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Download 1040x 5. Download 1040x   Recordkeeping Table of Contents How To Prove ExpensesWhat Are Adequate Records? What If I Have Incomplete Records? Separating and Combining Expenses How Long To Keep Records and Receipts Examples of Records If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expense. Download 1040x This chapter discusses the records you need to keep to prove these expenses. Download 1040x If you keep timely and accurate records, you will have support to show the IRS if your tax return is ever examined. Download 1040x You will also have proof of expenses that your employer may require if you are reimbursed under an accountable plan. Download 1040x These plans are discussed in chapter 6 under Reimbursements . Download 1040x How To Prove Expenses Table 5-1 is a summary of records you need to prove each expense discussed in this publication. Download 1040x You must be able to prove the elements listed across the top portion of the chart. Download 1040x You prove them by having the information and receipts (where needed) for the expenses listed in the first column. Download 1040x You cannot deduct amounts that you approximate or estimate. Download 1040x You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Download 1040x You must generally prepare a written record for it to be considered adequate. Download 1040x This is because written evidence is more reliable than oral evidence alone. Download 1040x However, if you prepare a record on a computer, it is considered an adequate record. Download 1040x What Are Adequate Records? You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. Download 1040x You should also keep documentary evidence that, together with your record, will support each element of an expense. Download 1040x Documentary evidence. Download 1040x   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Download 1040x Exception. Download 1040x   Documentary evidence is not needed if any of the following conditions apply. Download 1040x You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging. Download 1040x ( Accountable plans and per diem allowances are discussed in chapter 6. Download 1040x ) Your expense, other than lodging, is less than $75. Download 1040x You have a transportation expense for which a receipt is not readily available. Download 1040x Adequate evidence. Download 1040x   Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense. Download 1040x   For example, a hotel receipt is enough to support expenses for business travel if it has all of the following information. Download 1040x The name and location of the hotel. Download 1040x The dates you stayed there. Download 1040x Separate amounts for charges such as lodging, meals, and telephone calls. Download 1040x   A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information. Download 1040x The name and location of the restaurant. Download 1040x The number of people served. Download 1040x The date and amount of the expense. Download 1040x If a charge is made for items other than food and beverages, the receipt must show that this is the case. Download 1040x Canceled check. Download 1040x   A canceled check, together with a bill from the payee, ordinarily establishes the cost. Download 1040x However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose. Download 1040x Duplicate information. Download 1040x   You do not have to record information in your account book or other record that duplicates information shown on a receipt as long as your records and receipts complement each other in an orderly manner. Download 1040x   You do not have to record amounts your employer pays directly for any ticket or other travel item. Download 1040x However, if you charge these items to your employer, through a credit card or otherwise, you must keep a record of the amounts you spend. Download 1040x Timely-kept records. Download 1040x   You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. Download 1040x A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. Download 1040x   You do not need to write down the elements of every expense on the day of the expense. Download 1040x If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record. Download 1040x   If you give your employer, client, or customer an expense account statement, it can also be considered a timely-kept record. Download 1040x This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record. Download 1040x Proving business purpose. Download 1040x   You must generally provide a written statement of the business purpose of an expense. Download 1040x However, the degree of proof varies according to the circumstances in each case. Download 1040x If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation. Download 1040x Example. Download 1040x If you are a sales representative who calls on customers on an established sales route, you do not have to give a written explanation of the business purpose for traveling that route. Download 1040x You can satisfy the requirements by recording the length of the delivery route once, the date of each trip at or near the time of the trips, and the total miles you drove the car during the tax year. Download 1040x You could also establish the date of each trip with a receipt, record of delivery, or other documentary evidence. Download 1040x Confidential information. Download 1040x   You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. Download 1040x However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. Download 1040x What If I Have Incomplete Records? If you do not have complete records to prove an element of an expense, then you must prove the element with: Your own written or oral statement containing specific information about the element, and Other supporting evidence that is sufficient to establish the element. Download 1040x If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence. Download 1040x Direct evidence can be written statements or the oral testimony of your guests or other witnesses setting forth detailed information about the element. Download 1040x Documentary evidence can be receipts, paid bills, or similar evidence. Download 1040x If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial rather than direct. Download 1040x For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes. Download 1040x Invoices of deliveries establish when you used the car for business. Download 1040x Table 5-1. Download 1040x How To Prove Certain Business Expenses IF you have expenses for . Download 1040x . Download 1040x THEN you must keep records that show details of the following elements . Download 1040x . Download 1040x . Download 1040x   Amount Time Place or  Description Business Purpose Business Relationship Travel Cost of each separate expense for travel, lodging, and meals. Download 1040x Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Download 1040x Dates you left and returned for each trip and number of days spent on business. Download 1040x Destination or area of your travel (name of city, town, or other designation). Download 1040x Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Download 1040x    Relationship: N/A Entertainment Cost of each separate expense. Download 1040x Incidental expenses such as taxis, telephones, etc. Download 1040x , may be totaled on a daily basis. Download 1040x Date of entertainment. Download 1040x (Also see Business Purpose. Download 1040x ) Name and address or location of place of entertainment. Download 1040x Type of entertainment if not otherwise apparent. Download 1040x (Also see Business Purpose. Download 1040x ) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained. Download 1040x  For entertainment, the nature of the business discussion or activity. Download 1040x If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity. Download 1040x    Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. Download 1040x  For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Download 1040x Gifts Cost of the gift. Download 1040x Date of the gift. Download 1040x Description of the gift. Download 1040x   Transportation Cost of each separate expense. Download 1040x For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Download 1040x Date of the expense. Download 1040x For car expenses, the date of the use of the car. Download 1040x Your business destination. Download 1040x Purpose: Business purpose for the expense. Download 1040x    Relationship: N/A Sampling. Download 1040x   You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. Download 1040x You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year. Download 1040x Example. Download 1040x You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. Download 1040x There is no other business use of the car, but you and your family use the car for personal purposes. Download 1040x You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Download 1040x Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Download 1040x Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year. Download 1040x Exceptional circumstances. Download 1040x   You can satisfy the substantiation requirements with other evidence if, because of the nature of the situation in which an expense is made, you cannot get a receipt. Download 1040x This applies if all the following are true. Download 1040x You were unable to obtain evidence for an element of the expense or use that completely satisfies the requirements explained earlier under What Are Adequate Records . Download 1040x You are unable to obtain evidence for an element that completely satisfies the two rules listed earlier under What If I Have Incomplete Records . Download 1040x You have presented other evidence for the element that is the best proof possible under the circumstances. Download 1040x Destroyed records. Download 1040x   If you cannot produce a receipt because of reasons beyond your control, you can prove a deduction by reconstructing your records or expenses. Download 1040x Reasons beyond your control include fire, flood, and other casualties. Download 1040x    Table 5-2. Download 1040x Daily Business Mileage and Expense Log Name:       Odometer Readings Expenses Date Destination  (City, Town, or Area) Business Purpose Start Stop Miles  this trip Type  (Gas, oil, tolls, etc. Download 1040x ) Amount                                                                                                                   Weekly  Total             Total Year-to-Date             Separating and Combining Expenses This section explains when expenses must be kept separate and when expenses can be combined. Download 1040x Separating expenses. Download 1040x   Each separate payment is generally considered a separate expense. Download 1040x For example, if you entertain a customer or client at dinner and then go to the theater, the dinner expense and the cost of the theater tickets are two separate expenses. Download 1040x You must record them separately in your records. Download 1040x Season or series tickets. Download 1040x   If you buy season or series tickets for business use, you must treat each ticket in the series as a separate item. Download 1040x To determine the cost of individual tickets, divide the total cost (but not more than face value) by the number of games or performances in the series. Download 1040x You must keep records to show whether you use each ticket as a gift or entertainment. Download 1040x Also, you must be able to prove the cost of nonluxury box seat tickets if you rent a skybox or other private luxury box for more than one event. Download 1040x See Entertainment tickets in chapter 2. Download 1040x Combining items. Download 1040x   You can make one daily entry in your record for reasonable categories of expenses. Download 1040x Examples are taxi fares, telephone calls, or other incidental travel costs. Download 1040x Meals should be in a separate category. Download 1040x You can include tips for meal-related services with the costs of the meals. Download 1040x   Expenses of a similar nature occurring during the course of a single event are considered a single expense. Download 1040x For example, if during entertainment at a cocktail lounge, you pay separately for each serving of refreshments, the total expense for the refreshments is treated as a single expense. Download 1040x Car expenses. Download 1040x   You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record. Download 1040x Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use. Download 1040x Example. Download 1040x You make deliveries at several different locations on a route that begins and ends at your employer's business premises and that includes a stop at the business premises between two deliveries. Download 1040x You can account for these using a single record of miles driven. Download 1040x Gift expenses. Download 1040x   You do not always have to record the name of each recipient of a gift. Download 1040x A general listing will be enough if it is evident that you are not trying to avoid the $25 annual limit on the amount you can deduct for gifts to any one person. Download 1040x For example, if you buy a large number of tickets to local high school basketball games and give one or two tickets to each of many customers, it is usually enough to record a general description of the recipients. Download 1040x Allocating total cost. Download 1040x   If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro rata basis. Download 1040x To do so, you must establish the number of persons who participated in the event. Download 1040x   An allocation would be needed, for example, if you did not have a business relationship with all of your guests. Download 1040x See Allocating between business and nonbusiness in chapter 2. Download 1040x If your return is examined. Download 1040x    If your return is examined, you may have to provide additional information to the IRS. Download 1040x This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed. Download 1040x    THIS IS NOT AN OFFICIAL INTERNAL REVENUE FORM Table 5-3. Download 1040x Weekly Traveling Expense and Entertainment Record From: To: Name: Expenses Sunday Monday Tuesday Wednesday Thursday Friday Saturday Total 1. Download 1040x Travel Expenses: Airlines                                 Excess Baggage                                 Bus – Train                                 Cab and Limousine                                 Tips                                 Porter                                 2. Download 1040x Meals and Lodging:  Breakfast                                 Lunch                                 Dinner                                 Hotel and Motel  (Detail in Schedule B)                                 3. Download 1040x Entertainment  (Detail in Schedule C)                                 4. Download 1040x Other Expenses:  Postage                                 Telephone & Telegraph                                 Stationery & Printing                                 Stenographer                                 Sample Room                                 Advertising                                 Assistant(s)                                 Trade Shows                                 5. Download 1040x Car Expenses: (List all car expenses - the division between business and personal expenses may be made at the end of the year. Download 1040x ) (Detail mileage in Schedule A. Download 1040x ) Gas, oil, lube, wash                                 Repairs, parts                                 Tires, supplies                                 Parking fees, tolls                                 6. Download 1040x Other (Identify)                                 Total                                 Note: Attach receipted bills for (1) ALL lodging and (2) any other expenses of $75. Download 1040x 00 or more. Download 1040x Schedule A – Car Mileage: End                 Start                 Total                 Business Mileage                 Schedule B – Lodging Hotel or Motel Name                 City                 Schedule C – Entertainment Date Item Place Amount Business Purpose Business Relationship                                             WEEKLY REIMBURSEMENTS:     Travel and transportation expenses     Other reimbursements     TOTAL   How Long To Keep Records and Receipts You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Download 1040x Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. Download 1040x A return filed early is considered filed on the due date. Download 1040x For a more complete explanation of how long to keep records, see Publication 583, Starting a Business and Keeping Records. Download 1040x You must keep records of the business use of your car for each year of the recovery period. Download 1040x See More-than-50%-use test in chapter 4 under Depreciation Deduction. Download 1040x Reimbursed for expenses. Download 1040x   Employees who give their records and documentation to their employers and are reimbursed for their expenses generally do not have to keep copies of this information. Download 1040x However, you may have to prove your expenses if any of the following conditions apply. Download 1040x You claim deductions for expenses that are more than reimbursements. Download 1040x Your expenses are reimbursed under a nonaccountable plan. Download 1040x Your employer does not use adequate accounting procedures to verify expense accounts. Download 1040x You are related to your employer as defined under Per Diem and Car Allowances , in chapter 6. Download 1040x Reimbursements , adequate accounting , and nonaccountable plans are discussed in chapter 6. Download 1040x Examples of Records Table 5-2 and Table 5-3 are examples of worksheets which can be used for tracking business expenses. Download 1040x Prev  Up  Next   Home   More Online Publications
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IRS - Taxpayer Compliance Research

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The IRS seeks to help taxpayers comply with their tax obligations voluntarily and timely. The articles and publications on this page contain research related to taxpayer compliance. Compliance measurement research, also known as the tax gap, examines how much tax is not paid voluntarily and timely. Another set of research looks at the causes of taxpayer compliance.

All files on this page are available in Adobe® PDF format, which requires the free Adobe Acrobat® reader to view and print the file.


Tax Gap

Federal Tax Compliance Research: Individual Income Tax Gap Estimates for 1985, 1988, and 1992

Author:

IRS, Compliance Research

Publication date: April 1996, revised
Written for:

Publication 1415

Federal Tax Compliance Research: Gross and Net Employment Tax Gap Estimates for 1984-1997

Author:

IRS, Research Division

Publication date: October 1993, revised
Written for: Publication 1415-E

Income Tax Compliance Research: Net Tax Gap and Remittance Gap Estimates

Author:

IRS Research Division

Publication date: April 1990, revised
Written for:

Publication 1415


Compliance Analysis

Statistical Analysis of Compliance Using the NRP Data: Detection Controlled Models

Author:

Jonathan Feinstein
Yale University

Publication date: June 2004
Written for: 2004 IRS Research Conference
       
Trends as Changes in Variance: The Case of Tax Noncompliance
Author: Kim M. Bloomquist
IRS
Publication date: June 2003
Written for: 2003 IRS Research Conference
                                                   
IRS's Comprehensive Approach to Compliance Measurement
Authors: Robert E. Brown, IRS, National Research Program,
Mark J. Mazur, IRS, Research, Analysis, and Statistics
Publication date: June 2003
Written for: 2003 National Tax Association Spring Symposium
                                                  
Developing an Econometric Model for Measuring Tax Noncompliance Using Operational Audit Data
Authors: Brian Erard, B. Erard and Associates,
Chih-Chin Ho, IRS
Publication date: August 2002
Written for: 2002 American Statistical Association Conference
                                                                 
Compliance Estimates for Earned Income Tax Credit Claimed on 1999 Returns
Author: IRS
Publication date: June 2002
Written for: 2002 IRS Research Conference
                                                  
Compliance Measurement and Workload Selection with Operational Audit Data
Author: Brian Erard, B. Erard and Associates
Publication date: June 2002
Written for: 2002 IRS Research Conference
                                  
Trends in Book-Tax Income and Balance Sheet Differences
Authors:

Lillian Mills and Kaye Newberry, University of Arizona,
William B. Trautman, IRS, Large and Mid-Size Business Division

Publication date: June 2002
Written for: 2002 IRS Research Conference
                                        
Nonfiler Profiles, Fiscal Year 1993: A Focus on Repeaters
Author: Laura R. Rosage
IRS
Publication date: 1996
Written for: SOI Bulletin, Summer Issue
                                                


Determinants of Taxpayer Compliance

Audit Information Dissemination, Taxpayer Communication, and Compliance: An Experimental Approach
Authors:

James Alm, Georgia State University,
Betty Jackson, University of Colorado at Boulder,
Michael McKee, University of Tennessee at Knoxville

Publication date: June 2004 
Written for: 2004 IRS Research Conference 
    
                          
Criminal Investigation Enforcement Activities and Taxpayer Noncompliance
Author:

Jeffrey Dubin
California Institute of Technology

Publication date: June 2004
Written for: 2004 IRS Research Conference
                                                   
Tax Evasion, Income Inequality and Opportunity Costs of Compliance
Author: Kim M. Bloomquist,
IRS, Office of Research
Publication date: November 2003
Written for: 2003 National Tax Association Annual Conference
                                                  
Economic and Behavioral Determinants of Tax Compliance: Evidence from the 1997 Arkansas Tax Penalty Amnesty Program
Authors: Christina M. Ritsema, Hope College,
Deborah W. Thomas and Gary D. Ferrier, University of Arkansas
Publication date: June 2003
Written for: 2003 IRS Research Conference
                                                                 
The Impact of the IRS on Voluntary Tax Compliance: Preliminary Empirical Results
Author: Alan H. Plumley, Technical Advisor,
IRS, Office of Research
Publication date: November 2002
Written for: 2002 National Tax Association Conference
                                                  
The Determinants of Individual Income Tax Compliance: Estimating the Impacts of Tax Policy, Enforcement and IRS Responsiveness
Author: Alan H. Plumley, Technical Advisor,
IRS, Office of Research
Publication date: November 1996, revised
Written for: IRS Publication 1916



 

 

 

  

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Page Last Reviewed or Updated: 12-Mar-2014

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Download 1040x 3. Download 1040x   Savings Incentive Match Plans for Employees (SIMPLE) Table of Contents Introduction What Is a SIMPLE Plan?Eligible Employees How Are Contributions Made? How Much Can Be Contributed on Your Behalf?Matching contributions less than 3%. Download 1040x Traditional IRA mistakenly moved to SIMPLE IRA. Download 1040x When Can You Withdraw or Use Assets?Are Distributions Taxable? Introduction This chapter is for employees who need information about savings incentive match plans for employees (SIMPLE plans). Download 1040x It explains what a SIMPLE plan is, contributions to a SIMPLE plan, and distributions from a SIMPLE plan. Download 1040x Under a SIMPLE plan, SIMPLE retirement accounts for participating employees can be set up either as: Part of a 401(k) plan, or A plan using IRAs (SIMPLE IRA). Download 1040x This chapter only discusses the SIMPLE plan rules that relate to SIMPLE IRAs. Download 1040x See chapter 3 of Publication 560 for information on any special rules for SIMPLE plans that do not use IRAs. Download 1040x If your employer maintains a SIMPLE plan, you must be notified, in writing, that you can choose the financial institution that will serve as trustee for your SIMPLE IRA and that you can roll over or transfer your SIMPLE IRA to another financial institution. Download 1040x See Rollovers and Transfers Exception, later under When Can You Withdraw or Use Assets. Download 1040x What Is a SIMPLE Plan? A SIMPLE plan is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. Download 1040x See chapter 3 of Publication 560 for information on the requirements employers must satisfy to set up a SIMPLE plan. Download 1040x A SIMPLE plan is a written agreement (salary reduction agreement) between you and your employer that allows you, if you are an eligible employee (including a self-employed individual), to choose to: Reduce your compensation (salary) by a certain percentage each pay period, and Have your employer contribute the salary reductions to a SIMPLE IRA on your behalf. Download 1040x These contributions are called salary reduction contributions. Download 1040x All contributions under a SIMPLE IRA plan must be made to SIMPLE IRAs, not to any other type of IRA. Download 1040x The SIMPLE IRA can be an individual retirement account or an individual retirement annuity, described in chapter 1. Download 1040x Contributions are made on behalf of eligible employees. Download 1040x (See Eligible Employees below. Download 1040x ) Contributions are also subject to various limits. Download 1040x (See How Much Can Be Contributed on Your Behalf , later. Download 1040x ) In addition to salary reduction contributions, your employer must make either matching contributions or nonelective contributions. Download 1040x See How Are Contributions Made , later. Download 1040x You may be able to claim a credit for contributions to your SIMPLE plan. Download 1040x For more information, see chapter 4. Download 1040x Eligible Employees You must be allowed to participate in your employer's SIMPLE plan if you: Received at least $5,000 in compensation from your employer during any 2 years prior to the current year, and Are reasonably expected to receive at least $5,000 in compensation during the calendar year for which contributions are made. Download 1040x Self-employed individual. Download 1040x   For SIMPLE plan purposes, the term employee includes a self-employed individual who received earned income. Download 1040x Excludable employees. Download 1040x   Your employer can exclude the following employees from participating in the SIMPLE plan. Download 1040x Employees whose retirement benefits are covered by a collective bargaining agreement (union contract). Download 1040x Employees who are nonresident aliens and received no earned income from sources within the United States. Download 1040x Employees who would not have been eligible employees if an acquisition, disposition, or similar transaction had not occurred during the year. Download 1040x Compensation. Download 1040x   For purposes of the SIMPLE plan rules, your compensation for a year generally includes the following amounts. Download 1040x Wages, tips, and other pay from your employer that is subject to income tax withholding. Download 1040x Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457) plans, SEP plans, and SIMPLE plans. Download 1040x Self-employed individual compensation. Download 1040x   For purposes of the SIMPLE plan rules, if you are self-employed, your compensation for a year is your net earnings from self-employment (Schedule SE (Form 1040), Section A, line 4, or Section B, line 6) before subtracting any contributions made to a SIMPLE IRA on your behalf. Download 1040x   For these purposes, net earnings from self-employment include services performed while claiming exemption from self-employment tax as a member of a group conscientiously opposed to social security benefits. Download 1040x How Are Contributions Made? Contributions under a salary reduction agreement are called salary reduction contributions. Download 1040x They are made on your behalf by your employer. Download 1040x Your employer must also make either matching contributions or nonelective contributions. Download 1040x Salary reduction contributions. Download 1040x   During the 60-day period before the beginning of any year, and during the 60-day period before you are eligible, you can choose salary reduction contributions expressed either as a percentage of compensation, or as a specific dollar amount (if your employer offers this choice). Download 1040x You can choose to cancel the election at any time during the year. Download 1040x   Salary reduction contributions are also referred to as “elective deferrals. Download 1040x ”   Your employer cannot place restrictions on the contributions amount (such as by limiting the contributions percentage), except to comply with the salary reduction contributions limit, discussed under How Much Can Be Contributed on Your Behalf, later. Download 1040x Matching contributions. Download 1040x   Unless your employer chooses to make nonelective contributions, your employer must make contributions equal to the salary reduction contributions you choose (elect), but only up to certain limits. Download 1040x See How Much Can Be Contributed on Your Behalf below. Download 1040x These contributions are in addition to the salary reduction contributions and must be made to the SIMPLE IRAs of all eligible employees (defined earlier) who chose salary reductions. Download 1040x These contributions are referred to as matching contributions. Download 1040x   Matching contributions on behalf of a self-employed individual are not treated as salary reduction contributions. Download 1040x Nonelective contributions. Download 1040x   Instead of making matching contributions, your employer may be able to choose to make nonelective contributions on behalf of all eligible employees. Download 1040x These nonelective contributions must be made on behalf of each eligible employee who has at least $5,000 of compensation from your employer, whether or not the employee chose salary reductions. Download 1040x   One of the requirements your employer must satisfy is notifying the employees that the election was made. Download 1040x For other requirements that your employer must satisfy, see chapter 3 of Publication 560. Download 1040x How Much Can Be Contributed on Your Behalf? The limits on contributions to a SIMPLE IRA vary with the type of contribution that is made. Download 1040x Salary reduction contributions limit. Download 1040x   Salary reduction contributions (employee-chosen contributions or elective deferrals) that your employer can make on your behalf under a SIMPLE plan are limited to $12,000 for 2013. Download 1040x The limitation remains at $12,000 for 2014. Download 1040x If you are a participant in any other employer plans during 2013 and you have elective salary reductions or deferred compensation under those plans, the salary reduction contributions under the SIMPLE plan also are included in the annual limit of $17,500 for 2013 on exclusions of salary reductions and other elective deferrals. Download 1040x You, not your employer, are responsible for monitoring compliance with these limits. Download 1040x Additional elective deferrals can be contributed to your SIMPLE plan if: You reached age 50 by the end of 2013, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions, such as the regular annual limit. Download 1040x The most that can be contributed in additional elective deferrals to your SIMPLE plan is the lesser of the following two amounts. Download 1040x $2,500 for 2013, or Your compensation for the year reduced by your other elective deferrals for the year. Download 1040x The additional deferrals are not subject to any other contribution limit and are not taken into account in applying other contribution limits. Download 1040x The additional deferrals are not subject to the nondiscrimination rules as long as all eligible participants are allowed to make them. Download 1040x Matching employer contributions limit. Download 1040x   Generally, your employer must make matching contributions to your SIMPLE IRA in an amount equal to your salary reduction contributions. Download 1040x These matching contributions cannot be more than 3% of your compensation for the calendar year. Download 1040x See Matching contributions less than 3% below. Download 1040x Example 1. Download 1040x In 2013, Joshua was a participant in his employer's SIMPLE plan. Download 1040x His compensation, before SIMPLE plan contributions, was $41,600 ($800 per week). Download 1040x Instead of taking it all in cash, Joshua elected to have 12. Download 1040x 5% of his weekly pay ($100) contributed to his SIMPLE IRA. Download 1040x For the full year, Joshua's salary reduction contributions were $5,200, which is less than the $12,000 limit on these contributions. Download 1040x Under the plan, Joshua's employer was required to make matching contributions to Joshua's SIMPLE IRA. Download 1040x Because his employer's matching contributions must equal Joshua's salary reductions, but cannot be more than 3% of his compensation (before salary reductions) for the year, his employer's matching contribution was limited to $1,248 (3% of $41,600). Download 1040x Example 2. Download 1040x Assume the same facts as in Example 1 , except that Joshua's compensation for the year was $408,163 and he chose to have 2. Download 1040x 94% of his weekly pay contributed to his SIMPLE IRA. Download 1040x In this example, Joshua's salary reduction contributions for the year (2. Download 1040x 94% × $408,163) were equal to the 2013 limit for salary reduction contributions ($12,000). Download 1040x Because 3% of Joshua's compensation ($12,245) is more than the amount his employer was required to match ($12,000), his employer's matching contributions were limited to $12,000. Download 1040x In this example, total contributions made on Joshua's behalf for the year were $24,000 ($12,000 (Joshua's contributions) + $12,000 (matching contributions)), the maximum contributions permitted under a SIMPLE IRA for 2013. Download 1040x Matching contributions less than 3%. Download 1040x   Your employer can reduce the 3% limit on matching contributions for a calendar year, but only if: The limit is not reduced below 1%, The limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective, and Employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which they can enter into salary reduction agreements. Download 1040x   For purposes of applying the rule in item (2) in determining whether the limit was reduced below 3% for the year, any year before the first year in which your employer (or a former employer) maintains a SIMPLE IRA plan will be treated as a year for which the limit was 3%. Download 1040x If your employer chooses to make nonelective contributions for a year, that year also will be treated as a year for which the limit was 3%. Download 1040x Nonelective employer contributions limit. Download 1040x   If your employer chooses to make nonelective contributions, instead of matching contributions, to each eligible employee's SIMPLE IRA, contributions must be 2% of your compensation for the entire year. Download 1040x For 2013, only $255,000 of your compensation can be taken into account to figure the contribution limit. Download 1040x   Your employer can substitute the 2% nonelective contribution for the matching contribution for a year if both of the following requirements are met. Download 1040x Eligible employees are notified that a 2% nonelective contribution will be made instead of a matching contribution. Download 1040x This notice is provided within a reasonable period during which employees can enter into salary reduction agreements. Download 1040x Example 3. Download 1040x Assume the same facts as in Example 2 , except that Joshua's employer chose to make nonelective contributions instead of matching contributions. Download 1040x Because his employer's nonelective contributions are limited to 2% of up to $255,000 of Joshua's compensation, his employer's contribution to Joshua's SIMPLE IRA was limited to $5,100. Download 1040x In this example, total contributions made on Joshua's behalf for the year were $17,100 (Joshua's salary reductions of $12,000 plus his employer's contribution of $5,100). Download 1040x Traditional IRA mistakenly moved to SIMPLE IRA. Download 1040x   If you mistakenly roll over or transfer an amount from a traditional IRA to a SIMPLE IRA, you can later recharacterize the amount as a contribution to another traditional IRA. Download 1040x For more information, see Recharacterizations in chapter 1. Download 1040x Recharacterizing employer contributions. Download 1040x   You cannot recharacterize employer contributions (including elective deferrals) under a SEP or SIMPLE plan as contributions to another IRA. Download 1040x SEPs are discussed in chapter 2 of Publication 560. Download 1040x SIMPLE plans are discussed in this chapter. Download 1040x Converting from a SIMPLE IRA. Download 1040x   Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained in chapter 1 under Converting From Any Traditional IRA Into a Roth IRA . Download 1040x    However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer. Download 1040x When Can You Withdraw or Use Assets? Generally, the same distribution (withdrawal) rules that apply to traditional IRAs apply to SIMPLE IRAs. Download 1040x These rules are discussed in chapter 1. Download 1040x Your employer cannot restrict you from taking distributions from a SIMPLE IRA. Download 1040x Are Distributions Taxable? Generally, distributions from a SIMPLE IRA are fully taxable as ordinary income. Download 1040x If the distribution is an early distribution (discussed in chapter 1), it may be subject to the additional tax on early distributions. Download 1040x See Additional Tax on Early Distributions, later. Download 1040x Rollovers and Transfers Exception Generally, rollovers and trustee-to-trustee transfers are not taxable distributions. Download 1040x Two-year rule. Download 1040x   To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer's SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. Download 1040x The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA. Download 1040x   After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan). Download 1040x Additional Tax on Early Distributions The additional tax on early distributions (discussed in chapter 1) applies to SIMPLE IRAs. Download 1040x If a distribution is an early distribution and occurs during the 2-year period following the date on which you first participated in your employer's SIMPLE plan, the additional tax on early distributions is increased from 10% to 25%. Download 1040x If a rollover distribution (or transfer) from a SIMPLE IRA does not satisfy the 2-year rule, and is otherwise an early distribution, the additional tax imposed because of the early distribution is increased from 10% to 25% of the amount distributed. 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