This section provides procedures for checking Schedule A, Itemized Deductions. Schedule A changes affect the taxable income amount.

Update the Return Processable Date (RPD) if the Schedule A is a late reply to a "U" coded return. The RPD is the received date of the Schedule A. Refer to IRM 21.5.1.4.2.10, Late Replies, for more information.

The taxpayer must attach Schedule A, Itemized Deductions, to Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, if the taxpayer itemizes deductions. The taxpayer must also attach Schedule A to Form 1040-X, Amended U.S. Individual Income Tax Return, if the taxpayer is amending the return and a Schedule A was not previously filed with the original return.

Schedule A is divided into the following sections:

When correcting a previously filed Schedule A, taxpayers are advised to attach a corrected Schedule A to their Form 1040-X, Amended U.S. Individual Income Tax Return. Only reject claims for a missing Schedule A if you are unable to verify the change.

Changes to a Schedule A have different CAT-A criteria depending on the type of itemized deduction claimed. The following table provides the correct referral criteria. See Exhibit 21.5.3-2, Examination Criteria (CAT-A) — General.

An individual reports medical and dental expenses on Schedule A, Itemized Deductions. Taxpayers can deduct medical and dental expenses to the extent the expenses exceed 7.5% of the AGI.

See Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit), for deductible expenses.

Reference: IRC 213

For tax years 2018 - 2025, the following taxes paid are deductible but are subject to an aggregate limit of $10,000 ($5,000 for married taxpayers filing separately):

For tax years 2018 - 2025, the following taxes paid are deductible and are not subject to an aggregate limit of $10,000 ($5,000 for married taxpayers filing separately):

Taxpayers cannot deduct taxes and fees unless they fall into one of the specifically allowable categories stated above. Nondeductible taxes and fees include, but are not limited to:

For more information, see the Instructions for Schedule A.

Reference: IRC 164

The types of deductible interest are:

The following types of interest and fees are NOT deductible:

A charitable contribution is deductible only if it:

Various laws provide a temporary suspension of limitations on charitable contributions if the contribution was:

Qualified cash contributions paid in cash or check after December 31, 2019, to an organization listed as a qualified organization in Pub. 526, are limited to 100% of the taxpayer’s AGI. To make the election apply to the 100% AGI limitation for qualified cash contributions for 2020 and 2021 only, the taxpayer enters the amount of qualified contributions on the dotted line next to the Schedule A line 11 entry space.

See Publication 526, Charitable Contributions, and Pub. 976, Disaster Relief, for more information on limitations, substantiation, reporting, requirements for written acknowledgement, and claiming standard mileage rates for charitable contributions.

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, such as a fire, shipwreck or storm, that is not compensated for by insurance or otherwise. Taxpayers must file Form 4684, Casualties and Thefts, to support the deduction.

A theft is the unlawful taking and removing of property or money with the intent to deprive the owner of it. The loss is allowable to the extent not compensated for by insurance or otherwise; the taxpayer must file Form 4684, to support the loss.

Taxpayers filing or amending tax returns with additional casualty and theft losses must complete Form 4684 following normal procedures. If not attached, reject as an incomplete claim, see IRM 21.5.1.5.6, Incomplete CII Claims.

Taxpayers generally must deduct a casualty or theft loss in the year it occurred. However, if the loss occurred in a federally declared disaster area, taxpayers can elect to deduct the loss for the year immediately preceding the year in which the disaster occurred (example: a 2023 loss can be allowed on a 2022 return).

See Publication 547, Casualties, Disasters, and Thefts; Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property), and Pub. 976, Disaster Relief, for more information.

Losses of personal-use property are generally subject to the following limitations:

For tax years 2018 - 2025, net personal casualty and theft losses are allowed only when caused by a Presidentially declared disaster. Verify the taxpayer had a loss in the disaster area via the IRS Disaster Assistance Program.

For tax years 2016 through 2022, limitations on personal casualty and theft losses were changed for disaster areas:

Disaster casualty loss claims for those disasters listed in (8) are centralized in Austin and Philadelphia (International). Reassign the case per the AM Site Specialization Temporary Holding Numbers.

Control disaster loss claims shown in (8) using category code KATX, Priority Code 1, program code 710-82365. For all other disaster areas, control the case using category code DSTR.

Input RC 076, if the adjustment is input to adjust Schedule A, RC 092 if the adjustment is input to adjust the standard deduction.

For tax years 2018 - 2025, itemized deductions subject to the 2% AGI limitation are not allowed, and have been removed from Schedule A.

Some other expenses that are miscellaneous deductions are not subject to the 2 % limit. These expenses include, but are not limited to:

See Pub. 529, Miscellaneous Deductions, for more information about miscellaneous deductions not subject to the 2% limitation.

For tax years 2018 - 2025, there is no longer an overall limitation on itemized deductions.

An Employer Identification Number (EIN) is required on Schedule H, Household Employment Taxes.

To establish, change, or correct the primary or secondary EIN, use CC ADJ54 — "XREF-TIN" field.

If the taxpayer does not have an EIN, prepare a Form 4442/e-4442, Inquiry Referral, to request an EIN be assigned, attach a copy of the Schedule H, and fax to Entity. Include your fax number to receive a response when the EIN is assigned.

You must manually process all EIN changes on Schedule H, Household Employment Taxes, reporting social security and/or Medicare tax, to prevent erroneous Combined Annual Wage Reporting (CAWR) records. Individual Master File (IMF) systemically forwards a record to the Business Master File (BMF) containing the Schedule H social security and Medicare tax information.

Input reference number 993/994 .00 in the item reference code field on CC ADJ54.

Fiscal year filers must report wages paid to household employees on a calendar year basis.

Schedule H, Household Employment Taxes, has four parts:

Either the primary or secondary taxpayer may file Schedule H, Household Employment Taxes. IDRS allows the input and adjustment of either or both taxpayer's employment taxes.

The reference numbers for adjusting Schedule H, Part I are:

The employer is instructed to report social security and Medicare wages, with respect to any single household employee, for an amount equal to or more than $2,700 in 2024 ($2,600 in 2023, $2,400 in 2022, or $2,300 in 2021). Delete total social security and Medicare wages if less than those amounts.

Use RC 050 when adjusting Schedule H.

The interest-free provisions for underpayment adjustments on BMF taxes (IRC 6205) apply to errors discovered on IMF, Schedule H, Household Employment Taxes. Taxes imposed under the Federal Unemployment Tax Act (FUTA) are not eligible for the interest-free adjustment provision.

Household employers who discover (ascertain) they have reported and paid less FICA tax or income tax withholding than was due on an original tax return may qualify for an interest-free tax adjustment under Reg 31.6205-1(a).

To qualify for an interest-free tax adjustment, the employer must file an amended return reporting the correction by the due date of the tax return for the tax period in which the error was discovered. An error is considered discovered when the employer has sufficient knowledge of the error and can correct it.

Although employers have until the due date of the tax return for the tax period in which the error was discovered to file an amended return reporting an underpayment adjustment, regulations require employers to pay any underpayment of tax by the time the amended return is filed. Otherwise, the correction does not qualify for a completely interest-free tax adjustment. See the table below for more information.

When inputting a TC 298, the interest computation date is the IRS received date of the amended return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

Employers do not need to withhold income tax on amounts paid to household employees unless the employee requests and the employer agrees.

Generally, adjustments to income tax and Additional Medicare Tax withholding errors are only made for errors discovered during the calendar year in which wages were paid. Since household employees' employment taxes are reported annually on Schedule H, no quarterly adjustments are necessary. Adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year may only be made to correct an administrative error or if section 3509 applies. An administrative error occurs if the amount entered on Schedule H is not the amount the employer withheld. An example of an administrative error is an erroneous mathematical computation or a transposition error. See IRM 21.6.4.4.8.13, Schedule H, Household Employment Taxes, Claims Citing IRC 3509, for provisions about use of Section 3509 when the taxpayer incorrectly classified the worker.

When an adjustment includes a Schedule H (FICA or Income Tax Withholding; not FUTA) assessment AND another IMF issue(s), assure ONLY the FICA tax and any income tax withholding (not FUTA) of the Schedule H assessment receives the interest-free treatment.

A taxpayer can file a corrected Schedule H with a Form 1040-X or an amended Form 1041. The taxpayer explains the correction on the Schedule H in Part III of the Form 1040-X or on the required attached statement with the amended Form 1041. If a corrected Schedule H is filed by itself, the corrected Schedule H should include the date the error was discovered in the top margin. See Publication 926, Household Employer's Tax Guide, for more information.

The interest-free provisions for overpayment adjustments on BMF taxes (IRC 6413) apply to errors discovered on IMF, Schedule H, Household Employment Taxes. Taxes imposed under the Federal Unemployment Tax Act (FUTA) are not eligible for the interest-free adjustment provision. See IRM 20.2.10.6, Federal Unemployment Tax, for special rules for reductions in FUTA tax due to increased state credits.

Process an overpayment of social security and Medicare taxes (and any overpayment of income tax or Additional Medicare Tax withholding made as an administrative error) on a corrected Schedule H as an interest-free adjustment if there is any indication the taxpayer wants the overpayment applied as a credit to the period in which the Schedule H reporting the overpayment is filed.

Process an overpayment of social security and Medicare taxes (and any overpayment of income tax or Additional Medicare Tax withholding made as an administrative error) on Schedule H as a refund with interest if there is no indication the taxpayer wants the overpayment applied as a credit.

Interest-free adjustments to overpayments of social security and Medicare taxes are made at any time after the error is discovered within the applicable IRC 6511 period of limitations for the period in which the error occurred. However, an employer cannot make an interest-free adjustment in the last 90 days of the period of limitation.

A taxpayer can file a corrected Schedule H with a Form 1040-X or an amended Form 1041. The taxpayer explains the correction on the Schedule H in Part III of the Form 1040-X or on the required attached statement with the amended Form 1041. If a corrected Schedule H is filed by itself, the corrected Schedule H should include the date the error was discovered in the top margin. See Publication 926, Household Employer's Tax Guide, for more information.

Interest-free adjustments to overpayments for the employee share of social security and Medicare tax are only made once the employer has repaid or reimbursed the employee for the over collection of employee tax. An employer reimburses an employee by applying the over withheld amount against taxes to be withheld on future wages. Publication 926 instructs the employer to include a statement in their explanation in Part III of Form 1040-X, or in the attached statement to an amended Form 1041, that it has repaid or reimbursed its employee, except where taxes were not withheld from the employee or where, after reasonable efforts, the employer cannot locate the employee.
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As part of the claim process, the employer must repay or reimburse the employee for the over collection or secure the employee's consent to the allowance of the claim for refund. Publication 926 instructs the employer to include a statement in their explanation in Part III of Form 1040-X, or in the attached statement to an amended Form 1041, that it has repaid or reimbursed its employee or has secured the employee's written consent to the allowance of the filing of the claim, except to the extent the taxes were not withheld from the employee.
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Generally, interest-free adjustments to income tax or Additional Medicare Tax withholding errors are only made for errors discovered during the same calendar year. Since household employees' employment taxes are reported annually on Schedule H, no quarterly adjustments are necessary. Interest-free adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year are only made to correct an administrative error. An administrative error occurs if the amount entered on Schedule H is not the amount the employer withheld. An example of an administrative error is an erroneous mathematical computation or a transposition error.

When a Form 1040-X, Amended U.S. Individual Income Tax Return, includes an overpayment on the Schedule H (FICA or Income Tax Withholding; not FUTA) and another IMF issue(s), and indicates that it wants the overpayment applied as a credit, assure only the Schedule H overpayment receives interest-free treatment.

As part of the adjustment or claim process, an employer may not receive a refund of the employer share of overpaid social security and Medicare taxes without making reasonable efforts to protect the employees’ interests - to recover for its employees the corresponding employee share. An employer has a duty to assure that its employee’s rights to recover over-collected social security and Medicare taxes are protected by repaying or reimbursing over-collected amounts. Alternatively, an employer may obtain the employee’s consent to the filing of a refund claim. However, these requirements do not apply

The FUTA tax rate is 6% of the employee's FUTA wages. However, the employer may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. The 5.4% credit is reduced for wages paid in a credit reduction state.

Taxpayers are subject to FUTA tax on the first $7,000 of wages paid to each household employee if wages of $1,000 or more are paid to all household employees in any calendar quarter of the prior year or current year.

For more information on FUTA tax and FUTA wages, see Publication 926, Household Employer's Tax Guide.

For responses to FUTA discrepancy assessments, which is identified by a TC 290 assessed by IDRS number beginning with 02642, see IRM 21.7.3.4.2, Federal Unemployment Tax Act (FUTA) Certification Program - Discrepancy Cases.

FUTA State Codes must be input for adjusting both the primary and secondary taxpayer information.

The FUTA State Code is a three-character code comprised of a single Alpha letter followed by the two-character state code used by the U.S. Postal Service.

The FUTA State Code Alpha is used as follows:

The three-character code is systemically converted to the applicable item reference number (IRN) for Master File (MF).

For taxpayers reporting wages in multiple states, see IRM 21.7.3.4.5, Multiple State Cases.

The reference number is not displayed on tax modules.

Use RC 050 when adjusting Schedule H.

Following is a list of Unpostable Codes (UPC) applicable to Schedule H, Household Employment Taxes.

A loose Schedule H requires research to determine the right action.

When returning the Schedule H, tell the taxpayer:

When preparing a "dummy" Form 1040 for processing:

See IRM 21.6.4.4.8(8), Schedule H, Household Employment Taxes, for information about the ASED on a loose Schedule H.

Schedule H, Household Employment Taxes, received without Form 1040 or Form 1040-SR, are processed with a "dummy" Form 1040. A duplicate filing condition results if the taxpayer files an original return.

If the taxpayer filed Form 941, Employer's QUARTERLY Federal Tax Return, Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return, instead of Schedule H, Household Employment Taxes, (with or without Form 1040, U.S. Individual Income Tax Return), remove the tax from the BMF Form 941 (or Form 943 or Form 944) account and assess on the IMF Form 1040 account.

Take the following action on the Form 941 (MFT 01) account, the Form 944 (MFT 14) account, or Form 943 (MFT 11).

Take the following action on the Form 1040 (MFT 30) account:

If the taxpayer also erroneously reports FUTA on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, (MFT 10) for household employees:

Provide the taxpayer a complete explanation of the adjustments to the IMF and BMF accounts.

IRC 3509 provides for reduced rates for calculating employer liability for employment tax if a worker is reclassified from an independent contractor to an employee.

The taxpayer may submit Form 1040-X, U.S. Amended Individual Income Tax Return, with a Schedule H, Household Employment Taxes, if they discover the worker was incorrectly classified. If the taxpayer does not have a Form 1040 filing requirement, they may file the Schedule H by itself.

IMF handles IRC 3509 claims the same way BMF handles Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, citing IRC 3509.

To process the claim, refer to and use BMF instructions in IRM 21.7.2.5.4, IRC Section 3509.

Use IMF reference numbers, as shown in IRM 21.6.4.4.8.5, Schedule H, Household Employment Taxes, - Social Security, Medicare, and Income Taxes Part I.

If the discovered date is not given, contact the taxpayer. If no answer is received, input a TC 290 for the increase. IRM 21.6.4.4.8.6, Schedule H, Household Employment Taxes - Interest - Free Provisions - Underpayments.

Taxable income from a farming business, as defined in IRC 263A(e)(4), or fishing includes all of the items listed below that are attributable to any farming or fishing business:

Taxable income from farming does not include gains or losses from the sale or other disposition of land.

Elected farm income is the amount of taxable income attributable to a farming or fishing business that the taxpayer elects to include on line 2 of the Schedule J.

Math verify Schedule J, Income Averaging for Farmers and Fishermen.

Input the adjustment to tax with a TC 290 or TC 291.

Use Reason Code 046 and correct source code and blocking series.

The United States Department of Agriculture (USDA) paid cash settlements and granted loan cancellations to various groups of farmers pursuant to settlements approved throughout the years. The settlements resulted from discrimination suits brought against the USDA by farmers.

Taxpayers may use terms other than "USDA" when communicating about these claims. Some of the other terms frequently used are:

For 99% of the Pigford claimants, the settlement amounts fell into three categories:

Most taxpayers received these payments over a period of two years. The cash payment and the debt forgiveness occurred in one year, and the tax payment was remitted to IRS in the following year. The cash payment and the tax payment (the 25% amount) are taxable income. The forgiveness of debt is generally taxable income but may be excludable under certain circumstances. If the taxpayer uses the cash method of accounting, the taxpayer must report the tax payment (the 25% payment) as taxable income for the year when the payment was applied to the taxpayer's account.

The payment of tax (25% payment):

Keepseagle, Hispanics / Women, and Pigford II settlements were divided into two categories:

Both Track A and Track B claimants were issued a Form 1099-MISC, Miscellaneous Income, along with an instructional notice prepared by a third party (not the IRS) advising the farmer how to correctly report the settlement.

Farmers who had debt forgiveness received a Form 1099–C, Cancellation of Debt.

Farmers must file a return to receive a refund.

Refer to the table below to work settlement cases:

Follow the procedures in IRM 21.5.3.4, General Claims Procedures, if Form 8615, Tax for Certain Children Who Have Unearned Income, is missing or incomplete. Address any correspondence, about this return, to the taxpayer (child), in care of the parent(s) or guardian(s).

Adjustment action required:

Information contained in this section applies to all tax years, excluding 2018 and 2019, that the taxpayer did not make an election to calculate their tax based on the tax rate of the parent.

A taxpayer (child) or a legal representative may request the parents' tax return information to complete Form 8615, Tax for Certain Children Who Have Unearned Income. The IRS will supply the information upon request. The request must be:

The request must contain:

Verify all information is present upon receipt of the request.

Information contained in this section applies to all tax years, unless for tax years 2018 and 2019, the taxpayer did not make an election to calculate their tax based on the tax rate of the parent.

If the taxpayer submits an incomplete request, advise the taxpayer:

Reject the request if the requester did not make a sufficient attempt to obtain the parents' information. Refer to the Disclosure website if unable to determine if the requester's attempt was sufficient.

Do not honor the request if the requester does not meet the requirements of IRC 1(g).

Information contained in this section applies to all tax years, unless for tax years 2018 and 2019, the taxpayer did not make an election to calculate their tax based on the tax rate of the parent.

Upon receipt of a processable request, take the following actions:

Upon receipt of the parents' return, prepare a response to the taxpayer. The response must include the:

Advise taxpayer if the tax is from the Tax Table, Tax Rate Schedules, or Schedule D.

Each child whose income is reported on the parents’ return must submit a separate Form 8814, Parents' Election to Report Child's Interest and Dividends. If the return is missing or incomplete, refer to IRM 21.5.2, Adjustment Guidelines. Take the following action on complete forms:

Taxpayers who have a trade or business must pay self-employment (SE) tax on net earnings of $400 or more. SE Tax does not apply to amounts earned by:

The SE tax generally applies to the net earnings of self-employed persons (such as sole proprietors or partners), and not to earnings received by employees.

Income items included in computing SE tax are reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), Schedule E, Supplemental Income and Loss, Part II, and Schedule F, Profit or Loss From Farming, or sometimes as "other income" on Form 1040, Schedule 1, Additional Income and Adjustments to Income.

Changes in SE income may change the SE tax liability and related income tax deduction.

The best source of information for reporting SE tax are the Instructions for Schedule SE (Form 1040), Self-Employment Tax, for the applicable year. There are several special rules relating to SE tax other than the above.

For more details, see Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C).

If the taxpayer files an amended return to correct self-employment (SE) income and SE tax originally reported.

If married taxpayers combine their SE income onto one Schedule SE, or you are unable to determine which spouse the change applies to, send a Letter 324C requesting a correct Schedule SE and an explanation of the changes.

Use the following to correct the SE income and SE tax:

Generally, self-employment income cannot be adjusted after the statute of limitations. However, when income was reported under the wrong spouse, resulting in no tax change, and only requires moving income from the primary to the secondary, or secondary to the primary, the adjustment is allowable.

Combined wages, tips and net earnings, up to the amount shown in the table below, are subject to any combination of the 12.4% social security part of SE tax, social security tax or railroad retirement (tier 1) tax.

Combined wages, tips and net earnings are subject to any combination of the 2.9% Medicare part of SE tax, social security tax or railroad retirement (tier 1) tax. There is no income limit when computing Medicare tax.

If self-employment income exceeds the yearly limitation, or Medicare income is less than the self-employment income, the adjustment will result in an unpostable condition 189, reason code 8.

DO NOT assess self-employment tax unless a taxpayer reports it on an amended, superseding or supplemental return or a late reply to a Submission Processing Error Resolution request is received, such as a Schedule SE.

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The Examination function determines if the income is subject to SE Tax and takes the following action:

Data from adjustments to self-employment (SE) tax is sent to Social Security Administration (SSA) electronically. SSA notifies the Internal Revenue Service if there are discrepancies in adjustment data. Examples of possible discrepancies are:

Taxpayers may contact the IRS due to a self-employment income discrepancy between the IRS and SSA records. If SSA does not have record of or an incorrect amount of self-employment income for the taxpayer, the taxpayer must be able to provide proof of the income and proof of timely filing. A transcript of the year in question provides the required information. A tax return is “timely filed” for SSA purposes if it is filed within SSA's statute of limitations (i.e., 3 years, 3 months and 15 days after the close of the taxable year (April 15)) in which the self-employment income is reported. SSA's definition of “timely filed” is controlling when determining if an SE tax return is “timely filed” for SSA's purposes and not the IRS's definition of “timely filed”. The taxpayer must contact SSA to correct their records.

Taxpayers earning $20 or more in tips in a calendar month:

Tax from Form 4137 is reported on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, Schedule 2, Additional Taxes.

Taxpayer files an amended return reporting tip income and tax, without a Form 4137:

If a loose Form 4137 is received and it cannot be determined if the tips and tax were included on the original return:

Math verify the Form 4137 (either received from the taxpayer or a dummy prepared by Internal Revenue Service).

For tax year 2013 and later, taxpayers may be subject to the 0.9% Additional Medicare Tax. See IRM 21.6.4.4.18, Additional Medicare Tax, for more information.

Generally, a worker who receives a Form 1099-MISC or 1099-NEC for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly treated as an independent contractor when they are an employee. When this happens, Form 8919, Uncollected Social Security and Medicare Tax on Wages, is used when the employer did not withhold the worker's share of social security and Medicare taxes.

Employees who were misclassified by their employers as an independent contractor use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected social security and Medicare taxes due on their compensation.

In addition, the worker must say which one of several reasons they were an employee while performing the services that applies to them. The reasons include:

Tax from Form 8919 is reported on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, Schedule 2, Additional Taxes.

By using Form 8919, the worker's social security and Medicare wages are credited to their social security record. To facilitate this process, the IRS electronically shares Form 8919 data with the Social Security Administration.

For tax year 2013 and later, taxpayers may be subject to the 0.9% Additional Medicare Tax. See IRM 21.6.4.4.18, Additional Medicare Tax, for more information.

Claims for refund of self-employment (SE) tax by an individual claiming to be an employee who was treated as an independent contractor must include either:

The taxpayer must include compensation paid by the payer shown in the determination letter, or by the payer shown on the Form W-2C, Corrected Wage and Tax Statement, that was previously reported on Schedule C, Profit or Loss from Business (Sole Proprietorship).

The Form W-2C may or may not show any federal income tax withholding, social security or Medicare taxes withheld.

The deduction for the self-employment (SE) tax must be added back to the adjusted gross income.

Social security and Medicare tax must be computed on the compensation. For 2020, deferred social security tax must be refigured.

For 2020 and 2021, any credit claimed on Schedule 3, Additional Credits and Payments, from Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, must be refigured.

Some previously deducted Schedule C expenses may be claimed as employee business expenses on Form 2106, Employee Business Expenses, and carried to Schedule A, Itemized Deductions, subject to the 2% limitation (prior to 2018)

Refer the case to Exam as Category A if the Schedule C deductions included any of the following:

Process complete claims (with the necessary substantiation) as follows:

Input the following to adjust the account:

When social security income exceeds the yearly limitation, or when Medicare is less than the social security income, the adjustment will result in an unpostable condition 189, reason code 8.

Use Reason Code 024.

The information from the input of the IRNs is transmitted to Social Security Administration.

Take the following action:

For principal residences purchased in 2008, the First-Time Homebuyer Credit is recaptured over a period of 15 years. The tax imposed is 6 2/3% of the credit taken. The additional tax is reported on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Income Tax Return for Seniors, Schedule 2, Additional Taxes. The recapture began with the 2010 tax return.

For principal residences purchased in 2009, 2010 or 2011, the credit does not have to be paid back unless the home is disposed of or ceases to be the taxpayer’s main principal residence within 36 months of the purchase date. See IRM 21.6.4.4.17.2, Acceleration of Recapture.

CC ENMOD and CC IMFOL with definer code F displays the amount of credit taken and the amount of credit recaptured. The recapture amount field starts at zero and increases to the amount of credit taken.

Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, if they meet either of the following conditions:

Form 5405, Repayment of First-Time Homebuyer Credit, can be viewed using CC TRDBV or CC RTVUE with definer HC.

For homes purchased in 2008, if the home is disposed of or ceases to be the taxpayer's main home before the end of the recapture period, taxpayers generally must report all remaining annual installments in the year the event occurred. If the home is sold to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of credit.

For homes purchased in 2009, 2010 or 2011, if the home is disposed of or ceases to be the taxpayer's main home within 36 months of the purchase date, taxpayers generally must repay the credit in the year the event occurred. If the home is sold to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of credit.

Dispositions referenced above include:

Exceptions to the acceleration rule:

Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, with the correct box checked in Part I with their Form 1040, U.S. Individual Income Tax Return.

When a Form 5405, Repayment of First-Time Homebuyer Credit, is filed with a Form 1040, U.S. Individual Income Tax Return, the taxpayer's account is adjusted during processing. Transaction Code (TC) 971 Action Codes (AC) are systemically generated when the First-Time Homebuyer Credit (FTHBC) and total recapture amounts are moved or eliminated.

The TC 971 action codes generate with indicators, shown on CC TXMOD as "XREF MFT" , which provide descriptions of the systemic actions taken.
Action Code 511 with XREF MFT indicator:

When the FTHBC is systemically moved from one spouse to another, a TC 290 is generated containing all 8s in the blocking series and serial number of the Document Locator Number (DLN).

When taxpayers claim the FTHBC on a joint return and then file separate returns in later years, the FTHBC entity may not be moved to the spouse. The correct tax is captured on the spouse's account but the update to the FTHBC entity is reflected on the xref account.

Issues about FTHBC repayment can impact multiple years and multiple accounts. When reviewing a taxpayer’s issue and account, address all repayment issues. In addition, since the FTHBC entity (CC IMFOLF) can move from one account to another, depending on how taxpayers file, always check CC IMFOLF before adjusting any account. If CC IMFOLF is blank, the FTHBC entity has been moved to the spouse's SSN, which may not be the current spouse. If separate returns are later filed to repay the credit, or the joint return was filed under the spouse's SSN, you may need to input multiple adjustments.

When manually adjusting the FTHBC recapture amount, use specific item reference numbers (IRNs) with each adjustment. The table below lists the IRNs associated with the recapture and the reason codes (which are shown in (3)) associated with them.

The table below lists the reason codes associated with the recapture.

When adjusting the recapture amount, the adjustment is generally input on the year the recapture or disposition should have been reported, not the year the credit was claimed. The recapture amount starts at zero and builds up to the amount of credit taken. Annual installments and dispositions are captured in the recapture amount field.

When reporting a disposition, taxpayers are instructed to file Form 5405 with their original Form 1040 or Form 1040-X, no other documentation is required. Amended returns impacting multiple years do not require an amended return for each tax year.

When transferring the FTHBC from one account to another, the primary account must be zeroed out before the entity field can be established on the cross reference (xref) account. When creating the xref entity field, use the correct reason code and IRN 880 to show the year the home was purchased. When creating the FTHBC entity, if the recapture amount field needs to be updated, the entity must post first. Use a posting delay code (PDC) 1 with the IRN 877 adjustment.

When a disposition E (divorce) is reported, transfer the entire credit and repayment amount shown on CC IMFOLF to the gaining spouse.

When a taxpayer files an amended return reporting a divorce (Form 5405, line 3, box e) on Form 5405 which conflicts with the cross-referenced spouse's reported divorce (disposition e), disallow the claim. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. If the taxpayer responds to the disallowance with divorce papers, see the table below. Math error authority can be used to update the accounts.

When the FTHBC entity has been moved to a cross reference account and needs to be updated but no returns have been filed since at least 2008, a TC 290 with the above IRNs cannot be input. To update these accounts, the entity has to be systemically updated. To trigger the systemic update:

Taxpayers can choose to pay the entire recapture amount all at once rather than pay it over the 15 year period. Taxpayers should report this on line 7b of Form 1040, Schedule 2, Additional Taxes, or line 60b of the Form 1040 for tax years 2018 and prior. Form 5405 is not required. However, taxpayers may send in a payment rather than reporting the recapture on a return. If this happens, taxpayers must file an amended return for the last return filed. When the amended return is received, assess tax for the repayment using a TC 298, IRN 877 for the same amount and RC 119, 120 or 123.

When a taxpayer reports a disposition for a loss, if there are unfiled returns that require a 1/15 repayment, do not consider the claim following procedures found in IRM 21.5.3.4.6.3, No Consideration Procedures, and tell the taxpayer to file the required return(s).

Dispositions reported after the assessment statute expired for the tax year are allowable if the disposition was one for a loss or no change in tax. Follow normal statute procedures found in IRM 25.6.1.5, Basic Guide for Processing Cases with Statute of Limitations Issues, when considering tax adjustments and refunds.

Often an original joint return is filed with the spouse having an ITIN. If the spouse later gets an SSN, the spouse’s SSN field on CC IMFOLF is not systemically updated causing repayment problems in later years. To update the SSN field, you must update the entity for the year the credit was taken on the TIN where the credit was claimed.

If you identify issues not addressed above, elevate to your Planning & Analysis staff, following local procedures, for coordination with the author of this IRM.

These procedures are designed to be used by Statute unit employees processing STEX transcripts.

When processing an STEX transcript, review the module to determine if the taxpayer claimed the First-Time Homebuyer Credit (FTHBC).

Since the FTHBC is subject to repayment or recapture, depending on when the home was purchased, the account must be reviewed to determine if the taxpayer benefited from the credit, and if so, how much. Any portion of the credit that did not benefit the taxpayer must be disallowed.

To determine if the taxpayer benefited from the FTHBC, take the following steps:

If the tax is paid prior to applying the FTHBC, the taxpayer did not benefit from the credit and the entire credit is disallowed.

If the tax is not paid prior to applying the FTHBC, the taxpayer did benefit from the credit and a portion of the credit may be disallowed.

To disallow the credit:

A web tool called the First-Time Homebuyer Credit Account Look-up is available on the IRS web site. The web application provides account information that assists taxpayers to correctly self-report their FTHBC repayment obligations on their tax returns.

Taxpayers must self-authenticate to access their account information. Self-authentication consists of inputting their SSN, date of birth and complete address.

The account information screen displays the last 4 digits of the taxpayer's SSN, original credit amount, annual repayment amount, total amount paid and the total balance left to be paid.

Taxpayers are directed to contact the IRS by calling 800-919-0352 if the following occurs:

For tax years 2014 - 2018, a taxpayer said they and everyone in the tax household had minimum essential coverage for the entire year by checking the coverage checkbox. For tax year 2018, the checkbox was found in the entity section of Form 1040. For tax years 2017 and prior, the checkbox was found on Form 1040 line 61, Form 1040A line 38, Form 1040EZ line 11, and Form 1040-X full-year coverage, and recorded on MFT 30, on CC TXMOD as "Coverage-IND" . The values are:

If a taxpayer later updates the checkbox by filing an amended return, corresponding, filing a loose Form 1095, or a phone call; input item reference number (IRN) 869 with a .00 to turn it off, or .01 to turn it on. No supporting documentation is required.

You do not need to use a reason code with IRN 869, however, the correct source code and hold code are required.

Accept oral statement to update the coverage checkbox. However, if a taxpayer had previously reported an SRP which now needs to be removed, tell the taxpayer to file an amended return, check the coverage checkbox, and remove SRP, or request the removal of SRP in writing showing the tax household had health insurance coverage for the entire year. The account is updated when the amended return or correspondence is processed. Follow normal procedures if there is Compliance involvement.

If a taxpayer requests to update the checkbox prior to the return posting, tell the taxpayer no action is required at this time.

For tax years 2014 - 2018, a coverage exemption from the shared responsibility payment was reported on Form 8965, Health Coverage Exemptions. Part I of Form 8965 was used to report a Marketplace-granted coverage exemption and its Exemption Certificate Number (ECN). Part II and Part III were used to request an exemption transcribed by IRS.

Marketplace-granted coverage exemptions were not transcribed from the original return, nor were they input in post processing (e.g., amended returns, etc.). ECNs are transmitted to the IRS and can be found in the Coverage Data Repository (CDR).

Exemptions reported in Part II and Part III are transcribed from the original return and can be viewed using CC RTVUE, definer CE. Exemptions reported in Part II and Part III can also be input post processing (e.g., amended returns, etc.).

Upon receipt of a Form 8965, verify the box in Part II is checked, and/or Part III is complete, and if Part III is completed, the exemption type is one recorded by IRS.

No supporting documentation is required for Form 8965, nor is an amended return. If the form is incomplete or has an exemption type other than one listed below, return the request. Oral statement authority does not apply, the Form 8965 must be provided.

The following table provides the tax year 2018 exemption types, the exemption code associated with it, and who can grant the exemption. Only exemptions allowed on the tax return have a corresponding exemption code. For coverage exemptions prior to tax year 2018, see the Instructions for Form 8965.

When a taxpayer reports an exemption post-processing, the exemption is recorded on MFT 30, on CC TXMOD with a TC 971. Action Code (AC) 175 adds the exemption, AC 176 signifies the exemption is no longer valid. Since the exemption can be for the entire family, individual members of the family, different reasons, for the entire year, or just part of the year, multiple TC 971 action codes may be needed.

Use the "8965 Tool" in Accounts Management Service (AMS) to process a Form 8965.

When viewing the TC 971s on CC TXMOD or CC IMFOLT, the TIN populated in the XREF-TIN field says the person entitled to the exemption. The MISC field identifies the exemption type and the months the exemption applies. The following format is used in the MISC field:
Part II

The reporting of an exemption may impact SRP. If Form 8965 is received reporting an exemption and the taxpayer addresses SRP, or if the exemption(s) reported covers the tax family for the entire year, see IRM 21.6.4.4.20.3.1, Shared Responsibility Payment Adjustments.

For tax years 2014 - 2018, a taxpayer is liable for a SRP if the taxpayer, spouse, or the taxpayer's dependent(s) does not have either minimum essential coverage for every month of the year or an exemption. The taxpayer's SRP is the sum of the monthly payment amounts for all months when any member of the taxpayer's tax household is neither exempt nor has minimum essential coverage. The monthly payment amount is 1/12 of the annual payment amount.
The annual payment amount is the greater of:

The flat dollar amount is the sum of the applicable dollar amounts (ADAs) for all members of the household who are not exempt and do not have minimum essential coverage in a particular month. The ADA is $695 per individual for 2016 - 2018, $325 per individual for 2015, and $95 per individual for 2014, and is subject to indexing for subsequent years. For a child who is not yet 18 years old as of the beginning of the month when the child is neither exempt nor has minimum essential coverage, the ADA is one-half of the amounts listed earlier. The flat dollar amount for a tax household is capped at 300% of the ADA for adults.

See Instructions for Form 8965 for detailed information about computing the SRP. Additionally, see IRM 21.1.1.3.2, Out of Scope and Limited Service, for information about the SRP worksheet.

SRP is reported on Form 1040, Schedule 4, Other Taxes (for tax years 2017 and prior, Form 1040EZ line 11, Form 1040A line 38, or Form 1040, line 61). The amount reported is carried to MFT 35 and assessed as a TC 240 with penalty reference number (PRN) 692. MFT 35 posts one cycle after MFT 30.

SRP notices can be identified by an "H" after the CP number (i.e., CP 14H, CP 501H, etc.). SRP notices identify the form as "SRP" instead of "1040" .

Overpayments shown on the original Form 1040 are applied to MFT 35 prior to offsetting to any other balance due. The overpayments are applied with a TC 896. Any subsequent overpayment from MFT 30 is offset with a TC 826 following normal offset rules.

SRP is subject to interest, but not penalty (Failure to File or Failure to Pay).

Although CC IMFOLT for MFT 35 only shows the primary taxpayer’s name, joint refunds are issued in the primary and secondary name.

A transcript of the MFT 35 module can be requested using MFTRA type X.

Taxpayers who file a paper return and do not check the coverage checkbox, attach Form 8965, or report a shared responsibility payment, are issued a Letter 12C, Individual Return Incomplete for Processing, requesting the taxpayer address their health care responsibility. Electronic returns are rejected.

If a taxpayer responds to the Letter 12C assessing an SRP, or if no response is received, SRP is assessed at-filing and a math error notice issued with one of the following taxpayer notice codes (TPNC):

In addition to the TPNCs listed above, another TPNC is used when the taxpayer reports an SRP that exceeds the maximum amount shown in IRM 21.6.4.4.20.3, Shared Responsibility Payment Overview:

Various notices were sent addressing issues concerning the shared responsibility provision.

Below is a list of the notices issued and required actions. If a response to one of these notices result in an overpayment, input the adjustment using a priority code 3. Do not input an amended claims date. See IRM 20.2.4.7.5.5, 45-Day Rule and IRS Initiated Adjustments, for more information.