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Irs Gov 1040x

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Irs Gov 1040x

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

Most people will spend up to 1/3 of their life in retirement, depending on the age at which they choose to stop working full-time. Research has shown that staying engaged in retirement can result in better health and a prolonged life. Some of the ways satisfied retirees stay engaged after retirement are through education, part time work, and volunteering.


The Irs Gov 1040x

Irs gov 1040x Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. Irs gov 1040x The IRS Must Contact Your Spouse or Former Spouse Tax Court Review of Request Community Property LawsRelief for Married Persons Who Did Not File Joint Returns Innocent Spouse ReliefUnderstated Tax Erroneous Items Actual Knowledge or Reason To Know Indications of Unfairness for Innocent Spouse Relief Separation of Liability ReliefLimitations on Relief Equitable ReliefConditions for Getting Equitable Relief Factors for Determining Whether To Grant Equitable Relief RefundsProof Required Refunds Under Equitable Relief Limit on Amount of Refund Filled-in Form 8857 Flowcharts How To Request Relief File Form 8857 to ask the IRS for the types of relief discussed in this publication. Irs gov 1040x If you are requesting relief for more than three tax years, you must file an additional Form 8857. Irs gov 1040x The IRS will review your Form 8857 and let you know if you qualify. Irs gov 1040x A completed Form 8857 is shown later. Irs gov 1040x When to file Form 8857. Irs gov 1040x   You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. Irs gov 1040x The following are some of the ways you may become aware of such a liability. Irs gov 1040x The IRS is examining your tax return and proposing to increase your tax liability. Irs gov 1040x The IRS sends you a notice. Irs gov 1040x   You must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you that occurs after July 22, 1998. Irs gov 1040x (But see the exceptions below for different filing deadlines that apply. Irs gov 1040x ) For this reason, do not delay filing because you do not have all the documentation. Irs gov 1040x   Collection activities that may start the 2-year period are: The IRS offset your income tax refund against an amount you owed on a joint return for another year and the IRS informed you about your right to file Form 8857. Irs gov 1040x The filing of a claim by the IRS in a court proceeding in which you were a party or the filing of a claim in a proceeding that involves your property. Irs gov 1040x This includes the filing of a proof of claim in a bankruptcy proceeding. Irs gov 1040x The filing of a suit by the United States against you to collect the joint liability. Irs gov 1040x The issuance of a section 6330 notice, which notifies you of the IRS' intent to levy and your right to a collection due process (CDP) hearing. Irs gov 1040x The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. Irs gov 1040x Exception for equitable relief. Irs gov 1040x   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. Irs gov 1040x irs. Irs gov 1040x gov/irb/2011-32_IRB/ar11. Irs gov 1040x html) expanding the amount of time to request equitable relief. Irs gov 1040x The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both: Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. Irs gov 1040x Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. Irs gov 1040x In certain cases, the 10-year period is suspended. Irs gov 1040x The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. Irs gov 1040x See Pub. Irs gov 1040x 594, The IRS Collection Process, for details. Irs gov 1040x Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Irs gov 1040x But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. Irs gov 1040x See Pub. Irs gov 1040x 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. Irs gov 1040x Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability. Irs gov 1040x Exception for relief based on community property laws. Irs gov 1040x   If you are requesting relief based on community property laws, a different filing deadline applies. Irs gov 1040x See Relief from liability arising from community property law discussed later under Community Property Laws . Irs gov 1040x Form 8857 filed by or on behalf of a decedent. Irs gov 1040x   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. Irs gov 1040x An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. Irs gov 1040x For purposes of separation of liability relief (discussed later), the decedent's marital status is determined on the earlier of the date relief was requested or the date of death. Irs gov 1040x Situations in which you are not entitled to relief. Irs gov 1040x   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. Irs gov 1040x In a final decision dated after July 22, 1998, a court considered whether to grant you relief from joint liability and decided not to do so. Irs gov 1040x In a final decision dated after July 22, 1998, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief. Irs gov 1040x You entered into an offer in compromise with the IRS. Irs gov 1040x You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. Irs gov 1040x Exception for agreements relating to TEFRA partnership proceedings. Irs gov 1040x   You may be entitled to relief, discussed in (4) earlier, if you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending TEFRA partnership proceeding. Irs gov 1040x (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. Irs gov 1040x ) You are not entitled to relief for the nonpartnership items, but you will be entitled to relief for the partnership items (if you otherwise qualify). Irs gov 1040x Transferee liability not affected by innocent spouse relief provisions. Irs gov 1040x   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. Irs gov 1040x Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by these laws. Irs gov 1040x Example. Irs gov 1040x Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. Irs gov 1040x Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. Irs gov 1040x In August 2010, the IRS assessed a deficiency for the 2008 return. Irs gov 1040x The items causing the deficiency belong to Herb. Irs gov 1040x Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. Irs gov 1040x However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. Irs gov 1040x The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. Irs gov 1040x There are no exceptions, even for victims of spousal abuse or domestic violence. Irs gov 1040x We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. Irs gov 1040x If you are requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding your request for relief. Irs gov 1040x However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability. Irs gov 1040x If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. Irs gov 1040x Tax Court Review of Request After you file Form 8857, you may be able to petition (ask) the United States Tax Court to review your request for relief in the following two situations. Irs gov 1040x The IRS sends you a final determination letter regarding your request for relief. Irs gov 1040x You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. Irs gov 1040x If you seek equitable relief for an underpaid tax, you will be able to get a Tax Court review of your request only if the tax arose or remained unpaid on or after December 20, 2006. Irs gov 1040x The United States Tax Court is an independent judicial body and is not part of the IRS. Irs gov 1040x You must file a petition with the United States Tax Court in order for it to review your request for relief. Irs gov 1040x You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. Irs gov 1040x If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. Irs gov 1040x You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address:    United States Tax Court 400 Second Street, NW Washington, DC 20217 Or you can visit the Tax Court's website at www. Irs gov 1040x ustaxcourt. Irs gov 1040x gov Community Property Laws You must generally follow community property laws when filing a tax return if you are married and live in a community property state. Irs gov 1040x Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Irs gov 1040x Generally, community property laws require you to allocate community income and expenses equally between both spouses. Irs gov 1040x However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Irs gov 1040x Relief for Married Persons Who Did Not File Joint Returns Married persons who live in community property states, but who did not file joint returns, have two ways to get relief. Irs gov 1040x Relief From Liability Arising From Community Property Law You are not responsible for the tax relating to an item of community income if all the following conditions exist. Irs gov 1040x You did not file a joint return for the tax year. Irs gov 1040x You did not include the item of community income in gross income. Irs gov 1040x The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. Irs gov 1040x Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. Irs gov 1040x Your spouse's (or former spouse's) distributive share of partnership income. Irs gov 1040x Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Irs gov 1040x Use the appropriate community property law to determine what is separate property. Irs gov 1040x Any other income that belongs to your spouse (or former spouse) under community property law. Irs gov 1040x You establish that you did not know of, and had no reason to know of, that community income. Irs gov 1040x See  Actual Knowledge or Reason To Know , below. Irs gov 1040x Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. Irs gov 1040x See Indications of unfairness for liability arising from community property law, later. Irs gov 1040x Actual knowledge or reason to know. Irs gov 1040x   You knew or had reason to know of an item of community income if: You actually knew of the item of community income, or A reasonable person in similar circumstances would have known of the item of community income. Irs gov 1040x Amount of community income unknown. Irs gov 1040x   If you are aware of the source of the item of community income or the income-producing activity, but are unaware of the specific amount, you are considered to know or have reason to know of the item of community income. Irs gov 1040x Not knowing the specific amount is not a basis for relief. Irs gov 1040x Reason to know. Irs gov 1040x   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. Irs gov 1040x The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. Irs gov 1040x The financial situation of you and your spouse (or former spouse). Irs gov 1040x Your educational background and business experience. Irs gov 1040x Whether the item of community income represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Irs gov 1040x Indications of unfairness for liability arising from community property law. Irs gov 1040x   The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax due to the item of community income. Irs gov 1040x   The following are examples of factors the IRS will consider. Irs gov 1040x Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). Irs gov 1040x Whether your spouse (or former spouse) deserted you. Irs gov 1040x Whether you and your spouse have been divorced or separated. Irs gov 1040x  For other factors see Factors for Determining Whether To Grant Equitable Relief later. Irs gov 1040x Benefit from omitted item of community income. Irs gov 1040x   A benefit includes normal support, but does not include de minimis (small) amounts. Irs gov 1040x Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. Irs gov 1040x   For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the property is traceable to omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from those omitted items of community income. Irs gov 1040x Equitable Relief If you do not qualify for the relief described above and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief (discussed later). Irs gov 1040x How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. Irs gov 1040x Fill in Form 8857 according to the instructions. Irs gov 1040x For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief. Irs gov 1040x However, if the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days after the date the IRS' initial contact letter to you. Irs gov 1040x The period of limitation on assessment is the amount of time, generally three years, that the IRS has from the date you filed the return to assess taxes that you owe. Irs gov 1040x Innocent Spouse Relief By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Irs gov 1040x Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). Irs gov 1040x However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. Irs gov 1040x The IRS can collect these amounts from either you or your spouse (or former spouse). Irs gov 1040x You must meet all of the following conditions to qualify for innocent spouse relief. Irs gov 1040x You filed a joint return. Irs gov 1040x There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). Irs gov 1040x You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed). Irs gov 1040x See Actual Knowledge or Reason To Know, later. Irs gov 1040x Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. Irs gov 1040x See Indications of Unfairness for Innocent Spouse Relief , later. Irs gov 1040x Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. Irs gov 1040x A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Irs gov 1040x Understated Tax You have an understated tax if the IRS determined that your total tax should be more than the amount that was actually shown on your return. Irs gov 1040x Erroneous Items Erroneous items are either of the following. Irs gov 1040x Unreported income. Irs gov 1040x This is any gross income item received by your spouse (or former spouse) that is not reported. Irs gov 1040x Incorrect deduction, credit, or basis. Irs gov 1040x This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). Irs gov 1040x The following are examples of erroneous items. Irs gov 1040x The expense for which the deduction is taken was never paid or incurred. Irs gov 1040x For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising. Irs gov 1040x The expense does not qualify as a deductible expense. Irs gov 1040x For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Irs gov 1040x Fines are not deductible. Irs gov 1040x No factual argument can be made to support the deductibility of the expense. Irs gov 1040x For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. Irs gov 1040x Actual Knowledge or Reason To Know You knew or had reason to know of an understated tax if: You actually knew of the understated tax, or A reasonable person in similar circumstances would have known of the understated tax. Irs gov 1040x Actual knowledge. Irs gov 1040x   If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Irs gov 1040x You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Irs gov 1040x For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. Irs gov 1040x Reason to know. Irs gov 1040x   If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Irs gov 1040x You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Irs gov 1040x   The IRS will consider all facts and circumstances in determining whether you had reason to know of an understated tax due to an erroneous item. Irs gov 1040x The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. Irs gov 1040x The financial situation of you and your spouse (or former spouse). Irs gov 1040x Your educational background and business experience. Irs gov 1040x The extent of your participation in the activity that resulted in the erroneous item. Irs gov 1040x Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. Irs gov 1040x Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Irs gov 1040x Partial relief when a portion of erroneous item is unknown. Irs gov 1040x   You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. Irs gov 1040x You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. Irs gov 1040x Example. Irs gov 1040x At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. Irs gov 1040x The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. Irs gov 1040x You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. Irs gov 1040x The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. Irs gov 1040x The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. Irs gov 1040x Indications of Unfairness for Innocent Spouse Relief The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax. Irs gov 1040x The following are examples of factors the IRS will consider. Irs gov 1040x Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. Irs gov 1040x Whether your spouse (or former spouse) deserted you. Irs gov 1040x Whether you and your spouse have been divorced or separated. Irs gov 1040x Whether you received a benefit on the return from the understated tax. Irs gov 1040x For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. Irs gov 1040x Significant benefit. Irs gov 1040x   A significant benefit is any benefit in excess of normal support. Irs gov 1040x Normal support depends on your particular circumstances. Irs gov 1040x Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax. Irs gov 1040x Example. Irs gov 1040x You receive money from your spouse that is beyond normal support. Irs gov 1040x The money can be traced to your spouse's lottery winnings that were not reported on your joint return. Irs gov 1040x You will be considered to have received a significant benefit from that income. Irs gov 1040x This is true even if your spouse gives you the money several years after he or she received it. Irs gov 1040x Separation of Liability Relief Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). Irs gov 1040x The understated tax allocated to you is generally the amount you are responsible for. Irs gov 1040x This type of relief is available only for unpaid liabilities resulting from the understated tax. Irs gov 1040x Refunds are not allowed. Irs gov 1040x To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Irs gov 1040x You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Irs gov 1040x (Under this rule, you are no longer married if you are widowed. Irs gov 1040x ) You were not a member of the same household (explained below) as the spouse with whom you filed the joint return at any time during the 12-month per- iod ending on the date you file Form 8857. Irs gov 1040x Members of the same household. Irs gov 1040x   You and your spouse are not members of the same household if you are living apart and are estranged. Irs gov 1040x However, you and your spouse are considered members of the same household if any of the following conditions are met. Irs gov 1040x You and your spouse reside in the same dwelling. Irs gov 1040x You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below. Irs gov 1040x Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Irs gov 1040x Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. Irs gov 1040x Burden of proof. Irs gov 1040x   You must be able to prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). Irs gov 1040x You must also establish the basis for allocating the erroneous items. Irs gov 1040x Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. Irs gov 1040x The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Irs gov 1040x A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Irs gov 1040x The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). Irs gov 1040x For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. Irs gov 1040x Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Irs gov 1040x See Transfers of Property To Avoid Tax , later. Irs gov 1040x Actual Knowledge The relief discussed here does not apply to any part of the understated tax due to your spouse's (or former spouse's) erroneous items of which you had actual knowledge. Irs gov 1040x You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. Irs gov 1040x If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. Irs gov 1040x You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. Irs gov 1040x (This rule applies whether or not there was a receipt of cash. Irs gov 1040x ) You knew of the facts that made an incorrect deduction or credit unallowable. Irs gov 1040x For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return. Irs gov 1040x Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Irs gov 1040x Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Irs gov 1040x Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself. Irs gov 1040x Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Irs gov 1040x Neither is your actual knowledge of how the erroneous item was treated on the tax return. Irs gov 1040x For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable. Irs gov 1040x Example. Irs gov 1040x Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. Irs gov 1040x The IRS audited their return and found that Bill did not report $20,000 of self-employment income. Irs gov 1040x The additional income resulted in a $6,000 understated tax, plus interest and penalties. Irs gov 1040x After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. Irs gov 1040x The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Irs gov 1040x Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. Irs gov 1040x Karen is also liable for the understated tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. Irs gov 1040x The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it. Irs gov 1040x Factors supporting actual knowledge. Irs gov 1040x   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. Irs gov 1040x The following are examples of factors the IRS may use. Irs gov 1040x Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. Irs gov 1040x Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. Irs gov 1040x Exception for spousal abuse or domestic violence. Irs gov 1040x   Even if you had actual knowledge, you may still qualify for relief if you establish that: You were the victim of spousal abuse or domestic violence before signing the return, and Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you. Irs gov 1040x   If you establish that you signed your joint return under duress (threat of harm or other form of coercion), then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. Irs gov 1040x However, you may be required to file a separate return for that tax year. Irs gov 1040x For more information about duress, see the instructions for Form 8857. Irs gov 1040x Transfers of Property To Avoid Tax If your spouse (or former spouse) transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. Irs gov 1040x The increase may not be more than the entire amount of the liability. Irs gov 1040x A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. Irs gov 1040x This presumption will not apply if: The transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement, or You establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax. Irs gov 1040x If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above. Irs gov 1040x Equitable Relief If you do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. Irs gov 1040x Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax (defined earlier under Innocent Spouse Relief ) or an underpaid tax. Irs gov 1040x An underpaid tax is an amount of tax you properly reported on your return but you have not paid. Irs gov 1040x For example, your joint 2009 return shows that you and your spouse owed $5,000. Irs gov 1040x You paid $2,000 with the return. Irs gov 1040x You have an underpaid tax of $3,000. Irs gov 1040x Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. Irs gov 1040x You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Irs gov 1040x You have an understated tax or an underpaid tax. Irs gov 1040x You did not pay the tax. Irs gov 1040x However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. Irs gov 1040x You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax. Irs gov 1040x See Factors for Determining Whether To Grant Equitable Relief, later. Irs gov 1040x You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Irs gov 1040x A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Irs gov 1040x Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Irs gov 1040x See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. Irs gov 1040x You did not file or fail to file your return with the intent to commit fraud. Irs gov 1040x The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies: The item is attributable or partially attributable to you solely due to the operation of community property law. Irs gov 1040x If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. Irs gov 1040x If the item is titled in your name, the item is presumed to be attributable to you. Irs gov 1040x However, you can rebut this presumption based on the facts and circumstances. Irs gov 1040x You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. Irs gov 1040x If you meet this exception, the IRS will consider granting equitable relief although the underpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse). Irs gov 1040x You establish that you were the victim of spousal abuse or domestic violence before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's (or former spouse's) retaliation. Irs gov 1040x If you meet this exception, relief will be considered although the understated tax or underpaid tax may be attributable in part or in full to your item. Irs gov 1040x Factors for Determining Whether To Grant Equitable Relief The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understated or underpaid tax. Irs gov 1040x The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. Irs gov 1040x The IRS will consider all factors and weigh them appropriately. Irs gov 1040x Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. Irs gov 1040x Whether you are separated (whether legally or not) or divorced from your spouse. Irs gov 1040x A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. Irs gov 1040x A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Irs gov 1040x Whether you would suffer a significant economic hardship if relief is not granted. Irs gov 1040x (In other words, you would not be able to pay your reasonable basic living expenses. Irs gov 1040x ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. Irs gov 1040x This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. Irs gov 1040x Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. Irs gov 1040x (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. Irs gov 1040x ) Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. Irs gov 1040x Whether you knew or had reason to know about the items causing the understated tax or that the tax would not be paid, as explained next. Irs gov 1040x Knowledge or reason to know. Irs gov 1040x   In the case of an underpaid tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. Irs gov 1040x   In the case of an income tax liability that arose from an understated tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understated tax. Irs gov 1040x Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. Irs gov 1040x Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. Irs gov 1040x This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. Irs gov 1040x Reason to know. Irs gov 1040x   In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels. Irs gov 1040x Example. Irs gov 1040x You and your spouse filed a joint 2009 return. Irs gov 1040x That return showed you owed $10,000. Irs gov 1040x You had $5,000 of your own money and you took out a loan to pay the other $5,000. Irs gov 1040x You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Irs gov 1040x Without telling you, your spouse took the $5,000 loan and spent it on himself. Irs gov 1040x You and your spouse were divorced in 2010. Irs gov 1040x In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Irs gov 1040x These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. Irs gov 1040x The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpaid tax. Irs gov 1040x Factors Weighing in Favor of Equitable Relief The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief. Irs gov 1040x Whether your spouse (or former spouse) abused you. Irs gov 1040x Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. Irs gov 1040x Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . Irs gov 1040x Not permitted under separation of liability relief. Irs gov 1040x Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. Irs gov 1040x Proof Required The IRS will only refund payments you made with your own money. Irs gov 1040x However, you must provide proof that you made the payments with your own money. Irs gov 1040x Examples of proof are a copy of your bank statement or a canceled check. Irs gov 1040x No proof is required if your individual refund was used by the IRS to pay a tax you owed on a joint tax return for another year. Irs gov 1040x Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. Irs gov 1040x Underpaid tax. Irs gov 1040x   If you are granted relief for an underpaid tax, you are eligible for a refund of separate payments that you made after July 22, 1998. Irs gov 1040x However, you are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. Irs gov 1040x For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. Irs gov 1040x   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. Irs gov 1040x Understated tax. Irs gov 1040x   If you are granted relief for an understated tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. Irs gov 1040x You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement. Irs gov 1040x Only installment payments made after the date you filed Form 8857 are eligible for a refund. Irs gov 1040x   The amount of the refund is subject to the limit discussed next. Irs gov 1040x Limit on Amount of Refund The amount of your refund is limited. Irs gov 1040x Read the following chart to find out the limit. Irs gov 1040x IF you file Form 8857. Irs gov 1040x . Irs gov 1040x . Irs gov 1040x THEN the refund cannot be more than. Irs gov 1040x . Irs gov 1040x . Irs gov 1040x Within 3 years after filing your return The part of the tax paid within 3 years (plus any extension of time for filing your return) before you filed Form 8857. Irs gov 1040x After the 3-year period, but within 2 years from the time you paid the tax The tax you paid within 2 years immediately before you filed Form 8857. Irs gov 1040x Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. Irs gov 1040x Janie and Joe Boulder filed a joint tax return for 2007. Irs gov 1040x They claimed one dependency exemption for their son Michael. Irs gov 1040x Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. Irs gov 1040x Janie did not know about the award when the return was filed. Irs gov 1040x They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). Irs gov 1040x Janie and Joe were divorced on May 13, 2009. Irs gov 1040x In February 2010, Janie filed her 2009 federal income tax return as head of household. Irs gov 1040x She expected a refund of $1,203. Irs gov 1040x In May 2010, she received a notice informing her that the IRS had offset her refund against the $815 owed on her joint 2007 income tax return and that she had a right to file Form 8857. Irs gov 1040x Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. Irs gov 1040x Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. Irs gov 1040x Janie believes she meets the third condition. Irs gov 1040x She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs. Irs gov 1040x Janie believes she meets the fourth condition. Irs gov 1040x She believes it would be unfair to be held liable for the tax because she did not benefit from the award. Irs gov 1040x Joe spent it on personal items for his use only. Irs gov 1040x Because Janie believes she qualifies for innocent spouse relief, she first completes Part I of Form 8857 to determine if she should file the form. Irs gov 1040x In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. Irs gov 1040x Part I Line 1. Irs gov 1040x   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. Irs gov 1040x Line 2. Irs gov 1040x   She checks the box because she wants a refund. Irs gov 1040x Note. Irs gov 1040x Because the IRS used her individual refund to pay the tax owed on the joint tax return, she does not need to provide proof of payment. Irs gov 1040x Line 3. Irs gov 1040x   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. Irs gov 1040x Line 4. Irs gov 1040x   She checks the “Yes” box because she filed a joint tax return for tax year 2007. Irs gov 1040x Line 5. Irs gov 1040x   She skips this line because she checked the “Yes” box on line 4. Irs gov 1040x Part II Line 6. Irs gov 1040x   She enters her name, address, social security number, county, and best daytime phone number. Irs gov 1040x Part III Line 7. Irs gov 1040x   She enters Joe's name, address, social security number, and best daytime phone number. Irs gov 1040x Line 8. Irs gov 1040x   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. Irs gov 1040x ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. Irs gov 1040x Line 9. Irs gov 1040x   She checks the box for “High school diploma, equivalent, or less,” because she had completed high school when her 2007 joint tax return was filed. Irs gov 1040x Line 10. Irs gov 1040x   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. Irs gov 1040x Line 11. Irs gov 1040x   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. Irs gov 1040x Line 12. Irs gov 1040x   She checks the “Yes” box because she signed the 2007 joint tax return. Irs gov 1040x Line 13. Irs gov 1040x   She checks the “No” box because she did not have a mental or physical condition when the return was filed and does not have one now. Irs gov 1040x Part IV Line 14. Irs gov 1040x   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. Irs gov 1040x ” Line 15. Irs gov 1040x   She checks the box, “You did not know anything was incorrect or missing” because she did not know that Joe had received a $5,000 award. Irs gov 1040x She explains this in the space provided. Irs gov 1040x Line 16. Irs gov 1040x   She checks the box, “You knew that person had income” because she knew Joe had income from wages. Irs gov 1040x She also lists Joe's income. Irs gov 1040x Under “Type of Income” she enters “wages. Irs gov 1040x ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. Irs gov 1040x ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. Irs gov 1040x ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. Irs gov 1040x Line 17. Irs gov 1040x   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. Irs gov 1040x Line 18. Irs gov 1040x   She checks the “No” box because, when the return was signed, she was not having financial problems. Irs gov 1040x Line 19. Irs gov 1040x   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. Irs gov 1040x She provides additional information in the space provided. Irs gov 1040x Line 20. Irs gov 1040x   She checks the “No” box because Joe has never transferred money or property to her. Irs gov 1040x Part V Line 21. Irs gov 1040x   She enters the number “1” on both the line for “Adults” and the line for “Children” because her current household consists of herself and her son. Irs gov 1040x Line 22. Irs gov 1040x   She enters her average monthly income for her entire household. Irs gov 1040x Line 23. Irs gov 1040x   She lists her assets, which are $500 for the fair market value of a car, $450 in her checking account, and $100 in her savings account. Irs gov 1040x Signing and mailing Form 8857. Irs gov 1040x    Janie signs and dates the form. Irs gov 1040x She attaches the copy of her divorce decree (not illustrated) required by line 8. Irs gov 1040x Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. Irs gov 1040x This image is too large to be displayed in the current screen. Irs gov 1040x Please click the link to view the image. Irs gov 1040x Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. Irs gov 1040x Please click the link to view the image. Irs gov 1040x Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. Irs gov 1040x Please click the link to view the image. Irs gov 1040x Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. Irs gov 1040x Please click the link to view the image. Irs gov 1040x Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. Irs gov 1040x But do not rely on these flowcharts alone. Irs gov 1040x Also read the earlier discussions. Irs gov 1040x Figure A. Irs gov 1040x Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. Irs gov 1040x "Do You Qualify for Innocent Spouse Relief?" Figure B. Irs gov 1040x Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. Irs gov 1040x "Do You Qualify for Separation of Liability Relief?" Figure C. Irs gov 1040x Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. Irs gov 1040x Please click the link to view the image. Irs gov 1040x "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications