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Filing 2012 Taxes

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Filing 2012 Taxes

Filing 2012 taxes 11. Filing 2012 taxes   Your Rights as a Taxpayer Table of Contents Declaration of Taxpayer Rights Examinations, Appeals, Collections, and RefundsBy mail. Filing 2012 taxes By interview. Filing 2012 taxes Repeat examinations. Filing 2012 taxes The first part of this chapter explains some of your most important rights as a taxpayer. Filing 2012 taxes The second part explains the examination, appeal, collection, and refund processes. Filing 2012 taxes Declaration of Taxpayer Rights Protection of your rights. Filing 2012 taxes   IRS employees will explain and protect your rights as a taxpayer throughout your contact with us. Filing 2012 taxes Privacy and confidentiality. Filing 2012 taxes   The IRS will not disclose to anyone the information you give us, except as authorized by law. Filing 2012 taxes You have the right to know why we are asking you for information, how we will use it, and what happens if you do not provide requested information. Filing 2012 taxes Professional and courteous service. Filing 2012 taxes   If you believe that an IRS employee has not treated you in a professional, fair, and courteous manner, you should tell that employee's supervisor. Filing 2012 taxes If the supervisor's response is not satisfactory, you should write to the IRS director for your area or the center where you file your return. Filing 2012 taxes Representation. Filing 2012 taxes   You can either represent yourself or, with proper written authorization, have someone else represent you in your place. Filing 2012 taxes Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. Filing 2012 taxes If you are in an interview and ask to consult such a person, then we must stop and reschedule the interview in most cases. Filing 2012 taxes   You can have someone accompany you at an interview. Filing 2012 taxes You can make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting. Filing 2012 taxes Payment of only the correct amount of tax. Filing 2012 taxes   You are responsible for paying only the correct amount of tax due under the law—no more, no less. Filing 2012 taxes If you cannot pay all of your tax when it is due, you may be able to make monthly installment payments. Filing 2012 taxes Help with unresolved tax problems. Filing 2012 taxes   The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS. Filing 2012 taxes Your local Taxpayer Advocate can offer you special help if you have a significant hardship as a result of a tax problem. Filing 2012 taxes For more information, call toll free 1-877-777-4778 (1-800-829-4059 for TTY/TDD) or write to the Taxpayer Advocate at the IRS office that last contacted you. Filing 2012 taxes Appeals and judicial review. Filing 2012 taxes   If you disagree with us about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. Filing 2012 taxes You can also ask a court to review your case. Filing 2012 taxes Relief from certain penalties and interest. Filing 2012 taxes   The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. Filing 2012 taxes We will waive interest that is the result of certain errors or delays caused by an IRS employee. Filing 2012 taxes Examinations, Appeals, Collections, and Refunds Examinations (audits). Filing 2012 taxes   We accept most taxpayers' returns as filed. Filing 2012 taxes If we inquire about your return or select it for examination, it does not suggest that you are dishonest. Filing 2012 taxes The inquiry or examination may or may not result in more tax. Filing 2012 taxes We may close your case without change; or, you may receive a refund. Filing 2012 taxes   The process of selecting a return for examination usually begins in one of two ways. Filing 2012 taxes First, we use computer programs to identify returns that may have incorrect amounts. Filing 2012 taxes These programs may be based on information returns, such as Forms 1099 and W-2, on studies of past examinations, or on certain issues identified by compliance projects. Filing 2012 taxes Second, we use information from outside sources that indicates that a return may have incorrect amounts. Filing 2012 taxes These sources may include newspapers, public records, and individuals. Filing 2012 taxes If we determine that the information is accurate and reliable, we may use it to select a return for examination. Filing 2012 taxes   Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, explains the rules and procedures that we follow in examinations. Filing 2012 taxes The following sections give an overview of how we conduct examinations. Filing 2012 taxes By mail. Filing 2012 taxes   We handle many examinations and inquiries by mail. Filing 2012 taxes We will send you a letter with either a request for more information or a reason why we believe a change to your return may be needed. Filing 2012 taxes You can respond by mail or you can request a personal interview with an examiner. Filing 2012 taxes If you mail us the requested information or provide an explanation, we may or may not agree with you, and we will explain the reasons for any changes. Filing 2012 taxes Please do not hesitate to write to us about anything you do not understand. Filing 2012 taxes By interview. Filing 2012 taxes   If we notify you that we will conduct your examination through a personal interview, or you request such an interview, you have the right to ask that the examination take place at a reasonable time and place that is convenient for both you and the IRS. Filing 2012 taxes If our examiner proposes any changes to your return, he or she will explain the reasons for the changes. Filing 2012 taxes If you do not agree with these changes, you can meet with the examiner's supervisor. Filing 2012 taxes Repeat examinations. Filing 2012 taxes   If we examined your return for the same items in either of the 2 previous years and proposed no change to your tax liability, please contact us as soon as possible so we can see if we should discontinue the examination. Filing 2012 taxes Appeals. Filing 2012 taxes   If you do not agree with the examiner's proposed changes, you can appeal them to the Appeals Office of the IRS. Filing 2012 taxes Most differences can be settled without expensive and time-consuming court trials. Filing 2012 taxes Your appeal rights are explained in detail in both Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don't Agree, and Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. Filing 2012 taxes   If you do not wish to use the Appeals Office or disagree with its findings, you may be able to take your case to the U. Filing 2012 taxes S. Filing 2012 taxes Tax Court, U. Filing 2012 taxes S. Filing 2012 taxes Court of Federal Claims, or the U. Filing 2012 taxes S. Filing 2012 taxes District Court where you live. Filing 2012 taxes If you take your case to court, the IRS will have the burden of proving certain facts if you kept adequate records to show your tax liability, cooperated with the IRS, and meet certain other conditions. Filing 2012 taxes If the court agrees with you on most issues in your case and finds that our position was largely unjustified, you may be able to recover some of your administrative and litigation costs. Filing 2012 taxes You will not be eligible to recover these costs unless you tried to resolve your case administratively, including going through the appeals system, and you gave us the information necessary to resolve the case. Filing 2012 taxes Collections. Filing 2012 taxes   Publication 594, The IRS Collection Process, explains your rights and responsibilities regarding payment of federal taxes. Filing 2012 taxes It describes: What to do when you owe taxes. Filing 2012 taxes It describes what to do if you get a tax bill and what to do if you think your bill is wrong. Filing 2012 taxes It also covers making installment payments, delaying collection action, and submitting an offer in compromise. Filing 2012 taxes IRS collection actions. Filing 2012 taxes It covers liens, releasing a lien, levies, releasing a levy, seizures and sales, and release of property. Filing 2012 taxes   Your collection appeal rights are explained in detail in Publication 1660, Collection Appeal Rights. Filing 2012 taxes Innocent spouse relief. Filing 2012 taxes   Generally, both you and your spouse are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on your joint return. Filing 2012 taxes To seek relief from any liability related to your spouse (or former spouse), you must file a claim on Form 8857, Request for Innocent Spouse Relief. Filing 2012 taxes In some cases, Form 8857 may need to be filed within 2 years of the date on which the IRS first attempted to collect the tax from you. Filing 2012 taxes Do not file Form 8857 with your Form 1040. Filing 2012 taxes For more information, see Publication 971, Innocent Spouse Relief, and Form 8857 or you can call the Innocent Spouse office toll-free at 1-855-851-2009. Filing 2012 taxes Refunds. Filing 2012 taxes   You can file a claim for refund if you think you paid too much tax. Filing 2012 taxes You must generally file the claim within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. Filing 2012 taxes The law generally provides for interest on your refund if it is not paid within 45 days of the date you filed your return or claim for refund. Filing 2012 taxes Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, has more information on refunds. Filing 2012 taxes   If you were due a refund but you did not file a return, you must file within 3 years from the date the return was due (including extensions) to get that refund. Filing 2012 taxes Prev  Up  Next   Home   More Online Publications
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Understanding your 2800C Letter

We sent you this letter because we believe your employee may have filed an incorrect Form W-4, Employee's Withholding Allowance Certificate.  

What you need to do

Begin withholding income tax from this employee's wages based on the following withholding rates, effective 60 days from the date of this letter:  

  • Withholding rate (marital status): single
  • Withholding allowances:  0000   

You may want to…

  • Search keyword "withholding compliance" for more information on income tax withholding
  • Download the following materials:
    • Publication 15 (Circular E), Employer's Tax Guide  
    • Publication 51 (Circular A), Agricultural Employer's Tax Guide

Answers to Common Questions

If the IRS determines that an employee doesn’t have enough federal income tax withheld, what will you ask an employer to do?
If we determine that an employee doesn’t have enough withholding, we’ll send you a lock-in letter that specifies the maximum number of withholding allowances permitted for the employee. You must withhold tax as indicated in the lock-in letter by the date specified unless we notify you otherwise. This date is 60 days after the date of the lock-in letter. Once a lock-in rate is effective, an employer can’t decrease withholding unless the IRS approves it.
 

You’ll also receive a copy of the letter to give to the employee. If the employee no longer works for you, you don’t need to do anything. However, if the employee returns to work within 12 months, you should begin withholding income tax from the employee’s wages based on the withholding rate in the letter.

The letter will explain how the employee can provide additional information to help us determine the appropriate number of withholding exemptions. We’ll give the employee some time before the lock-in rate is effective to submit a new Form W-4 and a statement that supports the claims made on it. The employee must send the Form W-4 and the statement to the IRS address as shown on this webpage.

If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?
We‘re more effectively using information in our records and reported on Form W-2 wage statements to ensure that employees have enough federal income tax withheld.

After I lock in withholding on an employee, what do I do if I receive a revised Form W-4 from the employee?
You must disregard any Form W-4 that decreases the amount of withholding. The employee must submit for IRS approval any new Form W-4 and a statement that supports his or her request to decrease federal income tax withholding. The employee should send the Form W-4 and statement to the address on the lock-in letter. We’ll notify you if we approve the employee’s request. However, if the employee submits a Form W-4 that claims fewer withholding allowances than the maximum number specified in the lock-in letter, you must increase withholding based on that Form W-4.

As an employer who has received a modification letter (Letter 2808C) from the Withholding Compliance Program, do I wait for another 60 days to change the marital status or number of allowances as indicated in the modification letter?
The changes to the marital status or number of allowances become effective immediately upon receipt of the Letter 2808C.

Our employees can submit or change their Forms W-4 on line. How can I prevent them from changing their Forms W-4 after the IRS has locked them in?
You’ll need to block employees who have been locked-in from using an on-line Form W-4 system to decrease their withholding.

How to get help

  • Call toll free 1-855-839-2235 weekdays between 8:00 a.m. and 8:00 p.m.
  • Send a fax to 1-855-202-8300
  • Write to:

    Internal Revenue Service
    Compliance Services
    Withholding Compliance Unit
    P.O. Box 9047, Stop 837
    Andover, MA 01810-0947
Page Last Reviewed or Updated: 10-Jan-2014

The Filing 2012 Taxes

Filing 2012 taxes 10. Filing 2012 taxes   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Filing 2012 taxes Revoking the election. Filing 2012 taxes More information. Filing 2012 taxes Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Filing 2012 taxes Summary. Filing 2012 taxes Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Filing 2012 taxes If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Filing 2012 taxes This method of reporting gain is called the installment method. Filing 2012 taxes You cannot use the installment method to report a loss. Filing 2012 taxes You can choose to report all of your gain in the year of sale. Filing 2012 taxes Installment obligation. Filing 2012 taxes   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Filing 2012 taxes Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Filing 2012 taxes Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Filing 2012 taxes It generally includes the sale of real property and personal property reportable on the installment method. Filing 2012 taxes It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Filing 2012 taxes See Inventory , later. Filing 2012 taxes The selling price must be allocated to determine the amount received for each class of asset. Filing 2012 taxes The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Filing 2012 taxes (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Filing 2012 taxes ) Separate computations must be made to figure the gain or loss for each class of asset sold. Filing 2012 taxes See Sale of a Farm in chapter 8. Filing 2012 taxes If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Filing 2012 taxes See Depreciation recapture , later. Filing 2012 taxes This applies even if no payments are received in that year. Filing 2012 taxes Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Filing 2012 taxes A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Filing 2012 taxes See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Filing 2012 taxes If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Filing 2012 taxes Electing out of the installment method. Filing 2012 taxes   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Filing 2012 taxes   To make this election, do not report your sale on Form 6252. Filing 2012 taxes Instead, report it on Schedule D (Form 1040), Form 4797, or both. Filing 2012 taxes When to elect out. Filing 2012 taxes   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Filing 2012 taxes   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Filing 2012 taxes Write “Filed pursuant to section 301. Filing 2012 taxes 9100-2” at the top of the amended return and file it where the original return was filed. Filing 2012 taxes Revoking the election. Filing 2012 taxes   Once made, the election can be revoked only with IRS approval. Filing 2012 taxes A revocation is retroactive. Filing 2012 taxes More information. Filing 2012 taxes   See Electing Out of the Installment Method in Publication 537 for more information. Filing 2012 taxes Inventory. Filing 2012 taxes   The sale of farm inventory items cannot be reported on the installment method. Filing 2012 taxes All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Filing 2012 taxes   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Filing 2012 taxes If you do not, each payment must be allocated between the inventory and the other assets sold. Filing 2012 taxes Sale at a loss. Filing 2012 taxes   If your sale results in a loss, you cannot use the installment method. Filing 2012 taxes If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Filing 2012 taxes Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Filing 2012 taxes Interest income. Filing 2012 taxes Return of your adjusted basis in the property. Filing 2012 taxes Gain on the sale. Filing 2012 taxes In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Filing 2012 taxes You do not include in income the part that is the return of your basis in the property. Filing 2012 taxes Basis is the amount of your investment in the property for installment sale purposes. Filing 2012 taxes Interest income. Filing 2012 taxes   You must report interest as ordinary income. Filing 2012 taxes Interest is generally not included in a down payment. Filing 2012 taxes However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Filing 2012 taxes Interest provided in the agreement is called stated interest. Filing 2012 taxes If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Filing 2012 taxes See Unstated interest , later. Filing 2012 taxes    You must continue to report the interest income on payments you receive in subsequent years as interest income. Filing 2012 taxes Adjusted basis and installment sale income (gain on sale). Filing 2012 taxes   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Filing 2012 taxes A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Filing 2012 taxes Figuring adjusted basis for installment sale purposes. Filing 2012 taxes   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Filing 2012 taxes When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Filing 2012 taxes    Worksheet 10-1. Filing 2012 taxes Figuring Adjusted Basis and Gross Profit Percentage 1. Filing 2012 taxes Enter the selling price for the property   2. Filing 2012 taxes Enter your adjusted basis for the property     3. Filing 2012 taxes Enter your selling expenses     4. Filing 2012 taxes Enter any depreciation recapture     5. Filing 2012 taxes Add lines 2, 3, and 4. Filing 2012 taxes  This is your adjusted basis  for installment sale purposes   6. Filing 2012 taxes Subtract line 5 from line 1. Filing 2012 taxes If zero or less, enter -0-. Filing 2012 taxes  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Filing 2012 taxes You cannot use the installment method. Filing 2012 taxes   7. Filing 2012 taxes Enter the contract price for the property   8. Filing 2012 taxes Divide line 6 by line 7. Filing 2012 taxes This is your gross profit percentage   Selling price. Filing 2012 taxes   The selling price is the total cost of the property to the buyer and includes the following. Filing 2012 taxes Any money you are to receive. Filing 2012 taxes The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Filing 2012 taxes Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Filing 2012 taxes Any of your selling expenses the buyer pays. Filing 2012 taxes Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Filing 2012 taxes Adjusted basis for installment sale purposes. Filing 2012 taxes   Your adjusted basis is the total of the following three items. Filing 2012 taxes Adjusted basis. Filing 2012 taxes Selling expenses. Filing 2012 taxes Depreciation recapture. Filing 2012 taxes Adjusted basis. Filing 2012 taxes   Basis is your investment in the property for installment sale purposes. Filing 2012 taxes The way you figure basis depends on how you acquire the property. Filing 2012 taxes The basis of property you buy is generally its cost. Filing 2012 taxes The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Filing 2012 taxes   While you own property, various events may change your original basis. Filing 2012 taxes Some events, such as adding rooms or making permanent improvements, increase basis. Filing 2012 taxes Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Filing 2012 taxes The result is adjusted basis. Filing 2012 taxes See chapter 6 and Publication 551, Basis of Assets, for more information. Filing 2012 taxes Selling expenses. Filing 2012 taxes   Selling expenses relate to the sale of the property. Filing 2012 taxes They include commissions, attorney fees, and any other expenses paid on the sale. Filing 2012 taxes Selling expenses are added to the basis of the sold property. Filing 2012 taxes Depreciation recapture. Filing 2012 taxes   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Filing 2012 taxes See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Filing 2012 taxes Gross profit. Filing 2012 taxes   Gross profit is the total gain you report on the installment method. Filing 2012 taxes   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Filing 2012 taxes If the property you sold was your home, subtract from the gross profit any gain you can exclude. Filing 2012 taxes Contract price. Filing 2012 taxes   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Filing 2012 taxes Gross profit percentage. Filing 2012 taxes   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Filing 2012 taxes This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Filing 2012 taxes   The gross profit percentage generally remains the same for each payment you receive. Filing 2012 taxes However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Filing 2012 taxes Amount to report as installment sale income. Filing 2012 taxes   Multiply the payments you receive each year (less interest) by the gross profit percentage. Filing 2012 taxes The result is your installment sales income for the tax year. Filing 2012 taxes In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Filing 2012 taxes A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Filing 2012 taxes For a detailed discussion, see Payments Received or Considered Received , later. Filing 2012 taxes Selling price reduced. Filing 2012 taxes   If the selling price is reduced at a later date, the gross profit on the sale also will change. Filing 2012 taxes You then must refigure the gross profit percentage for the remaining payments. Filing 2012 taxes Refigure your gross profit using Worksheet 10-2. Filing 2012 taxes New Gross Profit Percentage — Selling Price Reduced. Filing 2012 taxes You will spread any remaining gain over future installments. Filing 2012 taxes    Worksheet 10-2. Filing 2012 taxes New Gross Profit Percentage — Selling Price Reduced 1. Filing 2012 taxes Enter the reduced selling  price for the property   2. Filing 2012 taxes Enter your adjusted  basis for the  property     3. Filing 2012 taxes Enter your selling  expenses     4. Filing 2012 taxes Enter any depreciation  recapture     5. Filing 2012 taxes Add lines 2, 3, and 4. Filing 2012 taxes   6. Filing 2012 taxes Subtract line 5 from line 1. Filing 2012 taxes  This is your adjusted  gross profit   7. Filing 2012 taxes Enter any installment sale  income reported in  prior year(s)   8. Filing 2012 taxes Subtract line 7 from line 6   9. Filing 2012 taxes Future installments     10. Filing 2012 taxes Divide line 8 by line 9. Filing 2012 taxes  This is your new  gross profit percentage*. Filing 2012 taxes   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing 2012 taxes Example. Filing 2012 taxes In 2011, you sold land with a basis of $40,000 for $100,000. Filing 2012 taxes Your gross profit was $60,000. Filing 2012 taxes You received a $20,000 down payment and the buyer's note for $80,000. Filing 2012 taxes The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Filing 2012 taxes Your gross profit percentage was 60%. Filing 2012 taxes You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Filing 2012 taxes You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Filing 2012 taxes 60)) in 2012. Filing 2012 taxes In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Filing 2012 taxes The new gross profit percentage, 47. Filing 2012 taxes 32%, is figured in Example — Worksheet 10-2. Filing 2012 taxes Example — Worksheet 10-2. Filing 2012 taxes New Gross Profit Percentage — Selling Price Reduced 1. Filing 2012 taxes Enter the reduced selling  price for the property 85,000 2. Filing 2012 taxes Enter your adjusted  basis for the  property 40,000   3. Filing 2012 taxes Enter your selling  expenses -0-   4. Filing 2012 taxes Enter any depreciation  recapture -0-   5. Filing 2012 taxes Add lines 2, 3, and 4. Filing 2012 taxes 40,000 6. Filing 2012 taxes Subtract line 5 from line 1. Filing 2012 taxes  This is your adjusted  gross profit 45,000 7. Filing 2012 taxes Enter any installment sale  income reported in  prior year(s) 22,605 8. Filing 2012 taxes Subtract line 7 from line 6 22,395 9. Filing 2012 taxes Future installments   47,325 10. Filing 2012 taxes Divide line 8 by line 9. Filing 2012 taxes  This is your new  gross profit percentage*. Filing 2012 taxes 47. Filing 2012 taxes 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing 2012 taxes You will report installment sale income of $6,878 (47. Filing 2012 taxes 32% of $14,535) in 2013, $7,449 (47. Filing 2012 taxes 32% of $15,742) in 2014, and $8,067 (47. Filing 2012 taxes 32% of $17,048) in 2015. Filing 2012 taxes Form 6252. Filing 2012 taxes   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Filing 2012 taxes Attach it to your tax return for each year. Filing 2012 taxes Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Filing 2012 taxes It is considered gain or loss on the sale of the property for which you received the installment obligation. Filing 2012 taxes Cancellation. Filing 2012 taxes   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Filing 2012 taxes Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Filing 2012 taxes If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Filing 2012 taxes Transfer due to death. Filing 2012 taxes   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Filing 2012 taxes Any unreported gain from the installment obligation is not treated as gross income to the decedent. Filing 2012 taxes No income is reported on the decedent's return due to the transfer. Filing 2012 taxes Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Filing 2012 taxes   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Filing 2012 taxes The estate must figure its gain or loss on the disposition. Filing 2012 taxes If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Filing 2012 taxes More information. Filing 2012 taxes   For more information on the disposition of an installment obligation, see Publication 537. Filing 2012 taxes Sale of depreciable property. Filing 2012 taxes   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Filing 2012 taxes See Sale to a Related Person in Publication 537. Filing 2012 taxes   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Filing 2012 taxes However, report any gain greater than the recapture income on the installment method. Filing 2012 taxes   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Filing 2012 taxes   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Filing 2012 taxes Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Filing 2012 taxes    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Filing 2012 taxes See the Form 6252 instructions for details. Filing 2012 taxes   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Filing 2012 taxes For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Filing 2012 taxes Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Filing 2012 taxes In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Filing 2012 taxes These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Filing 2012 taxes However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Filing 2012 taxes Buyer pays seller's expenses. Filing 2012 taxes   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Filing 2012 taxes Include these expenses in the selling and contract prices when figuring the gross profit percentage. Filing 2012 taxes Buyer assumes mortgage. Filing 2012 taxes   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Filing 2012 taxes Mortgage less than basis. Filing 2012 taxes   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Filing 2012 taxes It is considered a recovery of your basis. Filing 2012 taxes The contract price is the selling price minus the mortgage. Filing 2012 taxes Example. Filing 2012 taxes You sell property with an adjusted basis of $19,000. Filing 2012 taxes You have selling expenses of $1,000. Filing 2012 taxes The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Filing 2012 taxes The selling price is $25,000 ($15,000 + $10,000). Filing 2012 taxes Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Filing 2012 taxes The contract price is $10,000 ($25,000 − $15,000 mortgage). Filing 2012 taxes Your gross profit percentage is 50% ($5,000 ÷ $10,000). Filing 2012 taxes You report half of each $2,000 payment received as gain from the sale. Filing 2012 taxes You also report all interest you receive as ordinary income. Filing 2012 taxes Mortgage more than basis. Filing 2012 taxes   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Filing 2012 taxes The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Filing 2012 taxes   To figure the contract price, subtract the mortgage from the selling price. Filing 2012 taxes This is the total amount (other than interest) you will receive directly from the buyer. Filing 2012 taxes Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Filing 2012 taxes The contract price is then the same as your gross profit from the sale. Filing 2012 taxes    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Filing 2012 taxes Example. Filing 2012 taxes The selling price for your property is $9,000. Filing 2012 taxes The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Filing 2012 taxes Your adjusted basis in the property is $4,400. Filing 2012 taxes You have selling expenses of $600, for a total installment sale basis of $5,000. Filing 2012 taxes The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Filing 2012 taxes This amount is included in the contract price and treated as a payment received in the year of sale. Filing 2012 taxes The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Filing 2012 taxes Report 100% of each payment (less interest) as gain from the sale. Filing 2012 taxes Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Filing 2012 taxes Buyer assumes other debts. Filing 2012 taxes   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Filing 2012 taxes   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Filing 2012 taxes Compare the debt to your installment sale basis in the property being sold. Filing 2012 taxes If the debt is less than your installment sale basis, none of it is treated as a payment. Filing 2012 taxes If it is more, only the difference is treated as a payment. Filing 2012 taxes If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Filing 2012 taxes These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Filing 2012 taxes However, they apply only to the following types of debt the buyer assumes. Filing 2012 taxes Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Filing 2012 taxes Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Filing 2012 taxes   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Filing 2012 taxes The value of the assumed debt is then considered a payment to you in the year of sale. Filing 2012 taxes Property used as a payment. Filing 2012 taxes   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Filing 2012 taxes However, see Trading property for like-kind property , later. Filing 2012 taxes Generally, the amount of the payment is the property's FMV on the date you receive it. Filing 2012 taxes Exception. Filing 2012 taxes   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Filing 2012 taxes See Unstated interest , later. Filing 2012 taxes Examples. Filing 2012 taxes If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Filing 2012 taxes If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Filing 2012 taxes In these examples, use the above rules to determine the amount you should consider as payment in the year received. Filing 2012 taxes Debt not payable on demand. Filing 2012 taxes   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Filing 2012 taxes This is true even if the debt is guaranteed by a third party, including a government agency. Filing 2012 taxes Fair market value (FMV). Filing 2012 taxes   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Filing 2012 taxes Third-party note. Filing 2012 taxes   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Filing 2012 taxes Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Filing 2012 taxes The excess of the note's face value over its FMV is interest. Filing 2012 taxes Exclude this interest in determining the selling price of the property. Filing 2012 taxes However, see Exception under Property used as a payment , earlier. Filing 2012 taxes Example. Filing 2012 taxes You sold real estate in an installment sale. Filing 2012 taxes As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Filing 2012 taxes The FMV of the third-party note at the time of the sale was $30,000. Filing 2012 taxes This amount, not $50,000, is a payment to you in the year of sale. Filing 2012 taxes The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Filing 2012 taxes The remaining 40% is interest taxed as ordinary income. Filing 2012 taxes Bond. Filing 2012 taxes   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Filing 2012 taxes For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Filing 2012 taxes   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Filing 2012 taxes However, see Exception under Property used as a payment , earlier. Filing 2012 taxes Buyer's note. Filing 2012 taxes   The buyer's note (unless payable on demand) is not considered payment on the sale. Filing 2012 taxes However, its full face value is included when figuring the selling price and the contract price. Filing 2012 taxes Payments you receive on the note are used to figure your gain in the year received. Filing 2012 taxes Sale to a related person. Filing 2012 taxes   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Filing 2012 taxes For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Filing 2012 taxes Trading property for like-kind property. Filing 2012 taxes   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Filing 2012 taxes See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Filing 2012 taxes   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Filing 2012 taxes The contract price is reduced by the FMV of the like-kind property received in the trade. Filing 2012 taxes The gross profit is reduced by any gain on the trade that can be postponed. Filing 2012 taxes Like-kind property received in the trade is not considered payment on the installment obligation. Filing 2012 taxes Unstated interest. Filing 2012 taxes   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Filing 2012 taxes Interest provided in the contract is called stated interest. Filing 2012 taxes   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Filing 2012 taxes If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Filing 2012 taxes   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Filing 2012 taxes   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Filing 2012 taxes Therefore, the buyer cannot deduct the unstated interest. Filing 2012 taxes The seller must report the unstated interest as income. Filing 2012 taxes Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Filing 2012 taxes   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Filing 2012 taxes   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Filing 2012 taxes It increases the seller's interest income and the buyer's interest expense. Filing 2012 taxes   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Filing 2012 taxes    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Filing 2012 taxes You can get this information by contacting an IRS office. Filing 2012 taxes IRBs are also available at IRS. Filing 2012 taxes gov. Filing 2012 taxes More information. Filing 2012 taxes   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Filing 2012 taxes Example. Filing 2012 taxes You sell property at a contract price of $6,000 and your gross profit is $1,500. Filing 2012 taxes Your gross profit percentage is 25% ($1,500 ÷ $6,000). Filing 2012 taxes After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Filing 2012 taxes The remainder (balance) of each payment is the tax-free return of your adjusted basis. Filing 2012 taxes Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Filing 2012 taxes You received $50,000 down and the buyer's note for $200,000. Filing 2012 taxes In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Filing 2012 taxes The total selling price was $300,000. Filing 2012 taxes The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Filing 2012 taxes Your selling expenses were $15,000. Filing 2012 taxes Adjusted basis and depreciation. Filing 2012 taxes   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Filing 2012 taxes   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Filing 2012 taxes The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Filing 2012 taxes   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Filing 2012 taxes   The buildings are section 1250 property. Filing 2012 taxes There is no depreciation recapture income for them because they were depreciated using the straight line method. Filing 2012 taxes See chapter 9 for more information on depreciation recapture. Filing 2012 taxes   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Filing 2012 taxes See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Filing 2012 taxes See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Filing 2012 taxes Installment sale basis and gross profit. Filing 2012 taxes   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Filing 2012 taxes     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Filing 2012 taxes   The gain on the farm land and buildings is reported as section 1231 gains. Filing 2012 taxes See Section 1231 Gains and Losses in chapter 9. Filing 2012 taxes Contract price and gross profit percentage. Filing 2012 taxes   The contract price is $250,000 for the part of the sale reported on the installment method. Filing 2012 taxes This is the selling price ($300,000) minus the mortgage assumed ($50,000). Filing 2012 taxes   Gross profit percentage for the sale is 47. Filing 2012 taxes 70% ($119,260 gross profit ÷ $250,000 contract price). Filing 2012 taxes The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Filing 2012 taxes 256 Buildings ($36,120 ÷ $250,000) 14. Filing 2012 taxes 448 Total 47. Filing 2012 taxes 70 Figuring the gain to report on the installment method. Filing 2012 taxes   One hundred percent (100%) of each payment is reported on the installment method. Filing 2012 taxes The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Filing 2012 taxes The installment sale part of the total payments received in 2013 is also $75,000. Filing 2012 taxes Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Filing 2012 taxes   Income Farm land—33. Filing 2012 taxes 256% × $75,000 $24,942 Buildings—14. Filing 2012 taxes 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Filing 2012 taxes   Report the installment sale on Form 6252. Filing 2012 taxes Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Filing 2012 taxes Attach a separate page to Form 6252 that shows the computations in the example. Filing 2012 taxes If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Filing 2012 taxes Section 1231 gains. Filing 2012 taxes   The gains on the farm land and buildings are section 1231 gains. Filing 2012 taxes They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Filing 2012 taxes A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Filing 2012 taxes Installment income for years after 2013. Filing 2012 taxes   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Filing 2012 taxes If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Filing 2012 taxes You realize income as follows:   Income Farm land—33. Filing 2012 taxes 256% × $50,000 $16,628 Buildings—14. Filing 2012 taxes 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Filing 2012 taxes You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Filing 2012 taxes The interest received with each payment will be included in full as ordinary income. Filing 2012 taxes Summary. Filing 2012 taxes   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Filing 2012 taxes 70% 23,850 Gain reported in 2014:   $50,000 × 47. Filing 2012 taxes 70% 23,850 Gain reported in 2015:   $50,000 × 47. Filing 2012 taxes 70% 23,850 Gain reported in 2016:   $25,000 × 47. Filing 2012 taxes 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications