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Www Irs Gov Efile 941

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Www Irs Gov Efile 941

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Understanding your CP22I Notice

We made changes to your tax return for the tax year specified on the notice for Individual
Retirement Arrangement (IRA) taxes. You owe money on your taxes as a result
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How to get help

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

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Page Last Reviewed or Updated: 03-Mar-2014

The Www Irs Gov Efile 941

Www irs gov efile 941 2. Www irs gov efile 941   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Www irs gov efile 941 You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Www irs gov efile 941 This chapter discusses accounting methods. Www irs gov efile 941 For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Www irs gov efile 941 Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Www irs gov efile 941 Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Www irs gov efile 941 Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Www irs gov efile 941 A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Www irs gov efile 941 An item considered material for financial statement purposes is generally also considered material for income tax purposes. Www irs gov efile 941 See Publication 538 for more information. Www irs gov efile 941 You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Www irs gov efile 941 If you later want to change your accounting method, you generally must get IRS approval. Www irs gov efile 941 How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Www irs gov efile 941 Types of accounting methods. Www irs gov efile 941   Generally, you can use any of the following accounting methods. Www irs gov efile 941 Each method is discussed in detail below. Www irs gov efile 941 Cash method. Www irs gov efile 941 Accrual method. Www irs gov efile 941 Special methods of accounting for certain items of income and expenses. Www irs gov efile 941 Combination (hybrid) method using elements of two or more of the above. Www irs gov efile 941 Business and other items. Www irs gov efile 941   You can account for business and personal items using different accounting methods. Www irs gov efile 941 For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Www irs gov efile 941 Two or more businesses. Www irs gov efile 941   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Www irs gov efile 941 Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Www irs gov efile 941 Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Www irs gov efile 941 However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Www irs gov efile 941 See Accrual Method Required , later. Www irs gov efile 941 Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Www irs gov efile 941 Items of income include money received as well as property or services received. Www irs gov efile 941 If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Www irs gov efile 941 See chapter 3 for information on how to report farm income on your income tax return. Www irs gov efile 941 Constructive receipt. Www irs gov efile 941   Income is constructively received when an amount is credited to your account or made available to you without restriction. Www irs gov efile 941 You do not need to have possession of the income for it to be treated as income for the tax year. Www irs gov efile 941 If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Www irs gov efile 941 Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Www irs gov efile 941 Direct payments and counter-cyclical payments. Www irs gov efile 941   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Www irs gov efile 941 Delaying receipt of income. Www irs gov efile 941   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Www irs gov efile 941 You must report the income in the year the money or property is received or made available to you without restriction. Www irs gov efile 941 Example. Www irs gov efile 941 Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Www irs gov efile 941 She was told in December that her payment was available. Www irs gov efile 941 She requested not to be paid until January 2014. Www irs gov efile 941 However, she must still include this payment in her 2013 income because it was made available to her in 2013. Www irs gov efile 941 Debts paid by another person or canceled. Www irs gov efile 941   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Www irs gov efile 941 If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Www irs gov efile 941 See Cancellation of Debt in chapter 3. Www irs gov efile 941 Deferred payment contract. Www irs gov efile 941   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Www irs gov efile 941 However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Www irs gov efile 941 Example. Www irs gov efile 941 You are a farmer who uses the cash method and a calendar tax year. Www irs gov efile 941 You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Www irs gov efile 941 You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Www irs gov efile 941 However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Www irs gov efile 941 Repayment of income. Www irs gov efile 941   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Www irs gov efile 941 If the repayment is more than $3,000, a special rule applies. Www irs gov efile 941 For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Www irs gov efile 941 Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Www irs gov efile 941 This includes business expenses for which you contest liability. Www irs gov efile 941 However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Www irs gov efile 941 See chapter 4 for information on how to deduct farm business expenses on your income tax return. Www irs gov efile 941 Prepayment. Www irs gov efile 941   Generally, you cannot deduct expenses paid in advance. Www irs gov efile 941 This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Www irs gov efile 941 Example. Www irs gov efile 941 On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Www irs gov efile 941 In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Www irs gov efile 941 In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Www irs gov efile 941 An exception applies if the expense qualifies for the 12-month rule. Www irs gov efile 941 See Publication 538 for more information and examples. Www irs gov efile 941 See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Www irs gov efile 941 Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Www irs gov efile 941 The purpose of an accrual method of accounting is to correctly match income and expenses. Www irs gov efile 941 Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Www irs gov efile 941 See Accrual Method Required and Farm Inventory , later. Www irs gov efile 941 Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Www irs gov efile 941 Under this rule, include an amount in income on the earliest of the following dates. Www irs gov efile 941 When you receive payment. Www irs gov efile 941 When the income amount is due to you. Www irs gov efile 941 When you earn the income. Www irs gov efile 941 When title passes. Www irs gov efile 941 If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Www irs gov efile 941 Inventory. Www irs gov efile 941   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Www irs gov efile 941 An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Www irs gov efile 941 See Publication 538 for more information. Www irs gov efile 941 Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Www irs gov efile 941 Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Www irs gov efile 941 The all-events test has been met. Www irs gov efile 941 This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Www irs gov efile 941 Economic performance has occurred. Www irs gov efile 941 Economic performance. Www irs gov efile 941   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Www irs gov efile 941 If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Www irs gov efile 941 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Www irs gov efile 941 Example. Www irs gov efile 941 Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Www irs gov efile 941 She entered into a contract with ABC Farm Consulting in 2012. Www irs gov efile 941 The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Www irs gov efile 941 It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Www irs gov efile 941 Jane paid ABC Farm Consulting $2,000 in December 2012. Www irs gov efile 941 Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Www irs gov efile 941 Economic performance for Jane's liability in the contract occurs as the services are provided. Www irs gov efile 941 Jane incurs the $2,000 cost in 2013. Www irs gov efile 941 An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Www irs gov efile 941 For more information, see Economic Performance in Publication 538. Www irs gov efile 941 Special rule for related persons. Www irs gov efile 941   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Www irs gov efile 941 Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Www irs gov efile 941 For more information, see Internal Revenue Code section 267. Www irs gov efile 941 Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Www irs gov efile 941 A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Www irs gov efile 941 A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Www irs gov efile 941 A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Www irs gov efile 941 A tax shelter. Www irs gov efile 941 Note. Www irs gov efile 941 Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Www irs gov efile 941 Family corporation. Www irs gov efile 941   A family corporation is generally a corporation that meets one of the following ownership requirements. Www irs gov efile 941 Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Www irs gov efile 941 Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Www irs gov efile 941 Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Www irs gov efile 941 For more information on family corporations, see Internal Revenue Code section 447. Www irs gov efile 941 Tax shelter. Www irs gov efile 941   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Www irs gov efile 941 Its principal purpose is the avoidance or evasion of federal income tax. Www irs gov efile 941 It is a farming syndicate. Www irs gov efile 941 A farming syndicate is an entity that meets either of the following tests. Www irs gov efile 941 Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Www irs gov efile 941 More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Www irs gov efile 941   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Www irs gov efile 941   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Www irs gov efile 941 Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Www irs gov efile 941 This record should show the actual count or measurement of the inventory. Www irs gov efile 941 It should also show all factors that enter into its valuation, including quality and weight, if applicable. Www irs gov efile 941 Hatchery business. Www irs gov efile 941   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Www irs gov efile 941 Products held for sale. Www irs gov efile 941   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Www irs gov efile 941 , must be included in inventory. Www irs gov efile 941 Supplies. Www irs gov efile 941   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Www irs gov efile 941 Deduct the cost of supplies in the year used or consumed in operations. Www irs gov efile 941 Do not include incidental supplies in inventory as these are deductible in the year of purchase. Www irs gov efile 941 Livestock. Www irs gov efile 941   Livestock held primarily for sale must be included in inventory. Www irs gov efile 941 Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Www irs gov efile 941 See also Unit-livestock-price method , later. Www irs gov efile 941 If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Www irs gov efile 941 Growing crops. Www irs gov efile 941   Generally, growing crops are not required to be included in inventory. Www irs gov efile 941 However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Www irs gov efile 941 See Uniform capitalization rules below. Www irs gov efile 941 Also see Uniform Capitalization Rules in  chapter 6. Www irs gov efile 941 Items to include in inventory. Www irs gov efile 941   Your inventory should include all items held for sale, or for use as feed, seed, etc. Www irs gov efile 941 , whether raised or purchased, that are unsold at the end of the year. Www irs gov efile 941 Uniform capitalization rules. Www irs gov efile 941   The following applies if you are required to use an accrual method of accounting. Www irs gov efile 941 The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Www irs gov efile 941 The costs of animals are subject to the uniform capitalization rules. Www irs gov efile 941 Inventory valuation methods. Www irs gov efile 941   The following methods, described below, are those generally available for valuing inventory. Www irs gov efile 941 The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Www irs gov efile 941 Cost. Www irs gov efile 941 Lower of cost or market. Www irs gov efile 941 Farm-price method. Www irs gov efile 941 Unit-livestock-price method. Www irs gov efile 941 Cost and lower of cost or market methods. Www irs gov efile 941   See Publication 538 for information on these valuation methods. Www irs gov efile 941 If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Www irs gov efile 941 However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Www irs gov efile 941 Farm-price method. Www irs gov efile 941   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Www irs gov efile 941 Market price is the current price at the nearest market in the quantities you usually sell. Www irs gov efile 941 Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Www irs gov efile 941 If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Www irs gov efile 941 Unit-livestock-price method. Www irs gov efile 941   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Www irs gov efile 941 You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Www irs gov efile 941 The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Www irs gov efile 941 Unit prices and classifications are subject to approval by the IRS on examination of your return. Www irs gov efile 941 You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Www irs gov efile 941 IRS approval is not required for these adjustments. Www irs gov efile 941 Any other changes in unit prices or classifications do require IRS approval. Www irs gov efile 941   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Www irs gov efile 941 This method accounts only for the increase in cost of raising an animal to maturity. Www irs gov efile 941 It does not provide for any decrease in the animal's market value after it reaches maturity. Www irs gov efile 941 Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Www irs gov efile 941   Do not include sold or lost animals in the year-end inventory. Www irs gov efile 941 If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Www irs gov efile 941 The animals on hand at the end of the year are considered those most recently acquired. Www irs gov efile 941   You must include in inventory all livestock purchased primarily for sale. Www irs gov efile 941 You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Www irs gov efile 941 However, you must be consistent from year to year, regardless of the method you have chosen. Www irs gov efile 941 You cannot change your method without obtaining approval from the IRS. Www irs gov efile 941   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Www irs gov efile 941 If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Www irs gov efile 941 However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Www irs gov efile 941 This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Www irs gov efile 941 It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Www irs gov efile 941 Uniform capitalization rules. Www irs gov efile 941   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Www irs gov efile 941 This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Www irs gov efile 941 Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Www irs gov efile 941 Example 1. Www irs gov efile 941 You are a farmer who uses an accrual method of accounting. Www irs gov efile 941 You keep your books on the calendar year basis. Www irs gov efile 941 You sell grain in December 2013 but you are not paid until January 2014. Www irs gov efile 941 Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Www irs gov efile 941 Example 2. Www irs gov efile 941 Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Www irs gov efile 941 Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Www irs gov efile 941 Deduct the costs of producing the grain in the year you pay for them. Www irs gov efile 941 Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Www irs gov efile 941 Crop method. Www irs gov efile 941   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Www irs gov efile 941 You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Www irs gov efile 941 Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Www irs gov efile 941    See chapter 4 for details on deducting the costs of operating a farm. Www irs gov efile 941 Also see Regulations section 1. Www irs gov efile 941 162-12. Www irs gov efile 941 Other special methods. Www irs gov efile 941   Other special methods of accounting apply to the following items. Www irs gov efile 941 Amortization, see chapter 7. Www irs gov efile 941 Casualties, see chapter 11. Www irs gov efile 941 Condemnations, see chapter 11. Www irs gov efile 941 Depletion, see chapter 7. Www irs gov efile 941 Depreciation, see chapter 7. Www irs gov efile 941 Farm business expenses, see chapter 4. Www irs gov efile 941 Farm income, see chapter 3. Www irs gov efile 941 Installment sales, see chapter 10. Www irs gov efile 941 Soil and water conservation expenses, see chapter 5. Www irs gov efile 941 Thefts, see chapter 11. Www irs gov efile 941 Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Www irs gov efile 941 However, the following restrictions apply. Www irs gov efile 941 If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Www irs gov efile 941 If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Www irs gov efile 941 Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Www irs gov efile 941 Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Www irs gov efile 941 You may also have to pay a fee. Www irs gov efile 941 To obtain approval, you must generally file Form 3115. Www irs gov efile 941 There are instances when you can obtain automatic consent to change certain methods of accounting. Www irs gov efile 941 See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Www irs gov efile 941 For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Www irs gov efile 941 Also see Publication 538. Www irs gov efile 941 Prev  Up  Next   Home   More Online Publications