state tax forms A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. Where do i get state tax forms 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. Where do i get state tax forms Whether you would suffer a significant economic hardship if relief is not granted. Where do i get state tax forms (In other words, you would not be able to pay your reasonable basic living expenses. Where do i get state tax forms ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. Where do i get state tax forms 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. Where do i get state tax forms Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. Where do i get state tax forms (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. Where do i get state tax forms ) 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. Where do i get state tax forms 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. Where do i get state tax forms Knowledge or reason to know. Where do i get state tax forms   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. Where do i get state tax forms   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. Where do i get state tax forms Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. Where do i get state tax forms Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. Where do i get state tax forms This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. Where do i get state tax forms Reason to know. Where do i get state tax forms   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. Where do i get state tax forms Example. Where do i get state tax forms You and your spouse filed a joint 2009 return. Where do i get state tax forms That return showed you owed $10,000. Where do i get state tax forms You had $5,000 of your own money and you took out a loan to pay the other $5,000. Where do i get state tax forms You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Where do i get state tax forms Without telling you, your spouse took the $5,000 loan and spent it on himself. Where do i get state tax forms You and your spouse were divorced in 2010. Where do i get state tax forms In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Where do i get state tax forms These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Whether your spouse (or former spouse) abused you. Where do i get state tax forms Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. Where do i get state tax forms Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . Where do i get state tax forms Not permitted under separation of liability relief. Where do i get state tax forms Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. Where do i get state tax forms Proof Required The IRS will only refund payments you made with your own money. Where do i get state tax forms However, you must provide proof that you made the payments with your own money. Where do i get state tax forms Examples of proof are a copy of your bank statement or a canceled check. Where do i get state tax forms 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. Where do i get state tax forms Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. Where do i get state tax forms Underpaid tax. Where do i get state tax forms   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. Where do i get state tax forms 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. Where do i get state tax forms For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. Where do i get state tax forms   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. Where do i get state tax forms Understated tax. Where do i get state tax forms   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. Where do i get state tax forms 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. Where do i get state tax forms Only installment payments made after the date you filed Form 8857 are eligible for a refund. Where do i get state tax forms   The amount of the refund is subject to the limit discussed next. Where do i get state tax forms Limit on Amount of Refund The amount of your refund is limited. Where do i get state tax forms Read the following chart to find out the limit. Where do i get state tax forms IF you file Form 8857. Where do i get state tax forms . Where do i get state tax forms . Where do i get state tax forms THEN the refund cannot be more than. Where do i get state tax forms . Where do i get state tax forms . Where do i get state tax forms 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. Where do i get state tax forms 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. Where do i get state tax forms Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. Where do i get state tax forms Janie and Joe Boulder filed a joint tax return for 2007. Where do i get state tax forms They claimed one dependency exemption for their son Michael. Where do i get state tax forms Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. Where do i get state tax forms Janie did not know about the award when the return was filed. Where do i get state tax forms They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). Where do i get state tax forms Janie and Joe were divorced on May 13, 2009. Where do i get state tax forms In February 2010, Janie filed her 2009 federal income tax return as head of household. Where do i get state tax forms She expected a refund of $1,203. Where do i get state tax forms 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. Where do i get state tax forms Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. Where do i get state tax forms Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. Where do i get state tax forms Janie believes she meets the third condition. Where do i get state tax forms 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. Where do i get state tax forms Janie believes she meets the fourth condition. Where do i get state tax forms She believes it would be unfair to be held liable for the tax because she did not benefit from the award. Where do i get state tax forms Joe spent it on personal items for his use only. Where do i get state tax forms 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. Where do i get state tax forms In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. Where do i get state tax forms Part I Line 1. Where do i get state tax forms   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. Where do i get state tax forms Line 2. Where do i get state tax forms   She checks the box because she wants a refund. Where do i get state tax forms Note. Where do i get state tax forms 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. Where do i get state tax forms Line 3. Where do i get state tax forms   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. Where do i get state tax forms Line 4. Where do i get state tax forms   She checks the “Yes” box because she filed a joint tax return for tax year 2007. Where do i get state tax forms Line 5. Where do i get state tax forms   She skips this line because she checked the “Yes” box on line 4. Where do i get state tax forms Part II Line 6. Where do i get state tax forms   She enters her name, address, social security number, county, and best daytime phone number. Where do i get state tax forms Part III Line 7. Where do i get state tax forms   She enters Joe's name, address, social security number, and best daytime phone number. Where do i get state tax forms Line 8. Where do i get state tax forms   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. Where do i get state tax forms ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. Where do i get state tax forms Line 9. Where do i get state tax forms   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. Where do i get state tax forms Line 10. Where do i get state tax forms   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. Where do i get state tax forms Line 11. Where do i get state tax forms   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. Where do i get state tax forms Line 12. Where do i get state tax forms   She checks the “Yes” box because she signed the 2007 joint tax return. Where do i get state tax forms Line 13. Where do i get state tax forms   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. Where do i get state tax forms Part IV Line 14. Where do i get state tax forms   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. Where do i get state tax forms ” Line 15. Where do i get state tax forms   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. Where do i get state tax forms She explains this in the space provided. Where do i get state tax forms Line 16. Where do i get state tax forms   She checks the box, “You knew that person had income” because she knew Joe had income from wages. Where do i get state tax forms She also lists Joe's income. Where do i get state tax forms Under “Type of Income” she enters “wages. Where do i get state tax forms ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. Where do i get state tax forms ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. Where do i get state tax forms ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. Where do i get state tax forms Line 17. Where do i get state tax forms   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. Where do i get state tax forms Line 18. Where do i get state tax forms   She checks the “No” box because, when the return was signed, she was not having financial problems. Where do i get state tax forms Line 19. Where do i get state tax forms   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. Where do i get state tax forms She provides additional information in the space provided. Where do i get state tax forms Line 20. Where do i get state tax forms   She checks the “No” box because Joe has never transferred money or property to her. Where do i get state tax forms Part V Line 21. Where do i get state tax forms   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. Where do i get state tax forms Line 22. Where do i get state tax forms   She enters her average monthly income for her entire household. Where do i get state tax forms Line 23. Where do i get state tax forms   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. Where do i get state tax forms Signing and mailing Form 8857. Where do i get state tax forms    Janie signs and dates the form. Where do i get state tax forms She attaches the copy of her divorce decree (not illustrated) required by line 8. Where do i get state tax forms Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. Where do i get state tax forms This image is too large to be displayed in the current screen. Where do i get state tax forms Please click the link to view the image. Where do i get state tax forms Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. Where do i get state tax forms Please click the link to view the image. Where do i get state tax forms Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. Where do i get state tax forms Please click the link to view the image. Where do i get state tax forms Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. Where do i get state tax forms Please click the link to view the image. Where do i get state tax forms Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. Where do i get state tax forms But do not rely on these flowcharts alone. Where do i get state tax forms Also read the earlier discussions. Where do i get state tax forms Figure A. Where do i get state tax forms Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. Where do i get state tax forms "Do You Qualify for Innocent Spouse Relief?" Figure B. Where do i get state tax forms Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. Where do i get state tax forms "Do You Qualify for Separation of Liability Relief?" Figure C. Where do i get state tax forms Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. Where do i get state tax forms Please click the link to view the image. Where do i get state tax forms "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications