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Hr Block Free E File

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Hr Block Free E File

Hr block free e file Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Hr block free e file Proc. Hr block free e file 2013-16 Table of Contents SECTION 1. Hr block free e file PURPOSE SECTION 2. Hr block free e file BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Hr block free e file BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Hr block free e file FEDERAL INCOME TAX TREATMENT SECTION 5. Hr block free e file INFORMATION-REPORTING OBLIGATIONS SECTION 6. Hr block free e file HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Hr block free e file PENALTY RELIEF FOR 2012 SECTION 8. Hr block free e file SCOPE AND EFFECTIVE DATE SECTION 9. Hr block free e file DRAFTING INFORMATION SECTION 1. Hr block free e file PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Hr block free e file Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Hr block free e file In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Hr block free e file Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Hr block free e file The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Hr block free e file SECTION 2. Hr block free e file BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Hr block free e file 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Hr block free e file A description of the program can be found at www. Hr block free e file makinghomeaffordable. Hr block free e file gov. Hr block free e file . Hr block free e file 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Hr block free e file These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Hr block free e file . Hr block free e file 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Hr block free e file The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Hr block free e file However, as noted in section 2. Hr block free e file 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Hr block free e file (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Hr block free e file ”) . Hr block free e file 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Hr block free e file . Hr block free e file 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Hr block free e file The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Hr block free e file (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Hr block free e file ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Hr block free e file Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Hr block free e file Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Hr block free e file . Hr block free e file 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Hr block free e file (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Hr block free e file ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Hr block free e file . Hr block free e file 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Hr block free e file If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Hr block free e file These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Hr block free e file The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Hr block free e file The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Hr block free e file For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Hr block free e file ” . Hr block free e file 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Hr block free e file . Hr block free e file 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Hr block free e file 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Hr block free e file . Hr block free e file 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Hr block free e file SECTION 3. Hr block free e file BACKGROUND—APPLICABLE PROVISIONS OF LAW . Hr block free e file 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Hr block free e file See § 61(a)(12). Hr block free e file . Hr block free e file 02 Under § 1. Hr block free e file 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Hr block free e file In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Hr block free e file However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Hr block free e file See § 1. Hr block free e file 1001-3(c)(6). Hr block free e file . Hr block free e file 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Hr block free e file 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Hr block free e file If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Hr block free e file See also § 1. Hr block free e file 61-12(c). Hr block free e file . Hr block free e file 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Hr block free e file If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Hr block free e file See, e. Hr block free e file g. Hr block free e file , §§ 1. Hr block free e file 1272-1(c)(5) and 1. Hr block free e file 1274-2(d). Hr block free e file . Hr block free e file 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Hr block free e file Section 108(a)(1)(E) and 108(a)(1)(B). Hr block free e file (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Hr block free e file ) . Hr block free e file 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Hr block free e file . Hr block free e file 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Hr block free e file See §§ 108(h) and 163(h)(3)(B)(i). Hr block free e file . Hr block free e file 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Hr block free e file Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Hr block free e file . Hr block free e file 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Hr block free e file . Hr block free e file 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Hr block free e file Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Hr block free e file . Hr block free e file 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Hr block free e file See § 108(h)(1). Hr block free e file If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Hr block free e file See § 108(b). Hr block free e file For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Hr block free e file . Hr block free e file 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Hr block free e file See Form 982 instructions and Publication 4681. Hr block free e file This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Hr block free e file . Hr block free e file 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Hr block free e file See Notice 2003-18, 2003-1 C. Hr block free e file B. Hr block free e file 699, and Rev. Hr block free e file Rul. Hr block free e file 79-356, 1979-2 C. Hr block free e file B. Hr block free e file 28. Hr block free e file However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Hr block free e file See Rev. Hr block free e file Rul. Hr block free e file 2005-46, 2005-2 C. Hr block free e file B. Hr block free e file 120, and Rev. Hr block free e file Rul. Hr block free e file 75-246, 1975-1 C. Hr block free e file B. Hr block free e file 24. Hr block free e file . Hr block free e file 14 Under § 451 and § 1. Hr block free e file 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Hr block free e file . Hr block free e file 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Hr block free e file See § 6041(a) and (d) and § 1. Hr block free e file 6041-1(a)(1) and (b). Hr block free e file . Hr block free e file 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Hr block free e file See § 6050P(a)-(c) and §§ 1. Hr block free e file 6050P-1(a) and 1. Hr block free e file 6050P-2(a) and (d). Hr block free e file . Hr block free e file 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Hr block free e file These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Hr block free e file Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Hr block free e file ” . Hr block free e file 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Hr block free e file These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Hr block free e file Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Hr block free e file SECTION 4. Hr block free e file FEDERAL INCOME TAX TREATMENT . Hr block free e file 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Hr block free e file See § 1. Hr block free e file 1001-3. Hr block free e file At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Hr block free e file See also § 61(a)(12) and § 1. Hr block free e file 61-12(c). Hr block free e file . Hr block free e file 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Hr block free e file Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Hr block free e file Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Hr block free e file . Hr block free e file 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Hr block free e file Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Hr block free e file . Hr block free e file 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Hr block free e file Therefore, for purposes of § 1. Hr block free e file 1001-3, the date of the modification is the date of the permanent modification. Hr block free e file . Hr block free e file 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Hr block free e file 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Hr block free e file Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Hr block free e file The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Hr block free e file . Hr block free e file 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Hr block free e file . Hr block free e file 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Hr block free e file This is consistent with Rev. Hr block free e file Rul. Hr block free e file 2009-19, 2009-28 I. Hr block free e file R. Hr block free e file B. Hr block free e file 111, which addressed the treatment of Pay-for-Performance Success Payments. Hr block free e file . Hr block free e file 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Hr block free e file If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Hr block free e file . Hr block free e file 09 As described in section 2. Hr block free e file 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Hr block free e file To the extent that the HAMP-PRA borrower is described in section 4. Hr block free e file 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Hr block free e file To the extent that the HAMP-PRA borrower is described in section 4. Hr block free e file 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Hr block free e file SECTION 5. Hr block free e file INFORMATION-REPORTING OBLIGATIONS . Hr block free e file 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Hr block free e file A copy of this form is required to be furnished to the borrower. Hr block free e file . Hr block free e file 02 As stated in sections 4. Hr block free e file 01 and 4. Hr block free e file 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Hr block free e file . Hr block free e file 03 An investor is an applicable entity that is required under § 1. Hr block free e file 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Hr block free e file Under § 1. Hr block free e file 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Hr block free e file Identifiable events determine when Forms 1099-C have to be issued. Hr block free e file Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Hr block free e file This rule under § 1. Hr block free e file 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Hr block free e file . Hr block free e file 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Hr block free e file That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Hr block free e file . Hr block free e file 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Hr block free e file 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Hr block free e file Under § 6041, these payments are not subject to information reporting. Hr block free e file See Notice 2011-14, 2011-11 I. Hr block free e file R. Hr block free e file B. Hr block free e file 544, 546. Hr block free e file . Hr block free e file 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Hr block free e file 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Hr block free e file The payment is subject to the information reporting requirements of § 6041, as described in section 3. Hr block free e file 15 of this revenue procedure. Hr block free e file Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Hr block free e file SECTION 6. Hr block free e file HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Hr block free e file 01 In general. Hr block free e file The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Hr block free e file As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Hr block free e file Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Hr block free e file A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Hr block free e file 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Hr block free e file Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Hr block free e file 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Hr block free e file . Hr block free e file 02 HAMP-PRA borrower options. Hr block free e file A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Hr block free e file 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Hr block free e file If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Hr block free e file 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Hr block free e file . Hr block free e file 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Hr block free e file (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Hr block free e file (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Hr block free e file 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Hr block free e file 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Hr block free e file This section 6. Hr block free e file 03(2) applies only if the change to reporting the discharge using the method described in section 6. Hr block free e file 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Hr block free e file To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Hr block free e file (3) Example. Hr block free e file The following example illustrates the application of section 6. Hr block free e file 03(2) of this revenue procedure. Hr block free e file In 2010, B’s basis in B’s principal residence was $330,000. Hr block free e file In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Hr block free e file B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Hr block free e file The trial period plan effective date also fell in 2010. Hr block free e file B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Hr block free e file 02(2) of this revenue procedure. Hr block free e file That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Hr block free e file The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Hr block free e file For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Hr block free e file 02(1) of this revenue procedure. Hr block free e file Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Hr block free e file 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Hr block free e file (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Hr block free e file 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Hr block free e file 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Hr block free e file Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Hr block free e file 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Hr block free e file Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Hr block free e file (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Hr block free e file 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Hr block free e file The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Hr block free e file (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Hr block free e file The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Hr block free e file The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Hr block free e file . Hr block free e file 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Hr block free e file (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Hr block free e file Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Hr block free e file Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Hr block free e file If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Hr block free e file (2) A HAMP-PRA borrower who has been using the method described in section 6. Hr block free e file 02(1) of this revenue procedure may change to the method described in section 6. Hr block free e file 02(2) but must comply with the consistency and open-year requirements described in section 6. Hr block free e file 01 of this revenue procedure. Hr block free e file SECTION 7. Hr block free e file PENALTY RELIEF FOR 2012 . Hr block free e file 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Hr block free e file 03 through 5. Hr block free e file 04 and section 8. Hr block free e file 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Hr block free e file 01 through 4. Hr block free e file 04 of this revenue procedure) that is required to be reported for 2012. Hr block free e file (2) Not later than March 28, 2013, a statement is sent to the Service. Hr block free e file It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Hr block free e file 01(1) of this revenue procedure. Hr block free e file The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Hr block free e file 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Hr block free e file 06 and 8. Hr block free e file 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Hr block free e file . Hr block free e file 03 Section 8. Hr block free e file 03 and 8. Hr block free e file 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Hr block free e file SECTION 8. Hr block free e file SCOPE AND EFFECTIVE DATE . Hr block free e file 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Hr block free e file . Hr block free e file 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Hr block free e file . Hr block free e file 03 Because of the effective date in section 8. Hr block free e file 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Hr block free e file 03 through 5. Hr block free e file 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Hr block free e file 03 through 5. Hr block free e file 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Hr block free e file . Hr block free e file 04 Because of the effective date in section 8. Hr block free e file 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Hr block free e file 06 of this revenue procedure. Hr block free e file SECTION 9. Hr block free e file DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Hr block free e file Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Hr block free e file Pflanz and Sheldon A. Hr block free e file Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Hr block free e file Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Hr block free e file For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Hr block free e file Prev  Up  Next   Home   More Internal Revenue Bulletins
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Understanding your CP13M Notice

We made changes to your return involving the Making Work Pay credit or the Government Retiree Credit. You're not due a refund nor do you owe an additional amount because of our changes. Your account balance is zero.

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You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully — it will explain how the Making Work Pay credit or the Government Retiree Credit relate to the changes we made.
  • Review the notice and compare our changes to the information on your tax return.
  • Correct the copy of your tax return that you kept for your records.
  • You don't need to do anything if you agree with the notice.
  • If you disagree with the notice, please contact us at the toll-free number listed on its top right corner (within 60 days of its date).

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Answers to Common Questions

What is the Making Work Pay credit?
It is a refundable tax credit that can go up to $400 for individuals and $800 for married taxpayers.

What is the Government Retiree Credit?
It is a refundable tax credit that can go up to $250 for individuals and $500 for married taxpayers.

What should I do if I disagree with the changes you made?
Contact us at the toll free number listed on the top right corner of your notice if you disagree with the changes we made.

What should I do if I need to make another correction to my tax return?
You'll need to file an amended return to make a correction.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Perform a quick check on the amount you have withheld to make sure you won't owe money next year. You can use this IRS withholding calculator.

Page Last Reviewed or Updated: 20-Feb-2014

The Hr Block Free E File

Hr block free e file 2. Hr block free e file   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. Hr block free e file ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. Hr block free e file In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. Hr block free e file Those cases are called “abusive tax shelters. Hr block free e file ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. Hr block free e file Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . Hr block free e file Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Hr block free e file Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. Hr block free e file They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. Hr block free e file Despite appearances to the contrary, the taxpayer generally risks little. Hr block free e file Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. Hr block free e file Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. Hr block free e file (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. Hr block free e file ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. Hr block free e file This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. Hr block free e file Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. Hr block free e file However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. Hr block free e file Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. Hr block free e file These provisions include the following. Hr block free e file Disclosure of reportable transactions. Hr block free e file   You must disclose information for each reportable transaction in which you participate. Hr block free e file See Reportable Transaction Disclosure Statement , later. Hr block free e file   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. Hr block free e file To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. Hr block free e file   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. Hr block free e file They must provide this number to all persons to whom they acted as a material advisor. Hr block free e file They must provide the number at the time the transaction is entered into. Hr block free e file If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. Hr block free e file For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. Hr block free e file Requirement to maintain list. Hr block free e file   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. Hr block free e file The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. Hr block free e file See Regulations section 301. Hr block free e file 6112-1 for more information (including what information is required to be included on the list). Hr block free e file Confidentiality privilege. Hr block free e file   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. Hr block free e file Appraisal requirement for donated property. Hr block free e file   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. Hr block free e file If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. Hr block free e file If you file electronically, see Form 8453, U. Hr block free e file S. Hr block free e file Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. Hr block free e file For more information about appraisals, including exceptions, see Publication 561. Hr block free e file Passive activity loss and credit limits. Hr block free e file   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. Hr block free e file For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. Hr block free e file Interest on penalties. Hr block free e file   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. Hr block free e file Accounting method restriction. Hr block free e file   Tax shelters generally cannot use the cash method of accounting. Hr block free e file Uniform capitalization rules. Hr block free e file   The uniform capitalization rules generally apply to producing property or acquiring it for resale. Hr block free e file Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. Hr block free e file For more information, see Publication 538. Hr block free e file Denial of deduction for interest on an underpayment due to a reportable transaction. Hr block free e file   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. Hr block free e file This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. Hr block free e file Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. Hr block free e file The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. Hr block free e file Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. Hr block free e file So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. Hr block free e file In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. Hr block free e file The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. Hr block free e file Investor Reporting You may be required to file a reportable transaction disclosure statement. Hr block free e file Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. Hr block free e file Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. Hr block free e file Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). Hr block free e file In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. Hr block free e file  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. Hr block free e file If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. Hr block free e file If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. Hr block free e file See Penalty for failure to disclose a reportable transaction , later under Penalties. Hr block free e file The following discussion briefly describes reportable transactions. Hr block free e file For more details, see the Instructions for Form 8886. Hr block free e file Reportable transaction. Hr block free e file   A reportable transaction is any of the following. Hr block free e file A listed transaction. Hr block free e file A confidential transaction. Hr block free e file A transaction with contractual protection. Hr block free e file A loss transaction. Hr block free e file A transaction of interest entered into after November 1, 2006. Hr block free e file Note. Hr block free e file Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. Hr block free e file Listed transaction. Hr block free e file   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. Hr block free e file These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. Hr block free e file For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. Hr block free e file irs. Hr block free e file gov/irb/2009-31_IRB/ar07. Hr block free e file html. Hr block free e file Confidential transaction. Hr block free e file   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. Hr block free e file A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. Hr block free e file The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. Hr block free e file Transaction with contractual protection. Hr block free e file   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. Hr block free e file For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. Hr block free e file irs. Hr block free e file gov/irb/2007-07_IRB/ar15. Hr block free e file html. Hr block free e file Loss transaction. Hr block free e file   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. Hr block free e file A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. Hr block free e file   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. Hr block free e file For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. Hr block free e file irs. Hr block free e file gov/irb/2004-50_IRB/ar11. Hr block free e file html. Hr block free e file Transaction of interest. Hr block free e file   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. Hr block free e file The IRS has identified the following transactions of interest. Hr block free e file “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. Hr block free e file R. Hr block free e file B. Hr block free e file 545, available at www. Hr block free e file irs. Hr block free e file gov/irb/2007-36_IRB/ar20. Hr block free e file html. Hr block free e file Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. Hr block free e file R. Hr block free e file B. Hr block free e file 544, available at www. Hr block free e file irs. Hr block free e file gov/irb/2007-36_IRB/ar19. Hr block free e file html. Hr block free e file Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. Hr block free e file R. Hr block free e file B. Hr block free e file 1194, available at www. Hr block free e file irs. Hr block free e file gov/irb/2008-47_IRB/ar11. Hr block free e file html. Hr block free e file Certain transactions involving a U. Hr block free e file S. Hr block free e file taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. Hr block free e file R. Hr block free e file B. Hr block free e file 312, available at www. Hr block free e file irs. Hr block free e file gov/irb/2009-03_IRB/ar10. Hr block free e file html. Hr block free e file   For updates to this list, go to www. Hr block free e file irs. Hr block free e file gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. Hr block free e file Penalties Investing in an abusive tax shelter may lead to substantial expenses. Hr block free e file First, the promoter generally charges a substantial fee. Hr block free e file If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. Hr block free e file You may also be subject to the penalty for failure to pay tax. Hr block free e file These penalties are explained in the following paragraphs. Hr block free e file Accuracy-related penalties. Hr block free e file   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). Hr block free e file Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. Hr block free e file Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. Hr block free e file   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. Hr block free e file   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). Hr block free e file Negligence or disregard of rules or regulations. Hr block free e file   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. Hr block free e file The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. Hr block free e file    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Hr block free e file It also includes any failure to keep adequate books and records. Hr block free e file A return position that has a reasonable basis is not negligence. Hr block free e file   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. Hr block free e file   The penalty for disregard of rules and regulations can be avoided if all the following are true. Hr block free e file You keep adequate books and records. Hr block free e file You have a reasonable basis for your position on the tax issue. Hr block free e file You make an adequate disclosure of your position. Hr block free e file Use Form 8275 to make your disclosure and attach it to your return. Hr block free e file To disclose a position contrary to a regulation, use Form 8275-R. Hr block free e file Use Form 8886 to disclose a reportable transaction (discussed earlier). Hr block free e file Substantial understatement of tax. Hr block free e file   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. Hr block free e file An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. Hr block free e file The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. Hr block free e file   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. Hr block free e file In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. Hr block free e file Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. Hr block free e file   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. Hr block free e file An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. Hr block free e file Substantial valuation misstatement. Hr block free e file   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. Hr block free e file The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. Hr block free e file You underpaid your tax by more than $5,000 because of the misstatement. Hr block free e file You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. Hr block free e file   You may be assessed a penalty of 40% for a gross valuation misstatement. Hr block free e file If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. Hr block free e file The penalty rate is also 40% if the property's correct value or adjusted basis is zero. Hr block free e file Transaction lacking economic substance. Hr block free e file   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. Hr block free e file For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. Hr block free e file   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. Hr block free e file   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. Hr block free e file   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. Hr block free e file Relevant facts include any facts affecting the tax treatment of the transaction. Hr block free e file    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. Hr block free e file Undisclosed foreign financial asset understatement. Hr block free e file   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. Hr block free e file An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. Hr block free e file The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. Hr block free e file Any foreign business you control, reportable on Form 5471, Information Return of U. Hr block free e file S. Hr block free e file Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. Hr block free e file S. Hr block free e file Persons With Respect to Certain Foreign Partnerships. Hr block free e file Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. Hr block free e file S. Hr block free e file Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. Hr block free e file Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. Hr block free e file    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. Hr block free e file See the Instructions for Form 8938 for details. Hr block free e file    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. Hr block free e file Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Hr block free e file Penalty for incorrect appraisals. Hr block free e file   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. Hr block free e file For details on the penalty amount and exceptions, see Publication 561. Hr block free e file Penalty for failure to disclose a reportable transaction. Hr block free e file   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). Hr block free e file For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). Hr block free e file This penalty is in addition to any other penalty that may be imposed. Hr block free e file   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. Hr block free e file For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. Hr block free e file irs. Hr block free e file gov/irb/2007-09_IRB/ar12. Hr block free e file html. Hr block free e file Accuracy-related penalty for a reportable transaction understatement. Hr block free e file   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. Hr block free e file This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. Hr block free e file The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. Hr block free e file You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. Hr block free e file The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. Hr block free e file   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. Hr block free e file Civil fraud penalty. Hr block free e file   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. Hr block free e file Joint return. Hr block free e file   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. Hr block free e file Failure to pay tax. Hr block free e file   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. Hr block free e file Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. Hr block free e file Prev  Up  Next   Home   More Online Publications