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File taxes for free 2011 Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. File taxes for free 2011 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. File taxes for free 2011 If you are requesting relief for more than three tax years, you must file an additional Form 8857. File taxes for free 2011 The IRS will review your Form 8857 and let you know if you qualify. File taxes for free 2011 A completed Form 8857 is shown later. File taxes for free 2011 When to file Form 8857. File taxes for free 2011   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. File taxes for free 2011 The following are some of the ways you may become aware of such a liability. File taxes for free 2011 The IRS is examining your tax return and proposing to increase your tax liability. File taxes for free 2011 The IRS sends you a notice. File taxes for free 2011   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. File taxes for free 2011 (But see the exceptions below for different filing deadlines that apply. File taxes for free 2011 ) For this reason, do not delay filing because you do not have all the documentation. File taxes for free 2011   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. File taxes for free 2011 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. File taxes for free 2011 This includes the filing of a proof of claim in a bankruptcy proceeding. File taxes for free 2011 The filing of a suit by the United States against you to collect the joint liability. File taxes for free 2011 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. File taxes for free 2011 The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. File taxes for free 2011 Exception for equitable relief. File taxes for free 2011   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. File taxes for free 2011 irs. File taxes for free 2011 gov/irb/2011-32_IRB/ar11. File taxes for free 2011 html) expanding the amount of time to request equitable relief. File taxes for free 2011 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. File taxes for free 2011 Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. File taxes for free 2011 In certain cases, the 10-year period is suspended. File taxes for free 2011 The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. File taxes for free 2011 See Pub. File taxes for free 2011 594, The IRS Collection Process, for details. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 See Pub. File taxes for free 2011 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. File taxes for free 2011 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. File taxes for free 2011 Exception for relief based on community property laws. File taxes for free 2011   If you are requesting relief based on community property laws, a different filing deadline applies. File taxes for free 2011 See Relief from liability arising from community property law discussed later under Community Property Laws . File taxes for free 2011 Form 8857 filed by or on behalf of a decedent. File taxes for free 2011   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. File taxes for free 2011 An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. File taxes for free 2011 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. File taxes for free 2011 Situations in which you are not entitled to relief. File taxes for free 2011   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 You entered into an offer in compromise with the IRS. File taxes for free 2011 You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. File taxes for free 2011 Exception for agreements relating to TEFRA partnership proceedings. File taxes for free 2011   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. File taxes for free 2011 (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. File taxes for free 2011 ) 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). File taxes for free 2011 Transferee liability not affected by innocent spouse relief provisions. File taxes for free 2011   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. File taxes for free 2011 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. File taxes for free 2011 Example. File taxes for free 2011 Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. File taxes for free 2011 Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. File taxes for free 2011 In August 2010, the IRS assessed a deficiency for the 2008 return. File taxes for free 2011 The items causing the deficiency belong to Herb. File taxes for free 2011 Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. File taxes for free 2011 However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. File taxes for free 2011 The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. File taxes for free 2011 There are no exceptions, even for victims of spousal abuse or domestic violence. File taxes for free 2011 We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. File taxes for free 2011 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. File taxes for free 2011 The IRS sends you a final determination letter regarding your request for relief. File taxes for free 2011 You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. File taxes for free 2011 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. File taxes for free 2011 The United States Tax Court is an independent judicial body and is not part of the IRS. File taxes for free 2011 You must file a petition with the United States Tax Court in order for it to review your request for relief. File taxes for free 2011 You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. File taxes for free 2011 If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. File taxes for free 2011 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. File taxes for free 2011 ustaxcourt. File taxes for free 2011 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. File taxes for free 2011 Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. File taxes for free 2011 Generally, community property laws require you to allocate community income and expenses equally between both spouses. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 You did not file a joint return for the tax year. File taxes for free 2011 You did not include the item of community income in gross income. File taxes for free 2011 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. File taxes for free 2011 Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. File taxes for free 2011 Your spouse's (or former spouse's) distributive share of partnership income. File taxes for free 2011 Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). File taxes for free 2011 Use the appropriate community property law to determine what is separate property. File taxes for free 2011 Any other income that belongs to your spouse (or former spouse) under community property law. File taxes for free 2011 You establish that you did not know of, and had no reason to know of, that community income. File taxes for free 2011 See  Actual Knowledge or Reason To Know , below. File taxes for free 2011 Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. File taxes for free 2011 See Indications of unfairness for liability arising from community property law, later. File taxes for free 2011 Actual knowledge or reason to know. File taxes for free 2011   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. File taxes for free 2011 Amount of community income unknown. File taxes for free 2011   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. File taxes for free 2011 Not knowing the specific amount is not a basis for relief. File taxes for free 2011 Reason to know. File taxes for free 2011   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. File taxes for free 2011 The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. File taxes for free 2011 The financial situation of you and your spouse (or former spouse). File taxes for free 2011 Your educational background and business experience. File taxes for free 2011 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). File taxes for free 2011 Indications of unfairness for liability arising from community property law. File taxes for free 2011   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. File taxes for free 2011   The following are examples of factors the IRS will consider. File taxes for free 2011 Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). File taxes for free 2011 Whether your spouse (or former spouse) deserted you. File taxes for free 2011 Whether you and your spouse have been divorced or separated. File taxes for free 2011  For other factors see Factors for Determining Whether To Grant Equitable Relief later. File taxes for free 2011 Benefit from omitted item of community income. File taxes for free 2011   A benefit includes normal support, but does not include de minimis (small) amounts. File taxes for free 2011 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. File taxes for free 2011   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. File taxes for free 2011 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). File taxes for free 2011 How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. File taxes for free 2011 Fill in Form 8857 according to the instructions. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). File taxes for free 2011 However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. File taxes for free 2011 The IRS can collect these amounts from either you or your spouse (or former spouse). File taxes for free 2011 You must meet all of the following conditions to qualify for innocent spouse relief. File taxes for free 2011 You filed a joint return. File taxes for free 2011 There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). File taxes for free 2011 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). File taxes for free 2011 See Actual Knowledge or Reason To Know, later. File taxes for free 2011 Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. File taxes for free 2011 See Indications of Unfairness for Innocent Spouse Relief , later. File taxes for free 2011 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. File taxes for free 2011 A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. File taxes for free 2011 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. File taxes for free 2011 Erroneous Items Erroneous items are either of the following. File taxes for free 2011 Unreported income. File taxes for free 2011 This is any gross income item received by your spouse (or former spouse) that is not reported. File taxes for free 2011 Incorrect deduction, credit, or basis. File taxes for free 2011 This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). File taxes for free 2011 The following are examples of erroneous items. File taxes for free 2011 The expense for which the deduction is taken was never paid or incurred. File taxes for free 2011 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. File taxes for free 2011 The expense does not qualify as a deductible expense. File taxes for free 2011 For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. File taxes for free 2011 Fines are not deductible. File taxes for free 2011 No factual argument can be made to support the deductibility of the expense. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Actual knowledge. File taxes for free 2011   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. File taxes for free 2011 You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. File taxes for free 2011 For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. File taxes for free 2011 Reason to know. File taxes for free 2011   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. File taxes for free 2011 You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. File taxes for free 2011   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. File taxes for free 2011 The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. File taxes for free 2011 The financial situation of you and your spouse (or former spouse). File taxes for free 2011 Your educational background and business experience. File taxes for free 2011 The extent of your participation in the activity that resulted in the erroneous item. File taxes for free 2011 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. File taxes for free 2011 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). File taxes for free 2011 Partial relief when a portion of erroneous item is unknown. File taxes for free 2011   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. File taxes for free 2011 You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. File taxes for free 2011 Example. File taxes for free 2011 At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. File taxes for free 2011 The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. File taxes for free 2011 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. File taxes for free 2011 The following are examples of factors the IRS will consider. File taxes for free 2011 Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. File taxes for free 2011 Whether your spouse (or former spouse) deserted you. File taxes for free 2011 Whether you and your spouse have been divorced or separated. File taxes for free 2011 Whether you received a benefit on the return from the understated tax. File taxes for free 2011 For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. File taxes for free 2011 Significant benefit. File taxes for free 2011   A significant benefit is any benefit in excess of normal support. File taxes for free 2011 Normal support depends on your particular circumstances. File taxes for free 2011 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. File taxes for free 2011 Example. File taxes for free 2011 You receive money from your spouse that is beyond normal support. File taxes for free 2011 The money can be traced to your spouse's lottery winnings that were not reported on your joint return. File taxes for free 2011 You will be considered to have received a significant benefit from that income. File taxes for free 2011 This is true even if your spouse gives you the money several years after he or she received it. File taxes for free 2011 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). File taxes for free 2011 The understated tax allocated to you is generally the amount you are responsible for. File taxes for free 2011 This type of relief is available only for unpaid liabilities resulting from the understated tax. File taxes for free 2011 Refunds are not allowed. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 (Under this rule, you are no longer married if you are widowed. File taxes for free 2011 ) 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. File taxes for free 2011 Members of the same household. File taxes for free 2011   You and your spouse are not members of the same household if you are living apart and are estranged. File taxes for free 2011 However, you and your spouse are considered members of the same household if any of the following conditions are met. File taxes for free 2011 You and your spouse reside in the same dwelling. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. File taxes for free 2011 Burden of proof. File taxes for free 2011   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). File taxes for free 2011 You must also establish the basis for allocating the erroneous items. File taxes for free 2011 Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. File taxes for free 2011 The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. File taxes for free 2011 A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. File taxes for free 2011 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). File taxes for free 2011 For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. File taxes for free 2011 Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. File taxes for free 2011 See Transfers of Property To Avoid Tax , later. File taxes for free 2011 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. File taxes for free 2011 You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. File taxes for free 2011 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. File taxes for free 2011 You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. File taxes for free 2011 (This rule applies whether or not there was a receipt of cash. File taxes for free 2011 ) You knew of the facts that made an incorrect deduction or credit unallowable. File taxes for free 2011 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. File taxes for free 2011 Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. File taxes for free 2011 Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Neither is your actual knowledge of how the erroneous item was treated on the tax return. File taxes for free 2011 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. File taxes for free 2011 Example. File taxes for free 2011 Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. File taxes for free 2011 The IRS audited their return and found that Bill did not report $20,000 of self-employment income. File taxes for free 2011 The additional income resulted in a $6,000 understated tax, plus interest and penalties. File taxes for free 2011 After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. File taxes for free 2011 The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. File taxes for free 2011 Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Factors supporting actual knowledge. File taxes for free 2011   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. File taxes for free 2011 The following are examples of factors the IRS may use. File taxes for free 2011 Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. File taxes for free 2011 Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. File taxes for free 2011 Exception for spousal abuse or domestic violence. File taxes for free 2011   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. File taxes for free 2011   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. File taxes for free 2011 However, you may be required to file a separate return for that tax year. File taxes for free 2011 For more information about duress, see the instructions for Form 8857. File taxes for free 2011 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. File taxes for free 2011 The increase may not be more than the entire amount of the liability. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 An underpaid tax is an amount of tax you properly reported on your return but you have not paid. File taxes for free 2011 For example, your joint 2009 return shows that you and your spouse owed $5,000. File taxes for free 2011 You paid $2,000 with the return. File taxes for free 2011 You have an underpaid tax of $3,000. File taxes for free 2011 Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. File taxes for free 2011 You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. File taxes for free 2011 You have an understated tax or an underpaid tax. File taxes for free 2011 You did not pay the tax. File taxes for free 2011 However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. File taxes for free 2011 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. File taxes for free 2011 See Factors for Determining Whether To Grant Equitable Relief, later. File taxes for free 2011 You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. File taxes for free 2011 A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. File taxes for free 2011 Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. File taxes for free 2011 See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. File taxes for free 2011 You did not file or fail to file your return with the intent to commit fraud. File taxes for free 2011 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. File taxes for free 2011 If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. File taxes for free 2011 If the item is titled in your name, the item is presumed to be attributable to you. File taxes for free 2011 However, you can rebut this presumption based on the facts and circumstances. File taxes for free 2011 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. File taxes for free 2011 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). File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. File taxes for free 2011 The IRS will consider all factors and weigh them appropriately. File taxes for free 2011 Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. File taxes for free 2011 Whether you are separated (whether legally or not) or divorced from your spouse. File taxes for free 2011 A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. File taxes for free 2011 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. File taxes for free 2011 Whether you would suffer a significant economic hardship if relief is not granted. File taxes for free 2011 (In other words, you would not be able to pay your reasonable basic living expenses. File taxes for free 2011 ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. File taxes for free 2011 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. File taxes for free 2011 Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. File taxes for free 2011 (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. File taxes for free 2011 ) 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. File taxes for free 2011 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. File taxes for free 2011 Knowledge or reason to know. File taxes for free 2011   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. File taxes for free 2011   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. File taxes for free 2011 Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. File taxes for free 2011 Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. File taxes for free 2011 This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. File taxes for free 2011 Reason to know. File taxes for free 2011   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. File taxes for free 2011 Example. File taxes for free 2011 You and your spouse filed a joint 2009 return. File taxes for free 2011 That return showed you owed $10,000. File taxes for free 2011 You had $5,000 of your own money and you took out a loan to pay the other $5,000. File taxes for free 2011 You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. File taxes for free 2011 Without telling you, your spouse took the $5,000 loan and spent it on himself. File taxes for free 2011 You and your spouse were divorced in 2010. File taxes for free 2011 In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. File taxes for free 2011 These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Whether your spouse (or former spouse) abused you. File taxes for free 2011 Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. File taxes for free 2011 Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . File taxes for free 2011 Not permitted under separation of liability relief. File taxes for free 2011 Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. File taxes for free 2011 Proof Required The IRS will only refund payments you made with your own money. File taxes for free 2011 However, you must provide proof that you made the payments with your own money. File taxes for free 2011 Examples of proof are a copy of your bank statement or a canceled check. File taxes for free 2011 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. File taxes for free 2011 Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. File taxes for free 2011 Underpaid tax. File taxes for free 2011   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. File taxes for free 2011 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. File taxes for free 2011 For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. File taxes for free 2011   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. File taxes for free 2011 Understated tax. File taxes for free 2011   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. File taxes for free 2011 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. File taxes for free 2011 Only installment payments made after the date you filed Form 8857 are eligible for a refund. File taxes for free 2011   The amount of the refund is subject to the limit discussed next. File taxes for free 2011 Limit on Amount of Refund The amount of your refund is limited. File taxes for free 2011 Read the following chart to find out the limit. File taxes for free 2011 IF you file Form 8857. File taxes for free 2011 . File taxes for free 2011 . File taxes for free 2011 THEN the refund cannot be more than. File taxes for free 2011 . File taxes for free 2011 . File taxes for free 2011 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. File taxes for free 2011 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. File taxes for free 2011 Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. File taxes for free 2011 Janie and Joe Boulder filed a joint tax return for 2007. File taxes for free 2011 They claimed one dependency exemption for their son Michael. File taxes for free 2011 Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. File taxes for free 2011 Janie did not know about the award when the return was filed. File taxes for free 2011 They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). File taxes for free 2011 Janie and Joe were divorced on May 13, 2009. File taxes for free 2011 In February 2010, Janie filed her 2009 federal income tax return as head of household. File taxes for free 2011 She expected a refund of $1,203. File taxes for free 2011 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. File taxes for free 2011 Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. File taxes for free 2011 Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. File taxes for free 2011 Janie believes she meets the third condition. File taxes for free 2011 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. File taxes for free 2011 Janie believes she meets the fourth condition. File taxes for free 2011 She believes it would be unfair to be held liable for the tax because she did not benefit from the award. File taxes for free 2011 Joe spent it on personal items for his use only. File taxes for free 2011 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. File taxes for free 2011 In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. File taxes for free 2011 Part I Line 1. File taxes for free 2011   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. File taxes for free 2011 Line 2. File taxes for free 2011   She checks the box because she wants a refund. File taxes for free 2011 Note. File taxes for free 2011 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. File taxes for free 2011 Line 3. File taxes for free 2011   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. File taxes for free 2011 Line 4. File taxes for free 2011   She checks the “Yes” box because she filed a joint tax return for tax year 2007. File taxes for free 2011 Line 5. File taxes for free 2011   She skips this line because she checked the “Yes” box on line 4. File taxes for free 2011 Part II Line 6. File taxes for free 2011   She enters her name, address, social security number, county, and best daytime phone number. File taxes for free 2011 Part III Line 7. File taxes for free 2011   She enters Joe's name, address, social security number, and best daytime phone number. File taxes for free 2011 Line 8. File taxes for free 2011   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. File taxes for free 2011 ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. File taxes for free 2011 Line 9. File taxes for free 2011   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. File taxes for free 2011 Line 10. File taxes for free 2011   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. File taxes for free 2011 Line 11. File taxes for free 2011   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. File taxes for free 2011 Line 12. File taxes for free 2011   She checks the “Yes” box because she signed the 2007 joint tax return. File taxes for free 2011 Line 13. File taxes for free 2011   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. File taxes for free 2011 Part IV Line 14. File taxes for free 2011   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. File taxes for free 2011 ” Line 15. File taxes for free 2011   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. File taxes for free 2011 She explains this in the space provided. File taxes for free 2011 Line 16. File taxes for free 2011   She checks the box, “You knew that person had income” because she knew Joe had income from wages. File taxes for free 2011 She also lists Joe's income. File taxes for free 2011 Under “Type of Income” she enters “wages. File taxes for free 2011 ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. File taxes for free 2011 ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. File taxes for free 2011 ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. File taxes for free 2011 Line 17. File taxes for free 2011   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. File taxes for free 2011 Line 18. File taxes for free 2011   She checks the “No” box because, when the return was signed, she was not having financial problems. File taxes for free 2011 Line 19. File taxes for free 2011   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. File taxes for free 2011 She provides additional information in the space provided. File taxes for free 2011 Line 20. File taxes for free 2011   She checks the “No” box because Joe has never transferred money or property to her. File taxes for free 2011 Part V Line 21. File taxes for free 2011   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. File taxes for free 2011 Line 22. File taxes for free 2011   She enters her average monthly income for her entire household. File taxes for free 2011 Line 23. File taxes for free 2011   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. File taxes for free 2011 Signing and mailing Form 8857. File taxes for free 2011    Janie signs and dates the form. File taxes for free 2011 She attaches the copy of her divorce decree (not illustrated) required by line 8. File taxes for free 2011 Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. File taxes for free 2011 This image is too large to be displayed in the current screen. File taxes for free 2011 Please click the link to view the image. File taxes for free 2011 Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. File taxes for free 2011 Please click the link to view the image. File taxes for free 2011 Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. File taxes for free 2011 Please click the link to view the image. File taxes for free 2011 Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. File taxes for free 2011 Please click the link to view the image. File taxes for free 2011 Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. File taxes for free 2011 But do not rely on these flowcharts alone. File taxes for free 2011 Also read the earlier discussions. File taxes for free 2011 Figure A. File taxes for free 2011 Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. File taxes for free 2011 "Do You Qualify for Innocent Spouse Relief?" Figure B. File taxes for free 2011 Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. File taxes for free 2011 "Do You Qualify for Separation of Liability Relief?" Figure C. File taxes for free 2011 Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. File taxes for free 2011 Please click the link to view the image. File taxes for free 2011 "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications
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IRS Seeks Volunteers for Taxpayer Advocacy Panel

IR-2014-26, March 10, 2014

WASHINGTON — The Internal Revenue Service seeks civic-minded volunteers to serve on the Taxpayer Advocacy Panel (TAP), a federal advisory committee that listens to taxpayers, identifies major taxpayer concerns, and makes recommendations for improving IRS services.

The TAP provides a forum for taxpayers to raise concerns about IRS service and offer suggestions for improvement. The TAP reports annually to the Secretary of the Treasury, the IRS Commissioner and the National Taxpayer Advocate. The Office of the Taxpayer Advocate is an independent organization within the IRS and provides oversight of the TAP.

“In trying to comply with an increasingly complex tax system, taxpayers may find they need different services than the IRS is currently providing,” said Nina E. Olson, National Taxpayer Advocate. “The TAP is vital because it provides the IRS with the taxpayers’ perspective as well as recommendations for improvement. This helps the IRS deliver the best possible service to assist taxpayers in meeting their tax obligations.”  

The TAP includes members from all 50 states, the District of Columbia and Puerto Rico. Each member is appointed to represent the interests of taxpayers in his or her geographic location as well as taxpayers as a whole.

The TAP is also seeking to include at least one additional member to represent international taxpayers. For these purposes, “international taxpayers” are broadly defined to include U.S. citizens working, living, or doing business abroad or in a U.S. territory. The new international member will not be required to attend any face-to-face meetings.

To be a member of the TAP you must be a U.S. citizen, be current with your federal tax obligations, be able to commit 200 to 300 hours during the year and pass an FBI criminal background check. New TAP members will serve a three-year term starting in December 2014. Applicants chosen as alternate members will be considered to fill any vacancies that open in their areas during the next three years.

The TAP is seeking members in the following locations: Alaska, Arizona, California, Delaware, Idaho, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New York, Oregon, Pennsylvania, Utah, Vermont, Virginia and International.

The panel needs alternates for the District of Columbia, Florida, Georgia, Illinois, Louisiana, Maryland, North Dakota, Puerto Rico, Rhode Island, South Carolina and West Virginia.

Federal advisory committees are required to have a fairly balanced membership in terms of the points of view represented. As such, candidates from underrepresented groups, including but not limited to U.S. taxpayers living abroad, Native Americans, and non-tax practitioners, are encouraged to apply.

Applications for the TAP will be accepted through April 11, 2014. Applications are available online at www.improveirs.org. For additional information about the TAP or the application process, please call 888-912-1227 (a toll-free call) and select prompt number five. Callers who are outside of the U.S. and U.S. territories should call 954-423-7973 (not a toll-free call). You may also contact the TAP staff at taxpayeradvocacypanel@irs.gov for assistance.

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Page Last Reviewed or Updated: 10-Mar-2014

The File Taxes For Free 2011

File taxes for free 2011 3. File taxes for free 2011   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. File taxes for free 2011 Form 4797. File taxes for free 2011 Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. File taxes for free 2011 Granting the right to remove deposits. File taxes for free 2011 Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. File taxes for free 2011 You must report the income from all the different sources on your tax return, unless it is excluded by law. File taxes for free 2011 Where you report the income on your tax return depends on its source. File taxes for free 2011 This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. File taxes for free 2011 For information on where to report other income, see the Instructions for Form 1040, U. File taxes for free 2011 S. File taxes for free 2011 Individual Income Tax Return. File taxes for free 2011 Accounting method. File taxes for free 2011   The rules discussed in this chapter assume you use the cash method of accounting. File taxes for free 2011 Under the cash method, you generally include an item of income in gross income in the year you receive it. File taxes for free 2011 See Cash Method in chapter 2. File taxes for free 2011   If you use an accrual method of accounting, different rules may apply to your situation. File taxes for free 2011 See Accrual Method in chapter 2. File taxes for free 2011 Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. File taxes for free 2011 Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. File taxes for free 2011 Use this schedule to figure the net profit or loss from regular farming operations. File taxes for free 2011 Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. File taxes for free 2011 This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. File taxes for free 2011 It also includes income from the sale of crop shares if you materially participate in producing the crop. File taxes for free 2011 See Rents (Including Crop Shares) , later. File taxes for free 2011 Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. File taxes for free 2011 Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. File taxes for free 2011 Land. File taxes for free 2011 Depreciable farm equipment. File taxes for free 2011 Buildings and structures. File taxes for free 2011 Livestock held for draft, breeding, sport, or dairy purposes. File taxes for free 2011 Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. File taxes for free 2011 Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. File taxes for free 2011 Sales of Farm Products Where to report. File taxes for free 2011    Table 3-1 shows where to report the sale of farm products on your tax return. File taxes for free 2011 Schedule F. File taxes for free 2011   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. File taxes for free 2011 This includes money and the fair market value of any property or services you receive. File taxes for free 2011 When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). File taxes for free 2011 See chapter 6 for information on the basis of assets. File taxes for free 2011 You generally report these amounts on Schedule F for the year you receive payment. File taxes for free 2011 Example. File taxes for free 2011 In 2012, you bought 20 feeder calves for $11,000 for resale. File taxes for free 2011 You sold them in 2013 for $21,000. File taxes for free 2011 You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. File taxes for free 2011 Form 4797. File taxes for free 2011   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. File taxes for free 2011 In either case, you should always report these sales on Form 4797 instead of Schedule F. File taxes for free 2011 See Livestock under Ordinary or Capital Gain or Loss in chapter 8. File taxes for free 2011 Animals you do not hold primarily for sale are considered business assets of your farm. File taxes for free 2011 Table 3-1. File taxes for free 2011 Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. File taxes for free 2011   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. File taxes for free 2011 This applies even if your agent pays you in a later year. File taxes for free 2011 For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. File taxes for free 2011 Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. File taxes for free 2011 You must meet all the following conditions to qualify. File taxes for free 2011 Your principal trade or business is farming. File taxes for free 2011 You use the cash method of accounting. File taxes for free 2011 You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. File taxes for free 2011 The weather-related condition caused an area to be designated as eligible for assistance by the federal government. File taxes for free 2011 Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. File taxes for free 2011 The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. File taxes for free 2011 A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. File taxes for free 2011 See Other Involuntary Conversions in chapter 11. File taxes for free 2011 Usual business practice. File taxes for free 2011   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. File taxes for free 2011 Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. File taxes for free 2011 If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. File taxes for free 2011 Connection with affected area. File taxes for free 2011   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. File taxes for free 2011 However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. File taxes for free 2011 This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. File taxes for free 2011 Classes of livestock. File taxes for free 2011   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. File taxes for free 2011 Do not separate animals into classes based on age, sex, or breed. File taxes for free 2011 Amount to be postponed. File taxes for free 2011   Follow these steps to figure the amount of gain to be postponed for each class of animals. File taxes for free 2011 Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. File taxes for free 2011 For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. File taxes for free 2011 Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. File taxes for free 2011 Example. File taxes for free 2011 You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. File taxes for free 2011 As a result of drought, you sold 135 head during 2012. File taxes for free 2011 You realized $70,200 from the sale. File taxes for free 2011 On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. File taxes for free 2011 The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. File taxes for free 2011 How to postpone gain. File taxes for free 2011   To postpone gain, attach a statement to your tax return for the year of the sale. File taxes for free 2011 The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. File taxes for free 2011 A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). File taxes for free 2011 Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. File taxes for free 2011 A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. File taxes for free 2011 The number of animals sold in each of the 3 preceding years. File taxes for free 2011 The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. File taxes for free 2011 The total number of animals sold and the number sold because of weather-related conditions during the tax year. File taxes for free 2011 A computation, as described above, of the income to be postponed for each class of livestock. File taxes for free 2011   Generally, you must file the statement and the return by the due date of the return, including extensions. File taxes for free 2011 However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. File taxes for free 2011 For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). File taxes for free 2011 Attach the statement to the amended return and write “Filed pursuant to section 301. File taxes for free 2011 9100-2” at the top of the amended return. File taxes for free 2011 File the amended return at the same address you filed the original return. File taxes for free 2011 Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. File taxes for free 2011 Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. File taxes for free 2011 However, if you materially participate in farming operations on the land, the rent is farm income. File taxes for free 2011 See Landlord Participation in Farming in chapter 12. File taxes for free 2011 Pasture income and rental. File taxes for free 2011   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. File taxes for free 2011 You must enter it as Other income on Schedule F. File taxes for free 2011 If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. File taxes for free 2011 Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. File taxes for free 2011 It does not matter whether you use the cash method of accounting or an accrual method of accounting. File taxes for free 2011 If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. File taxes for free 2011 See Landlord Participation in Farming in chapter 12. File taxes for free 2011 Report the rental income on Schedule F. File taxes for free 2011 If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). File taxes for free 2011 The income is not included in self-employment income. File taxes for free 2011 Crop shares you use to feed livestock. File taxes for free 2011   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. File taxes for free 2011 You must include the fair market value of the crop shares in income at that time. File taxes for free 2011 You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. File taxes for free 2011 Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. File taxes for free 2011 See  chapter 12. File taxes for free 2011 Crop shares you give to others (gift). File taxes for free 2011   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. File taxes for free 2011 You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. File taxes for free 2011 Example. File taxes for free 2011 A tenant farmed part of your land under a crop-share arrangement. File taxes for free 2011 The tenant harvested and delivered the crop in your name to an elevator company. File taxes for free 2011 Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. File taxes for free 2011 They sell their crop shares in the following year and the elevator company makes payments directly to your children. File taxes for free 2011 In this situation, you are considered to have received rental income and then made a gift of that income. File taxes for free 2011 You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. File taxes for free 2011 Crop share loss. File taxes for free 2011   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. File taxes for free 2011 See Publication 925 for information on these rules. File taxes for free 2011 Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. File taxes for free 2011 However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. File taxes for free 2011 See Cost-Sharing Exclusion (Improvements) , later. File taxes for free 2011 Report the agricultural program payment on the appropriate line of Schedule F, Part I. File taxes for free 2011 Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. File taxes for free 2011 However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. File taxes for free 2011 Claim the deduction on Schedule F for the year of repayment or reduction. File taxes for free 2011 Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. File taxes for free 2011 However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. File taxes for free 2011 You do not need approval from the IRS to adopt this method of reporting CCC loans. File taxes for free 2011 Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. File taxes for free 2011 However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. File taxes for free 2011 For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. File taxes for free 2011 Revenue Procedure 2008-52, 2008-36 I. File taxes for free 2011 R. File taxes for free 2011 B. File taxes for free 2011 587, is available at  www. File taxes for free 2011 irs. File taxes for free 2011 gov/irb/2008-36_IRB/ar09. File taxes for free 2011 html. File taxes for free 2011 You can request income tax withholding from CCC loan payments you receive. File taxes for free 2011 Use Form W-4V, Voluntary Withholding Request. File taxes for free 2011 See chapter 16 for information about ordering the form. File taxes for free 2011 To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. File taxes for free 2011 Attach a statement to your return showing the details of the loan. File taxes for free 2011 You must file the statement and the return by the due date of the return, including extensions. File taxes for free 2011 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File taxes for free 2011 Attach the statement to the amended return and write “Filed pursuant to section 301. File taxes for free 2011 9100-2” at the top of the return. File taxes for free 2011 File the amended return at the same address you filed the original return. File taxes for free 2011 When you make this election, the amount you report as income becomes your basis in the commodity. File taxes for free 2011 See chapter 6 for information on the basis of assets. File taxes for free 2011 If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. File taxes for free 2011 If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. File taxes for free 2011 If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. File taxes for free 2011 If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. File taxes for free 2011 Form 1099-A. File taxes for free 2011   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. File taxes for free 2011 “CCC” should be shown in box 6. File taxes for free 2011 The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. File taxes for free 2011 Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. File taxes for free 2011 If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. File taxes for free 2011 Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. File taxes for free 2011 Market gain should be reported as follows. File taxes for free 2011 If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. File taxes for free 2011 However, adjust the basis of the commodity for the amount of the market gain. File taxes for free 2011 If you did not include the CCC loan in income in the year received, include the market gain in your income. File taxes for free 2011 The following examples show how to report market gain. File taxes for free 2011 Example 1. File taxes for free 2011 Mike Green is a cotton farmer. File taxes for free 2011 He uses the cash method of accounting and files his tax return on a calendar year basis. File taxes for free 2011 He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. File taxes for free 2011 In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. File taxes for free 2011 00 per pound). File taxes for free 2011 In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. File taxes for free 2011 50 per pound (lower than the loan amount). File taxes for free 2011 Later in 2013, he sold the cotton for $2,500. File taxes for free 2011 The market gain on the redemption was $. File taxes for free 2011 50 ($2. File taxes for free 2011 00 – $1. File taxes for free 2011 50) per pound. File taxes for free 2011 Mike realized total market gain of $500 ($. File taxes for free 2011 50 x 1,000 pounds). File taxes for free 2011 How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. File taxes for free 2011 Included CCC loan. File taxes for free 2011   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. File taxes for free 2011 The $500 market gain is not recognized on the redemption. File taxes for free 2011 He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. File taxes for free 2011   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. File taxes for free 2011 His gain from the sale is $1,000 ($2,500 – $1,500). File taxes for free 2011 He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. File taxes for free 2011 Excluded CCC loan. File taxes for free 2011   Mike has income of $500 from market gain in 2013. File taxes for free 2011 He reports it on Schedule F, lines 4a and 4b. File taxes for free 2011 His basis in the cotton is zero, so his gain from its sale is $2,500. File taxes for free 2011 He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. File taxes for free 2011 Example 2. File taxes for free 2011 The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. File taxes for free 2011 Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. File taxes for free 2011 In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. File taxes for free 2011 How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. File taxes for free 2011 Included CCC loan. File taxes for free 2011   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. File taxes for free 2011 The $500 market gain is not recognized on the redemption. File taxes for free 2011 Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. File taxes for free 2011   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. File taxes for free 2011 Mike has no gain or loss on its sale to the cotton buyer for that amount. File taxes for free 2011 Excluded CCC loan. File taxes for free 2011   As in Example 1, Mike has income of $500 from market gain in 2013. File taxes for free 2011 He reports it on Schedule F, lines 4a and 4b. File taxes for free 2011 His basis in the cotton is zero, so his gain from its sale is $1,500. File taxes for free 2011 He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. File taxes for free 2011 Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. File taxes for free 2011 You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. File taxes for free 2011 Cost-share payments you receive may qualify for the cost-sharing exclusion. File taxes for free 2011 See Cost-Sharing Exclusion (Improvements) , later. File taxes for free 2011 CRP payments are reported to you on Form 1099-G. File taxes for free 2011 Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. File taxes for free 2011 See the instructions for Schedule SE (Form 1040). File taxes for free 2011 Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. File taxes for free 2011 You generally include them in the year you receive them. File taxes for free 2011 Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. File taxes for free 2011 You can request income tax withholding from crop disaster payments you receive from the federal government. File taxes for free 2011 Use Form W-4V, Voluntary Withholding Request. File taxes for free 2011 See chapter 16 for information about ordering the form. File taxes for free 2011 Election to postpone reporting until the following year. File taxes for free 2011   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. File taxes for free 2011 You use the cash method of accounting. File taxes for free 2011 You receive the crop insurance proceeds in the same tax year the crops are damaged. File taxes for free 2011 You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. File taxes for free 2011   Deferral is not permitted for proceeds received from revenue insurance policies. File taxes for free 2011   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. File taxes for free 2011 Check the box on line 8c and attach a statement to your tax return. File taxes for free 2011 The statement must include your name and address and contain the following information. File taxes for free 2011 A statement that you are making an election under IRC section 451(d) and Regulations section 1. File taxes for free 2011 451-6. File taxes for free 2011 The specific crop or crops physically destroyed or damaged. File taxes for free 2011 A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. File taxes for free 2011 The cause of the physical destruction or damage and the date or dates it occurred. File taxes for free 2011 The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. File taxes for free 2011 The name of each insurance carrier from whom you received payments. File taxes for free 2011   One election covers all crops representing a single trade or business. File taxes for free 2011 If you have more than one farming business, make a separate election for each one. File taxes for free 2011 For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. File taxes for free 2011   An election is binding for the year unless the IRS approves your request to change it. File taxes for free 2011 To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. File taxes for free 2011 Ogden Submission Processing Center P. File taxes for free 2011 O. File taxes for free 2011 Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. File taxes for free 2011 These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. File taxes for free 2011 They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. File taxes for free 2011 Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. File taxes for free 2011 You must include these benefits in income in the year you receive them. File taxes for free 2011 You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. File taxes for free 2011 Report the benefits on Schedule F, Part I, as agricultural program payments. File taxes for free 2011 You can usually take a current deduction for the same amount as a feed expense. File taxes for free 2011 Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. File taxes for free 2011 A payment is any economic benefit you get as a result of an improvement. File taxes for free 2011 However, this exclusion applies only to that part of a payment that meets all three of the following tests. File taxes for free 2011 It was for a capital expense. File taxes for free 2011 You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. File taxes for free 2011 You must include the payment for a deductible expense in income, and you can take any offsetting deduction. File taxes for free 2011 See chapter 5 for information on deducting soil and water conservation expenses. File taxes for free 2011 It does not substantially increase your annual income from the property for which it is made. File taxes for free 2011 An increase in annual income is substantial if it is more than the greater of the following amounts. File taxes for free 2011 10% of the average annual income derived from the affected property before receiving the improvement. File taxes for free 2011 $2. File taxes for free 2011 50 times the number of affected acres. File taxes for free 2011 The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. File taxes for free 2011 Qualifying programs. File taxes for free 2011   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. File taxes for free 2011 The rural clean water program authorized by the Federal Water Pollution Control Act. File taxes for free 2011 The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. File taxes for free 2011 The water bank program authorized by the Water Bank Act. File taxes for free 2011 The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. File taxes for free 2011 The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. File taxes for free 2011 The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. File taxes for free 2011 The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. File taxes for free 2011 Certain small watershed programs, listed later. File taxes for free 2011 Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. File taxes for free 2011 Several state programs have been approved. File taxes for free 2011 For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). File taxes for free 2011 Small watershed programs. File taxes for free 2011   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. File taxes for free 2011 The programs under the Watershed Protection and Flood Prevention Act. File taxes for free 2011 The flood prevention projects under the Flood Control Act of 1944. File taxes for free 2011 The Emergency Watershed Protection Program under the Flood Control Act of 1950. File taxes for free 2011 Certain programs under the Colorado River Basin Salinity Control Act. File taxes for free 2011 The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. File taxes for free 2011 The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. File taxes for free 2011 The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. File taxes for free 2011 The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. File taxes for free 2011 The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. File taxes for free 2011 The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. File taxes for free 2011 The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. File taxes for free 2011 The Conservation Security Program authorized by the Food Security Act of 1985. File taxes for free 2011 The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. File taxes for free 2011 Income realized. File taxes for free 2011   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). File taxes for free 2011 Value of the improvement. File taxes for free 2011   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. File taxes for free 2011 The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. File taxes for free 2011 Any government payments under a program not listed earlier. File taxes for free 2011 Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. File taxes for free 2011 Any government payment to you for rent or for your services. File taxes for free 2011 The denominator of the fraction is the total cost of the improvement. File taxes for free 2011 Excludable portion. File taxes for free 2011   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. File taxes for free 2011 10% of the prior average annual income from the affected acreage. File taxes for free 2011 The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. File taxes for free 2011 $2. File taxes for free 2011 50 times the number of affected acres. File taxes for free 2011 The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. File taxes for free 2011 You may need to consult your tax advisor for assistance. File taxes for free 2011 Example. File taxes for free 2011 One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. File taxes for free 2011 The total cost of the improvement was $500,000. File taxes for free 2011 The USDA paid $490,000. File taxes for free 2011 You paid $10,000. File taxes for free 2011 The value of the cost-sharing improvement is $15,000. File taxes for free 2011 The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. File taxes for free 2011 The excludable portion is the greater amount, $1,550. File taxes for free 2011 You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. File taxes for free 2011   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. File taxes for free 2011 Any payment excluded from income is not part of your basis. File taxes for free 2011 In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. File taxes for free 2011   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. File taxes for free 2011 How to report the exclusion. File taxes for free 2011   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. File taxes for free 2011 The statement must include the following information. File taxes for free 2011 The dollar amount of the cost funded by the government payment. File taxes for free 2011 The value of the improvement. File taxes for free 2011 The amount you are excluding. File taxes for free 2011   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. File taxes for free 2011 Recapture. File taxes for free 2011   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. File taxes for free 2011 In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. File taxes for free 2011 You must report the recapture on Form 4797. File taxes for free 2011 See Section 1255 property under Other Gains in chapter 9. File taxes for free 2011 Electing not to exclude payments. File taxes for free 2011   You can elect not to exclude all or part of any payments you receive under these programs. File taxes for free 2011 If you make this election for all of these payments, none of the above restrictions and rules apply. File taxes for free 2011 You must make this election by the due date, including extensions, for filing your return. File taxes for free 2011 In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. File taxes for free 2011 If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). File taxes for free 2011 Write “Filed pursuant to section 301. File taxes for free 2011 9100-2” at the top of the amended return and file it at the same address you filed the original return. File taxes for free 2011 Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. File taxes for free 2011 You must include these payments on Schedule F, lines 4a and 4b. File taxes for free 2011 The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. File taxes for free 2011 You must include these payments on Schedule F, lines 6a and 6b. File taxes for free 2011 The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. File taxes for free 2011 Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. File taxes for free 2011 As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. File taxes for free 2011 If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. File taxes for free 2011 If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. File taxes for free 2011 Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. File taxes for free 2011 Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. File taxes for free 2011 The gain or loss is capital or ordinary depending on how you used the quota. File taxes for free 2011 See Capital or ordinary gain or loss , later. File taxes for free 2011 Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. File taxes for free 2011 Adjusted basis. File taxes for free 2011   The adjusted basis of your quota is determined differently depending on how you obtained the quota. File taxes for free 2011 The basis of a quota derived from an original grant by the federal government is zero. File taxes for free 2011 The basis of a purchased quota is the purchase price. File taxes for free 2011 The basis of a quota received as a gift is generally the same as the donor's basis. File taxes for free 2011 However, under certain circumstances, the basis is increased by the amount of gift taxes paid. File taxes for free 2011 If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. File taxes for free 2011 The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. File taxes for free 2011 Reduction of basis. File taxes for free 2011   You are required to reduce the basis of your tobacco quota by the following amounts. File taxes for free 2011 Deductions you took for amortization, depletion, or depreciation. File taxes for free 2011 Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. File taxes for free 2011 The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). File taxes for free 2011 Amount treated as interest. File taxes for free 2011   You must reduce your tobacco quota buyout program payment by the amount treated as interest. File taxes for free 2011 The interest is reportable as ordinary income. File taxes for free 2011 If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. File taxes for free 2011   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. File taxes for free 2011 You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. File taxes for free 2011 For more information, see Notice 2005-57, 2005-32 I. File taxes for free 2011 R. File taxes for free 2011 B. File taxes for free 2011 267, available at www. File taxes for free 2011 irs. File taxes for free 2011 gov/irb/2005-32_IRB/ar13. File taxes for free 2011 html. File taxes for free 2011 Installment method. File taxes for free 2011   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. File taxes for free 2011 Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. File taxes for free 2011 See chapter 10 for more information. File taxes for free 2011 Capital or ordinary gain or loss. File taxes for free 2011   Whether your gain or loss is ordinary or capital depends on how you used the quota. File taxes for free 2011 Quota used in the trade or business of farming. File taxes for free 2011   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. File taxes for free 2011 See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. File taxes for free 2011 Quota held for investment. File taxes for free 2011   If you held the quota for investment purposes, any gain or loss is capital gain or loss. File taxes for free 2011 The same result also applies if you held the quota for the production of income, though not connected with a trade or business. File taxes for free 2011 Gain treated as ordinary income. File taxes for free 2011   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. File taxes for free 2011 Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. File taxes for free 2011 The cost of acquiring a quota. File taxes for free 2011 Amounts for amortization, depletion, or depreciation. File taxes for free 2011 Amounts to reflect a reduction in the quota pounds. File taxes for free 2011   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. File taxes for free 2011 Self-employment income. File taxes for free 2011   The tobacco quota buyout payments are not self-employment income. File taxes for free 2011 Income averaging for farmers. File taxes for free 2011   The gain or loss resulting from the quota payments does not qualify for income averaging. File taxes for free 2011 A tobacco quota is considered an interest in land. File taxes for free 2011 Income averaging is not available for gain or loss arising from the sale or other disposition of land. File taxes for free 2011 Involuntary conversion. File taxes for free 2011   The buyout of the tobacco quota is not an involuntary conversion. File taxes for free 2011 Form 1099-S. File taxes for free 2011   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. File taxes for free 2011 The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. File taxes for free 2011 Like-kind exchange of quota. File taxes for free 2011   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. File taxes for free 2011 See Notice 2005-57 for more information. File taxes for free 2011 Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. File taxes for free 2011 Taxation of payments to tobacco growers. File taxes for free 2011   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. File taxes for free 2011 Individuals will generally report the payments as an Agricultural program payment on Schedule F. File taxes for free 2011 If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. File taxes for free 2011 Self-employment income. File taxes for free 2011   Payments to growers generally represent self-employment income. File taxes for free 2011 If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. File taxes for free 2011 Income averaging for farmers. File taxes for free 2011   Payments to growers who are individuals qualify for farm income averaging. File taxes for free 2011 Form 1099-G. File taxes for free 2011   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. File taxes for free 2011 Other Payments You must include most other government program payments in income. File taxes for free 2011 Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. File taxes for free 2011 How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. File taxes for free 2011 Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. File taxes for free 2011 You must also capitalize the full cost of the improvement. File taxes for free 2011 Since you have included the payments in income, they do not reduce your basis. File taxes for free 2011 However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. File taxes for free 2011 National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. File taxes for free 2011 You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. File taxes for free 2011 If you produce a tobacco crop, report the payments as income from farming on your Schedule F. File taxes for free 2011 If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. File taxes for free 2011 Payment to More Than One Person The USDA reports program payments to the IRS. File taxes for free 2011 It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). File taxes for free 2011 If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. File taxes for free 2011 You should file Form 1099-G to report the identity of the actual recipient to the IRS. File taxes for free 2011 You should also give this information to the recipient. File taxes for free 2011 You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. File taxes for free 2011 Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. File taxes for free 2011 However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. File taxes for free 2011 See chapter 16 for information about ordering Form 1099-G. File taxes for free 2011 Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). File taxes for free 2011 If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. File taxes for free 2011 Form 1099-PATR. File taxes for free 2011   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. File taxes for free 2011 Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. File taxes for free 2011 For information on the alternative minimum tax, see the Instructions for Form 6251. File taxes for free 2011 Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. File taxes for free 2011 They include the following items. File taxes for free 2011 Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). File taxes for free 2011 The stated dollar value of qualified written notices of allocation. File taxes for free 2011 The fair market value of other property. File taxes for free 2011 Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. File taxes for free 2011 You must reduce the cost or other basis of these items by the amount of such patronage dividends received. File taxes for free 2011 Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. File taxes for free 2011 If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. File taxes for free 2011 Qualified written notice of allocation. File taxes for free 2011   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. File taxes for free 2011 A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. File taxes for free 2011 The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. File taxes for free 2011 You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. File taxes for free 2011 Signing and giving a written agreement to the cooperative. File taxes for free 2011 Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. File taxes for free 2011 The cooperative must notify you in writing of this bylaw and give you a copy. File taxes for free 2011 Endorsing and cashing a qualified check paid as part of the same patronage dividend. File taxes for free 2011 You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. File taxes for free 2011 Qualified check. File taxes for free 2011   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. File taxes for free 2011 It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. File taxes for free 2011 It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. File taxes for free 2011 Loss on redemption. File taxes for free 2011   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. File taxes for free 2011 The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. File taxes for free 2011 Nonqualified notice of allocation. File taxes for free 2011   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. File taxes for free 2011 Your basis in the notice is zero. File taxes for free 2011 You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. File taxes for free 2011 Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. File taxes for free 2011 However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. File taxes for free 2011   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. File taxes for free 2011 For example, if it represents interest income, report it on your return as interest. File taxes for free 2011 Buying or selling capital assets or depreciable property. File taxes for free 2011   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. File taxes for free 2011 You must, however, reduce the basis of these assets by the dividends. File taxes for free 2011 This reduction is taken into account as of the first day of the tax year in which the dividends are received. File taxes for free 2011 If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. File taxes for free 2011   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. File taxes for free 2011 Example. File taxes for free 2011 On July 1, 2012, Mr. File taxes for free 2011 Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. File taxes for free 2011 The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). File taxes for free 2011 Mr. File taxes for free 2011 Brown files his return on a calendar year basis. File taxes for free 2011 For 2012, he claimed a depreciation deduction of $311, using the 10. File taxes for free 2011 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). File taxes for free 2011 On July 2, 2013, the cooperative association paid Mr. File taxes for free 2011 Brown a $300 cash patronage dividend for buying the machine. File taxes for free 2011 Mr. File taxes for free 2011 Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. File taxes for free 2011 Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. File taxes for free 2011 38% × 1. File taxes for free 2011 5 = 23. File taxes for free 2011 07% Depreciation deduction for 2013 ($2,289 × 23. File taxes for free 2011 07%) $528 Exceptions. File taxes for free 2011   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. File taxes for free 2011 If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. File taxes for free 2011 If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). File taxes for free 2011   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. File taxes for free 2011 Personal purchases. File taxes for free 2011   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). File taxes for free 2011 This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. File taxes for free 2011 Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. File taxes for free 2011 A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. File taxes for free 2011 These allocations can be paid in money, other property, or qualified certificates. File taxes for free 2011 Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. File taxes for free 2011 Qualified certificates. File taxes for free 2011   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. File taxes for free 2011 The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. File taxes for free 2011 If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. File taxes for free 2011 Nonqualified certificates. File taxes for free 2011   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. File taxes for free 2011 Your basis in the certificate is zero. File taxes for free 2011 You must include in income any amount you receive from its sale, redemption, or other disposition. File taxes for free 2011 Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. File taxes for free 2011 Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. File taxes for free 2011 For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. File taxes for free 2011 General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. File taxes for free 2011 Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. File taxes for free 2011 It is excluded from taxable income (see Exclusions , later). File taxes for free 2011 Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. File taxes for free 2011 If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. File taxes for free 2011 Election to defer income from discharge of indebtedness. File taxes for free 2011   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. File taxes for free 2011 Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. File taxes for free 2011 See IRC section 108(i) and Publication 4681 for details. File taxes for free 2011 Form 1099-C. File taxes for free 2011   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. File taxes for free 2011 The amount of debt canceled is shown in box 2. File taxes for free 2011 Exceptions The following discussion covers some exceptions to the general rule for canceled debt. File taxes for free 2011 These exceptions apply before the exclusions discussed below. File taxes for free 2011 Price reduced after purchase. File taxes for free 2011   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. File taxes for free 2011 Reduce your basis in the property by the amount of the reduction in the debt. File taxes for free 2011 The rules that apply to bankruptcy and insolvency are explained below under Exclusions . File taxes for free 2011 Deductible debt. File taxes for free 2011   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. File taxes for free 2011 This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. File taxes for free 2011 Example. File taxes for free 2011 You get accounting services for your farm on credit. File taxes for free 2011 Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. File taxes for free 2011 Your accountant forgives part of the amount you owe for the accounting services. File taxes for free 2011 How you treat the canceled debt depends on your method of accounting. File taxes for free 2011 Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. File taxes for free 2011 Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. File taxes for free 2011 Exclusions Do not include canceled debt in income in the following situations. File taxes for free 2011 The cancellation takes place in a bankruptcy case under title 11 of the U. File taxes for free 2011 S. File taxes for free 2011 Code. File taxes for free 2011 The cancellation takes place when you are insolvent. File taxes for free 2011 The canceled debt is a qualified farm debt. File taxes for free 2011 The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). File taxes for free 2011 See Publication 334, Tax Guide for Small Business, chapter 5. File taxes for free 2011 The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. File taxes for free 2011 The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. File taxes for free 2011 If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. File taxes for free 2011 If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. File taxes for free 2011 See Form 982 , later, for information on how to claim an exclusion for a canceled debt. File taxes for free 2011 Debt. File taxes for free 2011   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. File taxes for free 2011 Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. File taxes for free 2011 Bankruptcy. File taxes for free 2011   A bankruptcy case is a case under title 11 of the U. File taxes for free 2011 S. File taxes for free 2011 Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. File taxes for free 2011   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. File taxes for free 2011 Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . File taxes for free 2011 Insolvency. File taxes for free 2011   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. File taxes for free 2011   You can exclude canceled debt from gross income up to the amount by which you are insolvent. File taxes for free 2011 If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. File taxes for free 2011 Otherwise, you include the difference in gross income. File taxes for free 2011 Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . File taxes for free 2011 You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. File taxes for free 2011 Example. File taxes for free 2011 You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. File taxes for free 2011 Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. File taxes for free 2011 Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). File taxes for free 2011 You can exclude this amount from income. File taxes for free 2011 The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. File taxes for free 2011 If not, you must include it in income. File taxes for free 2011 Reduction of tax attributes. File taxes for free 2011   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. File taxes for free 2011 Order of reduction. File taxes for free 2011   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. File taxes for free 2011 Net operating loss (NOL). File taxes for free 2011 Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. File taxes for free 2011 Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. File taxes for free 2011 General business credit carryover. File taxes for free 2011 Reduce the credit carryover to or from the tax year of the debt cancellation. File taxes for free 2011 Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. File taxes for free 2011 Minimum tax credit. File taxes for free 2011 Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. File taxes for free 2011 Reduce the credit 331/3 cents for each dollar of excluded canceled debt. File taxes for free 2011 Capital loss. File taxes for free 2011 Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. File taxes for free 2011 Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. File taxes for free 2011 Basis. File taxes for free 2011 Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. File taxes for free 2011 Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. File taxes for free 2011 Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. File taxes for free 2011 Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. File taxes for free 2011 Inventory and accounts and notes receivable. File taxes for free 2011 Other property. File taxes for free 2011 Reduce the basis one dollar for each dollar of excluded canceled debt. File taxes for free 2011 However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. File taxes for free 2011 For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. File taxes for free 2011 1017-1(b)(2). File taxes for free 2011 Also see Electing to reduce the basis of depreciable property