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1040x 2010 Form

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1040x 2010 Form

1040x 2010 form 6. 1040x 2010 form   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. 1040x 2010 form Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. 1040x 2010 form Also use basis to figure depreciation, amortization, depletion, and casualty losses. 1040x 2010 form If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. 1040x 2010 form Only the basis allocated to the business or investment use of the property can be depreciated. 1040x 2010 form Your original basis in property is adjusted (increased or decreased) by certain events. 1040x 2010 form For example, if you make improvements to the property, increase your basis. 1040x 2010 form If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. 1040x 2010 form Keep accurate records of all items that affect the basis of your assets. 1040x 2010 form For information on keeping records, see chapter 1. 1040x 2010 form Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. 1040x 2010 form Cost Basis The basis of property you buy is usually its cost. 1040x 2010 form Cost is the amount you pay in cash, debt obligations, other property, or services. 1040x 2010 form Your cost includes amounts you pay for sales tax, freight, installation, and testing. 1040x 2010 form The basis of real estate and business assets will include other items, discussed later. 1040x 2010 form Basis generally does not include interest payments. 1040x 2010 form However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. 1040x 2010 form You also may have to capitalize (add to basis) certain other costs related to buying or producing property. 1040x 2010 form Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. 1040x 2010 form Loans with low or no interest. 1040x 2010 form   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. 1040x 2010 form You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040x 2010 form See the discussion of unstated interest in Publication 537, Installment Sales. 1040x 2010 form Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. 1040x 2010 form If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. 1040x 2010 form Some of these expenses are discussed next. 1040x 2010 form Lump sum purchase. 1040x 2010 form   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. 1040x 2010 form Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. 1040x 2010 form Figure the basis of each asset by multiplying the lump sum by a fraction. 1040x 2010 form The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040x 2010 form Fair market value (FMV). 1040x 2010 form   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040x 2010 form Sales of similar property on or about the same date may help in figuring the FMV of the property. 1040x 2010 form If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. 1040x 2010 form Real estate taxes. 1040x 2010 form   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040x 2010 form   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. 1040x 2010 form Whether or not you reimburse the seller, do not include that amount in the basis of your property. 1040x 2010 form Settlement costs. 1040x 2010 form   Your basis includes the settlement fees and closing costs for buying the property. 1040x 2010 form See Publication 551 for a detailed list of items you can and cannot include in basis. 1040x 2010 form   Do not include fees and costs for getting a loan on the property. 1040x 2010 form Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040x 2010 form Points. 1040x 2010 form   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. 1040x 2010 form You may be able to deduct the points currently or over the term of the loan. 1040x 2010 form For more information about deducting points, see Points in chapter 4 of Publication 535. 1040x 2010 form Assumption of a mortgage. 1040x 2010 form   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. 1040x 2010 form Example. 1040x 2010 form If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. 1040x 2010 form Constructing assets. 1040x 2010 form   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040x 2010 form Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040x 2010 form   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. 1040x 2010 form You must capitalize them (include them in the asset's basis). 1040x 2010 form Employee wages paid for the construction work, reduced by any employment credits allowed. 1040x 2010 form Depreciation on equipment you own while it is used in the construction. 1040x 2010 form Operating and maintenance costs for equipment used in the construction. 1040x 2010 form The cost of business supplies and materials used in the construction. 1040x 2010 form    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040x 2010 form Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. 1040x 2010 form To determine the basis of these assets or separate items, there must be an allocation of basis. 1040x 2010 form Group of assets acquired. 1040x 2010 form   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. 1040x 2010 form Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040x 2010 form You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. 1040x 2010 form If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040x 2010 form Farming business acquired. 1040x 2010 form   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. 1040x 2010 form Generally, reduce the purchase price by any cash received. 1040x 2010 form Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. 1040x 2010 form See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. 1040x 2010 form Transplanted embryo. 1040x 2010 form   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. 1040x 2010 form Allocate the rest of the purchase price to the basis of the calf. 1040x 2010 form Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. 1040x 2010 form Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. 1040x 2010 form You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040x 2010 form Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. 1040x 2010 form However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. 1040x 2010 form You produce property if you construct, build, install, manufacture, develop, improve, or create the property. 1040x 2010 form You are not subject to the uniform capitalization rules if the property is produced for personal use. 1040x 2010 form In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. 1040x 2010 form Plants. 1040x 2010 form   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. 1040x 2010 form Animals. 1040x 2010 form   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. 1040x 2010 form The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. 1040x 2010 form Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. 1040x 2010 form For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. 1040x 2010 form For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. 1040x 2010 form Exceptions. 1040x 2010 form   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. 1040x 2010 form   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040x 2010 form See Accrual Method Required under Accounting Methods in chapter 2. 1040x 2010 form   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. 1040x 2010 form If you make this election, special rules apply. 1040x 2010 form This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. 1040x 2010 form This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. 1040x 2010 form    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. 1040x 2010 form See chapter 7, for additional information on depreciation. 1040x 2010 form Example. 1040x 2010 form You grow trees that have a preproductive period of more than 2 years. 1040x 2010 form The trees produce an annual crop. 1040x 2010 form You are an individual and the uniform capitalization rules apply to your farming business. 1040x 2010 form You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. 1040x 2010 form You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. 1040x 2010 form Preproductive period of more than 2 years. 1040x 2010 form   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. 1040x 2010 form Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. 1040x 2010 form Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. 1040x 2010 form More information. 1040x 2010 form   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. 1040x 2010 form 263A-4. 1040x 2010 form Table 6-1. 1040x 2010 form Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. 1040x 2010 form Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. 1040x 2010 form The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. 1040x 2010 form Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040x 2010 form These include the cost of any improvements having a useful life of more than 1 year. 1040x 2010 form The following costs increase the basis of property. 1040x 2010 form The cost of extending utility service lines to property. 1040x 2010 form Legal fees, such as the cost of defending and perfecting title. 1040x 2010 form Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. 1040x 2010 form Assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040x 2010 form Do not deduct these expenses as taxes. 1040x 2010 form However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. 1040x 2010 form If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. 1040x 2010 form See chapter 7. 1040x 2010 form Deducting vs. 1040x 2010 form capitalizing costs. 1040x 2010 form   Do not add to your basis costs you can deduct as current expenses. 1040x 2010 form For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. 1040x 2010 form However, you can elect either to deduct or to capitalize certain other costs. 1040x 2010 form See chapter 7 in Publication 535. 1040x 2010 form Decreases to Basis The following are some items that reduce the basis of property. 1040x 2010 form Section 179 deduction. 1040x 2010 form Deductions previously allowed or allowable for amortization, depreciation, and depletion. 1040x 2010 form Alternative motor vehicle credit. 1040x 2010 form See Form 8910. 1040x 2010 form Alternative fuel vehicle refueling property credit. 1040x 2010 form See Form 8911. 1040x 2010 form Residential energy efficient property credits. 1040x 2010 form See Form 5695. 1040x 2010 form Investment credit (part or all) taken. 1040x 2010 form Casualty and theft losses and insurance reimbursements. 1040x 2010 form Payments you receive for granting an easement. 1040x 2010 form Exclusion from income of subsidies for energy conservation measures. 1040x 2010 form Certain canceled debt excluded from income. 1040x 2010 form Rebates from a manufacturer or seller. 1040x 2010 form Patronage dividends received from a cooperative association as a result of a purchase of property. 1040x 2010 form See Patronage Dividends in chapter 3. 1040x 2010 form Gas-guzzler tax. 1040x 2010 form See Form 6197. 1040x 2010 form Some of these items are discussed next. 1040x 2010 form For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. 1040x 2010 form Depreciation and section 179 deduction. 1040x 2010 form   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. 1040x 2010 form For more information on these deductions, see chapter 7. 1040x 2010 form Section 179 deduction. 1040x 2010 form   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040x 2010 form Depreciation. 1040x 2010 form   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. 1040x 2010 form If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040x 2010 form If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040x 2010 form   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. 1040x 2010 form   See chapter 7 for information on figuring the depreciation you should have claimed. 1040x 2010 form   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. 1040x 2010 form Casualty and theft losses. 1040x 2010 form   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. 1040x 2010 form Also, decrease it by any deductible loss not covered by insurance. 1040x 2010 form See chapter 11 for information about figuring your casualty or theft loss. 1040x 2010 form   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. 1040x 2010 form To make this determination, compare the repaired property to the property before the casualty. 1040x 2010 form Easements. 1040x 2010 form   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. 1040x 2010 form It reduces the basis of the affected part of the property. 1040x 2010 form If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040x 2010 form See Easements and rights-of-way in chapter 3. 1040x 2010 form Exclusion from income of subsidies for energy conservation measures. 1040x 2010 form   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. 1040x 2010 form Reduce the basis of the property by the excluded amount. 1040x 2010 form Canceled debt excluded from income. 1040x 2010 form   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040x 2010 form A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040x 2010 form   You can exclude your canceled debt from income if the debt is any of the following. 1040x 2010 form Debt canceled in a bankruptcy case or when you are insolvent. 1040x 2010 form Qualified farm debt. 1040x 2010 form Qualified real property business debt (provided you are not a C corporation). 1040x 2010 form Qualified principal residence indebtedness. 1040x 2010 form Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. 1040x 2010 form If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040x 2010 form If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. 1040x 2010 form   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. 1040x 2010 form For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. 1040x 2010 form For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. 1040x 2010 form For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. 1040x 2010 form Basis Other Than Cost There are times when you cannot use cost as basis. 1040x 2010 form In these situations, the fair market value or the adjusted basis of property may be used. 1040x 2010 form Examples are discussed next. 1040x 2010 form Property changed from personal to business or rental use. 1040x 2010 form   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040x 2010 form An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. 1040x 2010 form   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040x 2010 form   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. 1040x 2010 form The basis for figuring a gain is your adjusted basis in the property when you sell the property. 1040x 2010 form Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040x 2010 form Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . 1040x 2010 form Property received for services. 1040x 2010 form   If you receive property for services, include the property's FMV in income. 1040x 2010 form The amount you include in income becomes your basis. 1040x 2010 form If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040x 2010 form Example. 1040x 2010 form George Smith is an accountant and also operates a farming business. 1040x 2010 form George agreed to do some accounting work for his neighbor in exchange for a dairy cow. 1040x 2010 form The accounting work and the cow are each worth $1,500. 1040x 2010 form George must include $1,500 in income for his accounting services. 1040x 2010 form George's basis in the cow is $1,500. 1040x 2010 form Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. 1040x 2010 form A taxable gain or deductible loss also is known as a recognized gain or loss. 1040x 2010 form A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. 1040x 2010 form If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. 1040x 2010 form Example. 1040x 2010 form You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. 1040x 2010 form You must report a taxable gain of $4,000 for the land. 1040x 2010 form The tractor has a basis of $6,000. 1040x 2010 form Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. 1040x 2010 form Similar or related property. 1040x 2010 form   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. 1040x 2010 form However, make the following adjustments. 1040x 2010 form Decrease the basis by the following amounts. 1040x 2010 form Any loss you recognize on the involuntary conversion. 1040x 2010 form Any money you receive that you do not spend on similar property. 1040x 2010 form Increase the basis by the following amounts. 1040x 2010 form Any gain you recognize on the involuntary conversion. 1040x 2010 form Any cost of acquiring the replacement property. 1040x 2010 form Money or property not similar or related. 1040x 2010 form   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. 1040x 2010 form Allocating the basis. 1040x 2010 form   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040x 2010 form Basis for depreciation. 1040x 2010 form   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. 1040x 2010 form For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040x 2010 form For more information about involuntary conversions, see chapter 11. 1040x 2010 form Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040x 2010 form A nontaxable gain or loss also is known as an unrecognized gain or loss. 1040x 2010 form If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040x 2010 form Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040x 2010 form For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040x 2010 form There must also be an exchange of like-kind property. 1040x 2010 form For more information, see Like-Kind Exchanges in  chapter 8. 1040x 2010 form The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. 1040x 2010 form Example 1. 1040x 2010 form You traded a truck you used in your farming business for a new smaller truck to use in farming. 1040x 2010 form The adjusted basis of the old truck was $10,000. 1040x 2010 form The FMV of the new truck is $30,000. 1040x 2010 form Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. 1040x 2010 form Example 2. 1040x 2010 form You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). 1040x 2010 form You use both the field cultivator and the planter in your farming business. 1040x 2010 form The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. 1040x 2010 form   Exchange expenses generally are the closing costs that you pay. 1040x 2010 form They include such items as brokerage commissions, attorney fees, and deed preparation fees. 1040x 2010 form Add them to the basis of the like-kind property you receive. 1040x 2010 form Property plus cash. 1040x 2010 form   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. 1040x 2010 form Example. 1040x 2010 form You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. 1040x 2010 form Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). 1040x 2010 form Special rules for related persons. 1040x 2010 form   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040x 2010 form Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. 1040x 2010 form Each person reports it on the tax return filed for the year in which the later disposition occurred. 1040x 2010 form If this rule applies, the basis of the property received in the original exchange will be its FMV. 1040x 2010 form For more information, see chapter 8. 1040x 2010 form Exchange of business property. 1040x 2010 form   Exchanging the property of one business for the property of another business generally is a multiple property exchange. 1040x 2010 form For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040x 2010 form Basis for depreciation. 1040x 2010 form   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. 1040x 2010 form For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. 1040x 2010 form Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. 1040x 2010 form The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. 1040x 2010 form Decrease the basis by the following amounts. 1040x 2010 form Any money you receive. 1040x 2010 form Any loss you recognize on the exchange. 1040x 2010 form Increase the basis by the following amounts. 1040x 2010 form Any additional costs you incur. 1040x 2010 form Any gain you recognize on the exchange. 1040x 2010 form If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040x 2010 form Example 1. 1040x 2010 form You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. 1040x 2010 form You realize a gain of $40,000. 1040x 2010 form This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). 1040x 2010 form Include your gain in income (recognize gain) only to the extent of the cash received. 1040x 2010 form Your basis in the land you received is figured as follows. 1040x 2010 form Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. 1040x 2010 form You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. 1040x 2010 form You realize a gain of $7,250. 1040x 2010 form This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). 1040x 2010 form You include all the gain in your income (recognize gain) because the gain is less than the cash you received. 1040x 2010 form Your basis in the truck you received is figured as follows. 1040x 2010 form Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. 1040x 2010 form   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040x 2010 form The rest is the basis of the like-kind property. 1040x 2010 form Example. 1040x 2010 form You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. 1040x 2010 form You also received $1,000 cash and a truck that had an FMV of $3,000. 1040x 2010 form The truck is unlike property. 1040x 2010 form You realized a gain of $1,500. 1040x 2010 form This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). 1040x 2010 form You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040x 2010 form Your basis in the properties you received is figured as follows. 1040x 2010 form Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). 1040x 2010 form This is the truck's FMV. 1040x 2010 form The rest ($12,500) is the basis of the tractor. 1040x 2010 form Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040x 2010 form Example. 1040x 2010 form You used a tractor on your farm for 3 years. 1040x 2010 form Its adjusted basis is $22,000 and its FMV is $40,000. 1040x 2010 form You are interested in a new tractor, which sells for $60,000. 1040x 2010 form Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. 1040x 2010 form Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). 1040x 2010 form However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. 1040x 2010 form Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). 1040x 2010 form Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. 1040x 2010 form Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. 1040x 2010 form You also must know its FMV at the time it was given to you and any gift tax paid on it. 1040x 2010 form FMV equal to or greater than donor's adjusted basis. 1040x 2010 form   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. 1040x 2010 form Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040x 2010 form   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. 1040x 2010 form See Adjusted Basis , earlier. 1040x 2010 form   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. 1040x 2010 form Figure the increase by multiplying the gift tax paid by the following fraction. 1040x 2010 form Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. 1040x 2010 form The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040x 2010 form Example. 1040x 2010 form In 2013, you received a gift of property from your mother that had an FMV of $50,000. 1040x 2010 form Her adjusted basis was $20,000. 1040x 2010 form The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). 1040x 2010 form She paid a gift tax of $7,320. 1040x 2010 form Your basis, $26,076, is figured as follows. 1040x 2010 form Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . 1040x 2010 form 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. 1040x 2010 form If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. 1040x 2010 form However, your basis cannot exceed the FMV of the gift when it was given to you. 1040x 2010 form FMV less than donor's adjusted basis. 1040x 2010 form   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040x 2010 form Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. 1040x 2010 form Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. 1040x 2010 form (See Adjusted Basis , earlier. 1040x 2010 form )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. 1040x 2010 form Example. 1040x 2010 form You received farmland as a gift from your parents when they retired from farming. 1040x 2010 form At the time of the gift, the land had an FMV of $80,000. 1040x 2010 form Your parents' adjusted basis was $100,000. 1040x 2010 form After you received the land, no events occurred that would increase or decrease your basis. 1040x 2010 form If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. 1040x 2010 form If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. 1040x 2010 form If the sales price is between $80,000 and $100,000, you have neither gain nor loss. 1040x 2010 form For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. 1040x 2010 form If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. 1040x 2010 form Business property. 1040x 2010 form   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040x 2010 form Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. 1040x 2010 form The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. 1040x 2010 form However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. 1040x 2010 form The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. 1040x 2010 form For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. 1040x 2010 form Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. 1040x 2010 form If a federal estate return is filed, you can use its appraised value. 1040x 2010 form The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. 1040x 2010 form For information on the alternate valuation, see the Instructions for Form 706. 1040x 2010 form The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. 1040x 2010 form If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040x 2010 form Special-use valuation method. 1040x 2010 form   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. 1040x 2010 form If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. 1040x 2010 form If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. 1040x 2010 form The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040x 2010 form   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040x 2010 form Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. 1040x 2010 form Figure all FMVs without regard to the special-use valuation. 1040x 2010 form   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. 1040x 2010 form This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. 1040x 2010 form The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. 1040x 2010 form   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040x 2010 form To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. 1040x 2010 form If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040x 2010 form The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. 1040x 2010 form   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. 1040x 2010 form   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. 1040x 2010 form Property inherited from a decedent who died in 2010. 1040x 2010 form   If you inherited property from a decedent who died in 2010, different rules may apply. 1040x 2010 form See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. 1040x 2010 form Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. 1040x 2010 form Partner's basis. 1040x 2010 form   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. 1040x 2010 form However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. 1040x 2010 form For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. 1040x 2010 form Shareholder's basis. 1040x 2010 form   The basis of property distributed by a corporation to a shareholder is its fair market value. 1040x 2010 form For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. 1040x 2010 form Prev  Up  Next   Home   More Online Publications
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IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

IR-2014-16, Feb. 19, 2014

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

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

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

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

The following are the Dirty Dozen tax scams for 2014:

Identity Theft

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

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

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

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

Pervasive Telephone Scams

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

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

Characteristics of these scams can include:

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

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

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

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

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

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

Phishing

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

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

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

False Promises of “Free Money” from Inflated Refunds

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

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

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

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

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

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

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

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

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

Return Preparer Fraud

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

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

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

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

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

Hiding Income Offshore

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

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

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

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

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

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

Impersonation of Charitable Organizations

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

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

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

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

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

False Income, Expenses or Exemptions

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

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

Frivolous Arguments

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

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

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

Falsely Claiming Zero Wages or Using False Form 1099

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

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

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

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

Abusive Tax Structures

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

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

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

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

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

Misuse of Trusts

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

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

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

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Page Last Reviewed or Updated: 21-Feb-2014

The 1040x 2010 Form

1040x 2010 form 34. 1040x 2010 form   Child Tax Credit Table of Contents Introduction Useful Items - You may want to see: Qualifying Child Amount of CreditLimits on the Credit Claiming the Credit Additional Child Tax Credit Completing Schedule 8812 (Form 1040A or 1040)Part I Parts II–IV Introduction The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children. 1040x 2010 form The additional child tax credit is a credit you may be able to take if you are not able to claim the full amount of the child tax credit. 1040x 2010 form This chapter explains the following. 1040x 2010 form Who is a qualifying child. 1040x 2010 form The amount of the credit. 1040x 2010 form How to claim the credit. 1040x 2010 form The child tax credit and the additional child tax credit should not be confused with the child and dependent care credit discussed in chapter 32. 1040x 2010 form If you have no tax. 1040x 2010 form   Credits, such as the child tax credit or the credit for child and dependent care expenses, are used to reduce tax. 1040x 2010 form If your tax on Form 1040, line 46, or Form 1040A, line 28, is zero, do not figure the child tax credit because there is no tax to reduce. 1040x 2010 form However, you may qualify for the additional child tax credit on line 65 (Form 1040) or line 39 (Form 1040A). 1040x 2010 form Useful Items - You may want to see: Publication 972 Child Tax Credit Form (and Instructions) Schedule 8812 (Form 1040A or 1040) Child Tax Credit W-4 Employee's Withholding Allowance Certificate Qualifying Child A qualifying child for purposes of the child tax credit is a child who: Is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild, niece, or nephew), Was under age 17 at the end of 2013, Did not provide over half of his or her own support for 2013, Lived with you for more than half of 2013 (see Exceptions to time lived with you , later), Is claimed as a dependent on your return, Does not file a joint return for the year (or files it only as a claim for refund), and Was a U. 1040x 2010 form S. 1040x 2010 form citizen, a U. 1040x 2010 form S. 1040x 2010 form national, or a resident of the United States. 1040x 2010 form If the child was adopted, see Adopted child , later. 1040x 2010 form For each qualifying child you must check the box on Form 1040 or Form 1040A, line 6c. 1040x 2010 form Example 1. 1040x 2010 form Your son turned 17 on December 30, 2013. 1040x 2010 form He is a citizen of the United States and you claimed him as a dependent on your return. 1040x 2010 form He is not a qualifying child for the child tax credit because he was not under age 17 at the end of 2013. 1040x 2010 form Example 2. 1040x 2010 form Your daughter turned 8 years old in 2013. 1040x 2010 form She is not a citizen of the United States, has an ITIN, and lived in Mexico all of 2013. 1040x 2010 form She is not a qualifying child for the child tax credit because she was not a resident of the United States for 2013. 1040x 2010 form Filers who have certain child dependents with an Individual Taxpayer Identification Number (ITIN). 1040x 2010 form   If you are claiming a child tax credit or additional child tax credit for a child you identified on your tax return with an ITIN instead of an SSN, you must complete Part I of Schedule 8812 (Form 1040A or 1040). 1040x 2010 form   Although a child may be your dependent, you may only claim a child tax credit or additional child tax credit for a dependent who is a citizen, national, or resident of the United States. 1040x 2010 form To be treated as a resident of the United States, a child generally will need to meet the requirements of the substantial presence test. 1040x 2010 form For more information about the substantial presence test, see Publication 519, U. 1040x 2010 form S. 1040x 2010 form Tax Guide for Aliens. 1040x 2010 form Adopted child. 1040x 2010 form   An adopted child is always treated as your own child. 1040x 2010 form An adopted child includes a child lawfully placed with you for legal adoption. 1040x 2010 form   If you are a U. 1040x 2010 form S. 1040x 2010 form citizen or U. 1040x 2010 form S. 1040x 2010 form national and your adopted child lived with you all year as a member of your household in 2013, that child meets condition (7) above to be a qualifying child for the child tax credit. 1040x 2010 form Exceptions to time lived with you. 1040x 2010 form   A child is considered to have lived with you for more than half of 2013 if the child was born or died in 2013 and your home was this child's home for more than half the time he or she was alive. 1040x 2010 form Temporary absences by you or the child for special circumstances, such as for school, vacation, business, medical care, military service, or detention in a juvenile facility, count as time the child lived with you. 1040x 2010 form   There are also exceptions for kidnapped children and children of divorced or separated parents. 1040x 2010 form For details, see Residency Test in chapter 3. 1040x 2010 form Qualifying child of more than one person. 1040x 2010 form   A special rule applies if your qualifying child is the qualifying child of more than one person. 1040x 2010 form For details, see Special Rule for Qualifying Child of More Than One Person in chapter 3. 1040x 2010 form Amount of Credit The maximum amount you can claim for the credit is $1,000 for each qualifying child. 1040x 2010 form Limits on the Credit You must reduce your child tax credit if either (1) or (2) applies. 1040x 2010 form The amount on Form 1040, line 46, or Form 1040A, line 28, is less than the credit. 1040x 2010 form If this amount is zero, you cannot take this credit because there is no tax to reduce. 1040x 2010 form But you may be able to take the additional child tax credit. 1040x 2010 form See Additional Child Tax Credit , later. 1040x 2010 form Your modified adjusted gross income (AGI) is more than the amount shown below for your filing status. 1040x 2010 form Married filing jointly - $110,000. 1040x 2010 form Single, head of household, or qualifying widow(er) - $75,000. 1040x 2010 form Married filing separately - $55,000. 1040x 2010 form Modified AGI. 1040x 2010 form   For purposes of the child tax credit, your modified AGI is your AGI plus the following amounts that may apply to you. 1040x 2010 form Any amount excluded from income because of the exclusion of income from  Puerto Rico. 1040x 2010 form On the dotted line next to Form 1040, line 38, enter the amount excluded and identify it as “EPRI. 1040x 2010 form ” Also attach a copy of any Form(s) 499R-2/W-2PR to your return. 1040x 2010 form Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income. 1040x 2010 form Any amount on line 18 of Form 2555-EZ, Foreign Earned Income Exclusion. 1040x 2010 form Any amount on line 15 of Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa. 1040x 2010 form   If you do not have any of the above, your modified AGI is the same as your AGI. 1040x 2010 form AGI. 1040x 2010 form   Your AGI is the amount on Form 1040, line 38, or Form 1040A, line 22. 1040x 2010 form Claiming the Credit To claim the child tax credit, you must file Form 1040 or Form 1040A. 1040x 2010 form You cannot claim the child tax credit on Form 1040EZ. 1040x 2010 form You must provide the name and identification number (usually a social security number) on your tax return for each qualifying child. 1040x 2010 form If you claim the child tax credit with a child identified by an ITIN, you must also file Schedule 8812. 1040x 2010 form To figure your credit, first review the Child Tax Credit Worksheet in your Form 1040 or 1040A instructions. 1040x 2010 form If you are instructed to use Publication 972, you may not use the worksheet in your tax return instructions; instead, you must use Publication 972 to figure the credit. 1040x 2010 form If you are not instructed to use Publication 972, you may use the Child Tax Credit Worksheet in your Form 1040 or 1040A instructions or Publication 972 to figure the credit. 1040x 2010 form Additional Child Tax Credit This credit is for certain individuals who get less than the full amount of the child tax credit. 1040x 2010 form The additional child tax credit may give you a refund even if you do not owe any tax. 1040x 2010 form How to claim the additional child tax credit. 1040x 2010 form   To claim the additional child tax credit, follow the steps below. 1040x 2010 form Make sure you figured the amount, if any, of your child tax credit. 1040x 2010 form See Claiming the Credit , earlier. 1040x 2010 form If you answered “Yes” on line 9 or line 10 of the Child Tax Credit Worksheet in the Form 1040 or Form 1040A instructions, or line 13 of the Child Tax Credit Worksheet in Publication 972, use Parts II through IV of Schedule 8812 to see if you can take the additional child tax credit. 1040x 2010 form If you have an additional child tax credit on line 13 of Schedule 8812, carry it to Form 1040, line 65, or Form 1040A, line 39. 1040x 2010 form Completing Schedule 8812 (Form 1040A or 1040) Schedule 8812 contains four parts, but can really be thought of as two sections. 1040x 2010 form Part I is distinct and separate from Parts II–IV. 1040x 2010 form If all your children are identified by social security numbers or IRS adoption taxpayer identification numbers and you are not claiming the additional child tax credit, you do not need to complete or attach Schedule 8812 to your tax return. 1040x 2010 form Part I You only need to complete Part I if you are claiming the child tax credit for a child identified by an IRS individual taxpayer identification number (ITIN). 1040x 2010 form When completing Part I, only answer the questions with regard to children identified by an ITIN; you do not need to complete Part I of Schedule 8812 for any child that is identified by a social security number (SSN) or an IRS adoption taxpayer identification number (ATIN). 1040x 2010 form If all the children for whom you checked the box in column 4 of line 6c on your Form 1040 or Form 1040A are identified by an SSN or an ATIN, you do not need to complete Part I of Schedule 8812. 1040x 2010 form Parts II–IV Parts II–IV help you figure your additional child tax credit. 1040x 2010 form Generally, you should only complete Parts II–IV if you are instructed to do so after completing the Child Tax Credit Worksheet in your tax return instructions or Publication 972. 1040x 2010 form See How to claim the additional child tax credit , earlier. 1040x 2010 form Prev  Up  Next   Home   More Online Publications