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Free taxes online Publication 947 - Main Content Table of Contents Practice Before the IRSWhat Is Practice Before the IRS? Who Can Practice Before the IRS? Who Cannot Practice Before the IRS? How Does an Individual Become Enrolled? What Are the Rules of Practice? Authorizing a RepresentativeWhat Is a Power of Attorney? When Is a Power of Attorney Required? When Is a Power of Attorney Not Required? How Do I Fill Out Form 2848? What Happens to the Power of Attorney When Filed? How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Free taxes online Practice Before the IRS The Office of Professional Responsibility and the Return Preparer Office generally are responsible for administering and enforcing the regulations governing practice before the IRS. Free taxes online The Office of Professional Responsibility generally has responsibility for matters related to practitioner conduct and exclusive responsibility for discipline, including disciplinary proceedings and sanctions. Free taxes online The Return Preparer Office is responsible for matters related to the authority to practice, including acting on applications for enrollment and administering competency testing and continuing education. Free taxes online What Is Practice Before the IRS? Practice before the IRS covers all matters relating to any of the following. Free taxes online Communicating with the IRS for a taxpayer regarding the taxpayer's rights, privileges, or liabilities under laws and regulations administered by the IRS. Free taxes online Representing a taxpayer at conferences, hearings, or meetings with the IRS. Free taxes online Preparing and filing documents, including tax returns, with the IRS for a taxpayer. Free taxes online Providing a client with written advice which has a potential for tax avoidance or evasion. Free taxes online Furnishing information at the request of the IRS or appearing as a witness for the taxpayer is not practice before the IRS. Free taxes online Who Can Practice Before the IRS? The following individuals can practice before the IRS. Free taxes online However, any individual who is recognized to practice (a recognized representative) must be designated as the taxpayer's representative and file a written declaration with the IRS stating that he or she is authorized and qualified to represent a particular taxpayer. Free taxes online Form 2848 can be used for this purpose. Free taxes online Attorneys. Free taxes online   Any attorney who is not currently under suspension or disbarment from practice before the IRS and who is a member in good standing of the bar of the highest court of any state, possession, territory, commonwealth, or the District of Columbia may practice before the IRS. Free taxes online Certified public accountants (CPAs). Free taxes online   Any CPA who is not currently under suspension or disbarment from practice before the IRS and who is duly qualified to practice as a CPA in any state, possession, territory, commonwealth, or the District of Columbia may practice before the IRS. Free taxes online Enrolled agents. Free taxes online   Any enrolled agent in active status who is not currently under suspension or disbarment from practice before the IRS may practice before the IRS. Free taxes online Enrolled retirement plan agents. Free taxes online   Any enrolled retirement plan agent in active status who is not currently under suspension or disbarment from practice before the IRS may practice before the IRS. Free taxes online The practice of enrolled retirement plan agents is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans. Free taxes online Enrolled actuaries. Free taxes online   Any individual who is enrolled as an actuary by the Joint Board for the Enrollment of Actuaries who is not currently under suspension or disbarment from practice before the IRS may practice before the IRS. Free taxes online The practice of enrolled actuaries is limited to certain Internal Revenue Code sections that relate to their area of expertise, principally those sections governing employee retirement plans. Free taxes online Student. Free taxes online    Under certain circumstances, a student who is supervised by a practitioner may request permission to represent another person before the IRS. Free taxes online For more information, see Authorization for special appearances, later. Free taxes online Registered tax return preparers and unenrolled return preparers. Free taxes online   A registered tax return preparer is an individual who has passed an IRS competency test and is authorized to prepare and sign tax returns as the preparer. Free taxes online An unenrolled return preparer is an individual other than an attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary who prepares and signs a taxpayer's return as the preparer, or who prepares a return but is not required (by the instructions to the return or regulations) to sign the return. Free taxes online   Registered tax return preparers and unenrolled return preparers may only represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the Internal Revenue Service (including the Taxpayer Advocate Service) during an examination of the taxable year or period covered by the tax return they prepared and signed. Free taxes online Registered tax return preparers and unenrolled return preparers cannot represent taxpayers, regardless of the circumstances requiring representation, before appeals officers, revenue officers, counsel or similar officers or employees of the Internal Revenue Service or the Department of Treasury. Free taxes online Registered tax return preparers and unenrolled return preparers cannot execute closing agreements, extend the statutory period for tax assessments or collection of tax, execute waivers, execute claims for refund, or sign any document on behalf of a taxpayer. Free taxes online   If the unenrolled return preparer does not meet the requirements for limited representation, you may file Form 8821 to allow the preparer to inspect your tax information and receive copies of notices sent to you by the IRS. Free taxes online See Form 8821. Free taxes online Practice denied. Free taxes online   Any individual engaged in limited practice before the IRS who is involved in disreputable conduct is subject to disciplinary action. Free taxes online Disreputable conduct includes, but is not limited to, the list of items under Incompetence and Disreputable Conduct shown later under What Are the Rules of Practice. Free taxes online Other individuals who may serve as representatives. Free taxes online   Because of their special relationship with a taxpayer, the following individuals can represent the specified taxpayers before the IRS, provided they present satisfactory identification and, except in the case of an individual described in (1) below, proof of authority to represent the taxpayer. Free taxes online An individual. Free taxes online An individual can represent himself or herself before the IRS and does not have to file a written declaration of qualification and authority. Free taxes online A family member. Free taxes online An individual can represent members of his or her immediate family. Free taxes online Immediate family includes a spouse, child, parent, brother, or sister of the individual. Free taxes online An officer. Free taxes online A bona fide officer of a corporation (including a parent, subsidiary, or other affiliated corporation), association, or organized group can represent the corporation, association, or organized group. Free taxes online An officer of a governmental unit, agency, or authority, in the course of his or her official duties, can represent the organization before the IRS. Free taxes online A partner. Free taxes online A general partner may represent the partnership before the IRS. Free taxes online An employee. Free taxes online A regular full-time employee can represent his or her employer. Free taxes online An employer can be, but is not limited to, an individual, partnership, corporation (including a parent, subsidiary, or other affiliated corporation), association, trust, receivership, guardianship, estate, organized group, governmental unit, agency, or authority. Free taxes online A fiduciary. Free taxes online A fiduciary (trustee, executor, personal representative, administrator, receiver, or guardian) stands in the position of a taxpayer and acts as the taxpayer, not as a representative. Free taxes online See Fiduciary under When Is a Power of Attorney Not Required, later. Free taxes online Representation Outside the United States Any individual may represent an individual or entity, who is outside the United States, before personnel of the IRS when such representation occurs outside the United States. Free taxes online See section 10. Free taxes online 7(c)(1)(vii) of Circular 230. Free taxes online Authorization for Special Appearances The Commissioner of Internal Revenue, or delegate, can authorize an individual who is not otherwise eligible to practice before the IRS to represent another person for a particular matter. Free taxes online The prospective representative must request this authorization in writing from the Office of Professional Responsibility. Free taxes online However, it is granted only when extremely compelling circumstances exist. Free taxes online If granted, the Commissioner, or delegate, will issue a letter that details the conditions related to the appearance and the particular tax matter for which the authorization is granted. Free taxes online The authorization letter should not be confused with a letter from an IRS center advising an individual that he or she has been assigned a Centralized Authorization File (CAF) number. Free taxes online The issuance of a CAF number does not indicate that an individual is either recognized or authorized to practice before the IRS. Free taxes online It merely confirms that a centralized file for authorizations has been established for the individual under that number. Free taxes online Students in LITCs and the STCP. Free taxes online   A student who works in a Low Income Taxpayer Clinic (LITC) or Student Tax Clinic Program (STCP) who is supervised by a practitioner may request permission to represent another person before the IRS. Free taxes online Authorization requests must be made to the Office of Professional Responsibility. Free taxes online If granted, a letter authorizing the student's special appearance and detailing any conditions related to the appearance will be issued. Free taxes online Students receiving an authorization letter generally can represent taxpayers before any IRS function or office subject to any conditions in the authorization letter. Free taxes online If you intend to have a student represent you, review the authorization letter and ask your student, your student's supervisor, or the Office of Professional Responsibility if you have questions about the terms of the authorization. Free taxes online Who Cannot Practice Before the IRS? In general, individuals who are not eligible or who have lost the privilege as a result of certain actions cannot practice before the IRS. Free taxes online If an individual loses eligibility to practice, the IRS will not recognize a power of attorney that names the individual as a representative. Free taxes online Corporations, associations, partnerships, and other persons that are not individuals. Free taxes online   These organizations (or persons) are not eligible to practice before the IRS. Free taxes online Loss of Eligibility Generally, individuals lose their eligibility to practice before the IRS in the following ways. Free taxes online Not meeting the requirements for renewal of enrollment (such as continuing professional education). Free taxes online Requesting to be placed in inactive retirement status. Free taxes online Being suspended or disbarred by the Office of Professional Responsibility for violating the regulations governing practice before the IRS. Free taxes online Failure to meet requirements. Free taxes online   Individuals who fail to comply with the requirements for eligibility for renewal of enrollment will be notified by the IRS. Free taxes online The notice will explain the reason for noncompliance and provide the individual with an opportunity to furnish information for reconsideration. Free taxes online The individual has 60 days from the date of the notice to respond. Free taxes online Inactive roster. Free taxes online   An individual will be placed on the roster of inactive individuals for a period of three years, if he or she: Fails to respond timely to the notice of noncompliance with the renewal requirements, Fails to file timely the application for renewal, or Does not satisfy the requirements of eligibility for renewal. Free taxes online The individual must file an application for renewal and satisfy all requirements for renewal after being placed in inactive status. Free taxes online Otherwise, at the conclusion of the next renewal cycle, he or she will be removed from the roster and the enrollment or registration terminated. Free taxes online Inactive retirement status. Free taxes online   Individuals who request to be placed in an inactive retirement status will be ineligible to practice before the IRS. Free taxes online They must continue to adhere to all renewal requirements. Free taxes online They can be reinstated to an active enrollment status by filing an application for renewal and providing evidence that they have completed the required continuing professional education hours for the enrollment cycle or registration year. Free taxes online Suspension and disbarment. Free taxes online   Individuals authorized to practice before the IRS are subject to disciplinary proceedings and may be suspended or disbarred for violating any regulation governing practice before the IRS. Free taxes online This includes engaging in acts of disreputable conduct. Free taxes online For more information, see Incompetence and Disreputable Conduct under What are the Rules of Practice, later. Free taxes online   Practitioners who are suspended in a disciplinary proceeding are not allowed to practice before the IRS during the period of suspension. Free taxes online See What Is Practice Before the IRS, earlier. Free taxes online   Practitioners who are disbarred in a disciplinary proceeding are not allowed to practice before the IRS. Free taxes online However, a practitioner can seek reinstatement from the Office of Professional Responsibility five years after disbarment. Free taxes online   If the practitioner seeks reinstatement, he or she may not practice before the IRS until the Office of Professional Responsibility authorizes reinstatement. Free taxes online The Office of Professional Responsibility may reinstate the practitioner if it is determined that: The practitioner's future conduct is not likely to be in violation of the regulations, and Granting the reinstatement would not be contrary to the public interest. Free taxes online How Does an Individual Become Enrolled? The Return Preparer Office can grant enrollment to practice before the IRS to an applicant who demonstrates special competence in tax matters by passing a written examination administered by the IRS. Free taxes online Enrollment also can be granted to an applicant who qualifies because of past service and technical experience in the IRS. Free taxes online In either case, certain application forms, discussed next, must be filed. Free taxes online Additionally, an applicant must not have engaged in any conduct that would justify suspension or disbarment from practice before the IRS. Free taxes online See Incompetence and Disreputable Conduct, later. Free taxes online Form 2587. Free taxes online   Applicants can apply to take the special enrollment examination by filing Form 2587, Application for Special Enrollment Examination. Free taxes online Form 2587 can be filed online, by mail, or by fax. Free taxes online For more information, see instructions and fees listed on the form. Free taxes online To get Form 2587, see How To Get Tax Help, later. Free taxes online Form 23 and Form 23-EP. Free taxes online   Individuals who have passed the examination or are applying on the basis of past service and technical experience with the IRS can apply for enrollment by filing Form 23, Application for Enrollment to Practice Before the Internal Revenue Service, or Form 23-EP, Application for Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent. Free taxes online The application must include a check or money order in the amount of the fee shown on Form 23 or Form 23-EP. Free taxes online Alternatively, payment may be made electronically pursuant to instructions on the forms. Free taxes online To get Form 23 or Form 23-EP, see How To Get Tax Help, later. Free taxes online Form 5434. Free taxes online   An individual may apply as an enrolled actuary on the basis of past employment with the IRS and technical experience by filing Form 5434, Application for Enrollment, with the Joint Board for the Enrollment of Actuaries. Free taxes online The application must include a check or money order in the amount of the fee shown on Form 5434. Free taxes online To get Form 5434, see How To Get Tax Help, later. Free taxes online Period of enrollment. Free taxes online   An enrollment card will be issued to each individual whose enrollment application is approved. Free taxes online The individual is enrolled until the expiration date shown on the enrollment card or certificate. Free taxes online To continue practicing beyond the expiration date, the individual must request renewal of the enrollment by filing Form 8554, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service, or Form 8554-EP, Application for Renewal of Enrollment to Practice Before the Internal Revenue Service as an Enrolled Retirement Plan Agent (ERPA). Free taxes online What Are the Rules of Practice? The rules governing practice before the IRS are published in the Code of Federal Regulations at 31 C. Free taxes online F. Free taxes online R. Free taxes online part 10 and reprinted in Treasury Department Circular No. Free taxes online 230 (Circular 230). Free taxes online An attorney, CPA, enrolled agent, enrolled retirement plan agent, registered tax return preparer, or enrolled actuary authorized to practice before the IRS (referred to hereafter as a practitioner) has the duty to perform certain acts and is restricted from performing other acts. Free taxes online In addition, a practitioner cannot engage in disreputable conduct (discussed later). Free taxes online Any practitioner who does not comply with the rules of practice or engages in disreputable conduct is subject to disciplinary action. Free taxes online Also, unenrolled preparers must comply with the rules of practice and conduct to exercise the privilege of limited practice before the IRS. Free taxes online See Publication 470 for a discussion of the special rules for limited practice by unenrolled preparers. Free taxes online Duties Practitioners must promptly submit records or information requested by officers or employees of the IRS, except when the practitioner believes on reasonable belief and good faith that the information is privileged. Free taxes online Communications with respect to tax advice between a federally authorized tax practitioner and a taxpayer generally are confidential to the same extent that communication would be privileged if it were between a taxpayer and an attorney if the advice relates to: Noncriminal tax matters before the IRS, or Noncriminal tax proceedings brought in federal court by or against the United States. Free taxes online Communications regarding corporate tax shelters. Free taxes online   This protection of tax advice communications does not apply to any written communications between a federally authorized tax practitioner and any person, including a director, shareholder, officer, employee, agent, or representative of a corporation if the communication involves the promotion of the direct or indirect participation of the corporation in any tax shelter. Free taxes online Duty to advise. Free taxes online   A practitioner who knows that his or her client has not complied with the revenue laws or has made an error or omission in any return, document, affidavit, or other required paper, has the responsibility to advise the client promptly of the noncompliance, error, or omission, and the consequences of the noncompliance, error, or omission. Free taxes online Due diligence. Free taxes online   A practitioner must exercise due diligence when performing the following duties. Free taxes online Preparing or assisting in the preparing, approving, and filing of returns, documents, affidavits, and other papers relating to IRS matters. Free taxes online Determining the correctness of oral or written representations made by him or her to the Department of the Treasury. Free taxes online Determining the correctness of oral or written representations made by him or her to clients with reference to any matter administered by the IRS. Free taxes online Restrictions Practitioners are restricted from engaging in certain practices. Free taxes online The following paragraphs discuss some of these restricted practices. Free taxes online Delays. Free taxes online   A practitioner must not unreasonably delay the prompt disposition of any matter before the IRS. Free taxes online Assistance from disbarred or suspended persons and former IRS employees. Free taxes online   A practitioner must not knowingly, directly or indirectly, do the following. Free taxes online Accept assistance from, or assist, any person who is under disbarment or suspension from practice before the IRS if the assistance relates to matters considered practice before the IRS. Free taxes online Accept assistance from any former government employee where provisions of Circular 230 or any federal law would be violated. Free taxes online Performance as a notary. Free taxes online   A practitioner who is a notary public and is employed as counsel, attorney, or agent in a matter before the IRS, or has a material interest in the matter, cannot engage in any notary activities related to that matter. Free taxes online Negotiations of taxpayer refund checks. Free taxes online   Practitioners must not endorse or otherwise negotiate (cash) any refund check (including directing or accepting payment by any means, electronic or otherwise, in an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to the taxpayer. Free taxes online Incompetence and Disreputable Conduct Any practitioner or unenrolled return preparer may be disbarred or suspended from practice before the IRS, or censured, for incompetence or disreputable conduct. Free taxes online The following list contains examples of conduct that is considered disreputable. Free taxes online Being convicted of any criminal offense under the revenue laws or of any offense involving dishonesty or breach of trust. Free taxes online Knowingly giving false or misleading information in connection with federal tax matters, or participating in such activity. Free taxes online Soliciting employment by prohibited means as discussed in section 10. Free taxes online 30 of Circular 230. Free taxes online Willfully failing to file a federal tax return, evading or attempting to evade any federal tax or payment, or participating in such actions. Free taxes online Misappropriating, or failing to properly and promptly remit, funds received from clients for payment of taxes or other obligations due the United States. Free taxes online Directly or indirectly attempting to influence the official action of IRS employees by the use of threats, false accusations, duress, or coercion, or by offering gifts, favors, or any special inducements. Free taxes online Being disbarred or suspended from practice as an attorney, CPA, public accountant, or actuary, by the District of Columbia or any state, possession, territory, commonwealth, or any federal court, or any federal agency, body, or board. Free taxes online Knowingly aiding and abetting another person to practice before the IRS during a period of suspension, disbarment, or ineligibility of that other person. Free taxes online Using abusive language, making false accusations and statements knowing them to be false, circulating or publishing malicious or libelous matter, or engaging in any contemptuous conduct in connection with practice before the IRS. Free taxes online Giving a false opinion knowingly, recklessly, or through gross incompetence; or following a pattern of providing incompetent opinions in questions arising under the federal tax laws. Free taxes online Censure, Disbarments, and Suspensions The Office of Professional Responsibility may censure or institute proceedings to censure, suspend or disbar any attorney, CPA, or enrolled agent who has violated Circular 230. Free taxes online A practitioner will be given the opportunity to demonstrate compliance with the rules before any disciplinary action is taken. Free taxes online Authorizing a Representative You may either represent yourself, or you may authorize an individual to represent you before the IRS. Free taxes online If you chose to have someone represent you, your representative must be a person eligible to practice before the IRS. Free taxes online See Who Can Practice Before the IRS, earlier. Free taxes online What Is a Power of Attorney? A power of attorney is your written authorization for an individual to act on your behalf. Free taxes online If the authorization is not limited, the individual generally can perform all acts that you can perform. Free taxes online The authority granted to a registered tax return preparer or an unenrolled preparer is limited. Free taxes online For information on the limits regarding registered tax return preparers, see Circular 230 §10. Free taxes online 3(f). Free taxes online For information on the limits regarding unenrolled preparers, see Publication 470. Free taxes online Acts performed. Free taxes online   Any representative, other than a registered tax return preparer or an unenrolled return preparer, can usually perform the following acts. Free taxes online Represent you before any office of the IRS. Free taxes online Sign an offer or a waiver of restriction on assessment or collection of a tax deficiency, or a waiver of notice of disallowance of claim for credit or refund. Free taxes online Sign a consent to extend the statutory time period for assessment or collection of a tax. Free taxes online Sign a closing agreement. Free taxes online Signing your return. Free taxes online   The representative named under a power of attorney is not permitted to sign your income tax return unless: The signature is permitted under the Internal Revenue Code and the related regulations (see Regulations section 1. Free taxes online 6012-1(a)(5)). Free taxes online You specifically authorize this in your power of attorney. Free taxes online For example, the regulation permits a representative to sign your return if you are unable to sign the return due to: Disease or injury. Free taxes online Continuous absence from the United States (including Puerto Rico) for a period of at least 60 days prior to the date required by law for filing the return. Free taxes online Other good cause if specific permission is requested of and granted by the IRS. Free taxes online When a return is signed by a representative, it must be accompanied by a power of attorney (or copy) authorizing the representative to sign the return. Free taxes online For more information, see the Form 2848 instructions. Free taxes online Limitation on substitution or delegation. Free taxes online   A recognized representative can substitute or delegate authority under the power of attorney to another recognized representative only if the act is specifically authorized by you on the power of attorney. Free taxes online   After a substitution has been made, only the newly recognized representative will be recognized as the taxpayer's representative. Free taxes online If a delegation of power has been made, both the original and the delegated representative will be recognized by the IRS to represent you. Free taxes online Disclosure of returns to a third party. Free taxes online   Your representative cannot execute consents that will allow the IRS to disclose tax return or return information to a third party unless you specifically delegate this authority to your representative on line 5 of Form 2848. Free taxes online Incapacity or incompetency. Free taxes online   A power of attorney is generally terminated if you become incapacitated or incompetent. Free taxes online   The power of attorney can continue, however, in the case of your incapacity or incompetency if you authorize this on line 5 “Other” of the Form 2848 and if your non-IRS durable power of attorney meets all the requirements for acceptance by the IRS. Free taxes online See Non-IRS powers of attorney, later. Free taxes online When Is a Power of Attorney Required? Submit a power of attorney when you want to authorize an individual to represent you before the IRS, whether or not the representative performs any of the other acts cited earlier under What Is a Power of Attorney. Free taxes online A power of attorney is most often required when you want to authorize another individual to perform at least one of the following acts on your behalf. Free taxes online Represent you at a meeting with the IRS. Free taxes online Prepare and file a written response to the IRS. Free taxes online Form Required Use Form 2848 to appoint a recognized representative to act on your behalf before the IRS. Free taxes online Individuals recognized to practice before the IRS are listed under Part II, Declaration of Representative, of Form 2848. Free taxes online Your representative must complete that part of the form. Free taxes online Non-IRS powers of attorney. Free taxes online   The IRS will accept a non-IRS power of attorney, but a completed Form 2848 must be attached in order for the power of attorney to be entered on the Centralized Authorization File (CAF) system. Free taxes online For more information, see Processing a non-IRS power of attorney, later. Free taxes online   If you want to use a power of attorney document other than Form 2848, it must contain the following information. Free taxes online Your name and mailing address. Free taxes online Your social security number and/or employer identification number. Free taxes online Your employee plan number, if applicable. Free taxes online The name and mailing address of your representative(s). Free taxes online The types of tax involved. Free taxes online The federal tax form number. Free taxes online The specific year(s) or period(s) involved. Free taxes online For estate tax matters, the decedent's date of death. Free taxes online A clear expression of your intention concerning the scope of authority granted to your representative(s). Free taxes online Your signature and date. Free taxes online You also must attach to the non-IRS power of attorney a signed and dated statement made by your representative. Free taxes online This statement, which is referred to as the Declaration of Representative, is contained in Part II of Form 2848. Free taxes online The statement should read: I am not currently under suspension or disbarment from practice before the Internal Revenue Service or other practice of my profession by any other authority, I am aware of the regulations contained in Circular 230, I am authorized to represent the taxpayer(s) identified in the power of attorney, and I am an individual described in 26 CFR 601. Free taxes online 502(b). Free taxes online Required information missing. Free taxes online   The IRS will not accept your non-IRS power of attorney if it does not contain all the information listed above. Free taxes online You can sign and submit a completed Form 2848 or a new non-IRS power of attorney that contains all the information. Free taxes online If you cannot sign an acceptable replacement document, your attorney-in-fact may be able to perfect (make acceptable to the IRS) your non-IRS power of attorney by using the procedure described next. Free taxes online Procedure for perfecting a non-IRS power of attorney. Free taxes online   Under the following conditions, the attorney-in-fact named in your non-IRS power of attorney can sign a Form 2848 on your behalf. Free taxes online The original non-IRS power of attorney grants authority to handle federal tax matters (for example, general authority to perform any acts). Free taxes online The attorney-in-fact attaches a statement (signed under penalty of perjury) to the Form 2848 stating that the original non-IRS power of attorney is valid under the laws of the governing jurisdiction. Free taxes online Example. Free taxes online John Elm, a taxpayer, signs a non-IRS durable power of attorney that names his neighbor and CPA, Ed Larch, as his attorney-in-fact. Free taxes online The power of attorney grants Ed the authority to perform any and all acts on John's behalf. Free taxes online However, it does not list specific tax-related information such as types of tax or tax form numbers. Free taxes online Shortly after John signs the power of attorney, he is declared incompetent. Free taxes online Later, a federal tax matter arises concerning a prior year return filed by John. Free taxes online Ed attempts to represent John before the IRS but is rejected because the durable power of attorney does not contain required information. Free taxes online If Ed attaches a statement (signed under the penalty of perjury) that the durable power of attorney is valid under the laws of the governing jurisdiction, he can sign a completed Form 2848 and submit it on John's behalf. Free taxes online If Ed can practice before the IRS (see Who Can Practice Before the IRS, earlier), he can name himself as representative on Form 2848. Free taxes online Otherwise, he must name another individual who can practice before the IRS. Free taxes online Processing a non-IRS power of attorney. Free taxes online   The IRS has a centralized computer database system called the CAF system. Free taxes online This system contains information on the authority of taxpayer representatives. Free taxes online Generally, when you submit a power of attorney document to the IRS, it is processed for inclusion on the CAF system. Free taxes online Entry of your power of attorney on the CAF system enables IRS personnel, who do not have a copy of your power of attorney, to verify the authority of your representative by accessing the CAF. Free taxes online It also enables the IRS to automatically send copies of notices and other IRS communications to your representative if you specify that your representative should receive those communications. Free taxes online   You can have your non-IRS power of attorney entered on the CAF system by attaching it to a completed Form 2848 and submitting it to the IRS. Free taxes online Your signature is not required; however, your attorney-in-fact must sign the Declaration of Representative (see Part II of Form 2848). Free taxes online Preparation of Form — Helpful Hints The preparation of Form 2848 is illustrated by an example, later under How Do I Fill Out Form 2848. Free taxes online However, the following will also assist you in preparing the form. Free taxes online Line-by-line hints. Free taxes online   The following hints are summaries of some of the line-by-line instructions for Form 2848. Free taxes online Line 1—Taxpayer information. Free taxes online   If a joint return is involved, the husband and wife each file a separate Form 2848 if they both want to be represented. Free taxes online If only one spouse wants to be represented in the matter, that spouse files a Form 2848. Free taxes online Line 2—Representative(s). Free taxes online   Only individuals may be named as representatives. Free taxes online If your representative has not been assigned a CAF number, enter “None” on that line and the IRS will issue one to your representative. Free taxes online If the representative's address or phone number has changed since the CAF number was issued, you should check the appropriate box. Free taxes online Enter your representative's fax number if available. Free taxes online   If you want to name more than three representatives, attach additional Form(s) 2848. Free taxes online The IRS can send copies of notices and communications to two of your representatives. Free taxes online You must, however, check the boxes on line 2 of the Form 2848 if you want the IRS to routinely send copies of notices and communications to your representatives. Free taxes online If you do not check the boxes, your representatives will not routinely receive copies of notices and communications. Free taxes online Line 3—Tax matters. Free taxes online   You may list any tax years or periods that have already ended as of the date you sign the power of attorney. Free taxes online However, you may include on a power of attorney only future tax periods that end no later than 3 years after the date the power of attorney is received by the IRS. Free taxes online The 3 future periods are determined starting after December 31 of the year the power of attorney is received by the IRS. Free taxes online However, avoid general references such as “all years” or “all taxes. Free taxes online ” Any Form 2848 with general references will be returned. Free taxes online Line 4—Specific use not recorded on Centralized Authorization File (CAF). Free taxes online   Certain matters cannot be recorded on the CAF system. Free taxes online Examples of such matters include, but are not limited to, the following. Free taxes online Requests for a private letter ruling or technical advice. Free taxes online Applications for an employer identification number (EIN). Free taxes online Claims filed on Form 843, Claim for Refund and Request for Abatement. Free taxes online Corporate dissolutions. Free taxes online Requests for change of accounting method. Free taxes online Requests for change of accounting period. Free taxes online Applications for recognition of exemption under sections 501(c)(3), 501(a), or 521 (Forms 1023, 1034, or 1028). Free taxes online Request for a determination of the qualified status of an employee benefit plan (Forms 5300, 5307, or 5310). Free taxes online Application for Award for Original Information under section 7623. Free taxes online Voluntary submissions under the Employee Plans Compliance Resolution System (EPCRS). Free taxes online Freedom of Information Act requests. Free taxes online If the tax matter described on line 3 of Form 2848 concerns one of these matters specifically, check the box on line 4. Free taxes online If this box is checked, the representative should mail or fax the power of attorney to the IRS office handling the matter. Free taxes online Otherwise, the representative should bring a copy of the power of attorney to each meeting with the IRS. Free taxes online Where To File a Power of Attorney Generally, you can mail or fax a paper Form 2848 directly to the IRS. Free taxes online To determine where you should file Form 2848, see Where To File in the instructions for Form 2848. Free taxes online If Form 2848 is for a specific use, mail or fax it to the office handling that matter. Free taxes online For more information on specific use, see the Instructions for Form 2848, line 4. Free taxes online FAX copies. Free taxes online   The IRS will accept a copy of a power of attorney that is submitted by facsimile transmission (fax). Free taxes online If you choose to file a power of attorney by fax, be sure the appropriate IRS office is equipped to accept this type of transmission. Free taxes online Your representative may be able to file Form 2848 electronically via the IRS website. Free taxes online For more information, your representative can go to www. Free taxes online irs. Free taxes online gov and under the Tax Professionals tab, click on e-services–Online Tools for Tax Professionals. Free taxes online If you complete Form 2848 for electronic signature authorization, do not file Form 2848 with the IRS. Free taxes online Instead, give it to your representative, who will retain the document. Free taxes online Updating a power of attorney. Free taxes online   Submit any update or modification to an existing power of attorney in writing. Free taxes online Your signature (or the signature of the individual(s) authorized to sign on your behalf) is required. Free taxes online Do this by sending the updated Form 2848 or non-IRS power of attorney to the IRS office(s) where you previously sent the original(s), including the center where the related return was, or will be filed. Free taxes online   A recognized representative may substitute or delegate authority if you specifically authorize your representative to substitute or delegate representation in the original power of attorney. Free taxes online To make a substitution or delegation, the representative must file the following items with the IRS office(s) where the power of attorney was filed. Free taxes online A written notice of substitution or delegation signed by the recognized representative. Free taxes online A written declaration of representative made by the new representative. Free taxes online A copy of the power of attorney that specifically authorizes the substitution or delegation. Free taxes online Retention/Revocation of Prior Power(s) of Attorney A newly filed power of attorney concerning the same matter will revoke a previously filed power of attorney. Free taxes online However, the new power of attorney will not revoke the prior power of attorney if it specifically states it does not revoke such prior power of attorney and either of the following are attached to the new power of attorney. Free taxes online A copy of the unrevoked prior power of attorney, or A statement signed by the taxpayer listing the name and address of each representative authorized under the prior unrevoked power of attorney. Free taxes online Note. Free taxes online The filing of Form 2848 will not revoke any  Form 8821 that is in effect. Free taxes online Revocation of Power of Attorney/Withdrawal of Representative If you want to revoke an existing power of attorney and do not want to name a new representative, or if a representative wants to withdraw from representation, mail or fax a copy of the previously executed power of attorney to the IRS, or if the power of attorney is for a specific matter, to the IRS office handling the matter. Free taxes online If the taxpayer is revoking the power of attorney, the taxpayer must write “REVOKE” across the top of the first page with a current signature and date below this annotation. Free taxes online If the representative is withdrawing from the representation, the representative must write “WITHDRAW” across the top of the first page with a current signature and date below this annotation. Free taxes online If you do not have a copy of the power of attorney you want to revoke or withdraw, send a statement to the IRS. Free taxes online The statement of revocation or withdrawal must indicate that the authority of the power of attorney is revoked or withdrawn, list the matters and periods, and must be signed and dated by the taxpayer or representative as applicable. Free taxes online If the taxpayer is revoking, list the name and address of each recognized representative whose authority is revoked. Free taxes online When the taxpayer is completely revoking authority, the form should state “remove all years/periods” instead of listing the specific tax matter, years, or periods. Free taxes online If the representative is withdrawing, list the name, TIN, and address (if known) of the taxpayer. Free taxes online To revoke a specific use power of attorney, send the power of attorney or statement of revocation to the IRS office handling your case, using the above instructions. Free taxes online A power of attorney held by a student will be recorded on the CAF system for 130 days from the receipt date. Free taxes online If you are authorizing a student to represent you after that time, you will need to submit a current and valid Form 2848. Free taxes online When Is a Power of Attorney Not Required? A power of attorney is not required when the third party is not dealing with the IRS as your representative. Free taxes online The following situations do not require a power of attorney. Free taxes online Providing information to the IRS. Free taxes online Authorizing the disclosure of tax return information through Form 8821, Tax Information Authorization, or other written or oral disclosure consent. Free taxes online Allowing the IRS to discuss return information with a third party via the checkbox provided on a tax return or other document. Free taxes online Allowing a tax matters partner or person (TMP) to perform acts for the partnership. Free taxes online Allowing the IRS to discuss return information with a fiduciary. Free taxes online How Do I Fill Out Form 2848? The following example illustrates how to complete Form 2848. Free taxes online The two completed forms for this example are shown on the next pages. Free taxes online Example. Free taxes online Stan and Mary Doe have been notified that their joint tax returns (Forms 1040) for 2009, 2010, and 2011 are being examined. Free taxes online They have decided to appoint Jim Smith, an enrolled agent, to represent them in this matter and any future matters concerning these returns. Free taxes online Jim, who has prepared returns at the same location for years, already has a Centralized Authorization File (CAF) number assigned to him. Free taxes online Mary does not want Jim to sign any agreements on her behalf, but Stan is willing to have Jim do so. Free taxes online They want copies of all notices and written communications sent to Jim. Free taxes online This is the first time Stan and Mary have given power of attorney to anyone. Free taxes online They should each complete a Form 2848 as follows. Free taxes online Line 1—Taxpayer information. Free taxes online   Stan and Mary must each file a separate Form 2848. Free taxes online On his separate Form 2848, Stan enters his name, street address, and social security number in the spaces provided. Free taxes online Mary does likewise on her separate Form 2848. Free taxes online Line 2—Representative(s). Free taxes online   On their separate Forms 2848, Stan and Mary each enters the name and current address of their chosen representative, Jim Smith. Free taxes online Both Stan and Mary want Jim Smith to receive notices and communications concerning the matters identified in line 3, so on their separate Forms 2848, Stan and Mary each checks the box in the first column of line 2. Free taxes online They also enter Mr. Free taxes online Smith's CAF number, his telephone number, and his fax number. Free taxes online Mr. Free taxes online Smith's address, telephone number, and fax number have not changed since the IRS issued his CAF number, so Stan and Mary do not check the boxes in the second column. Free taxes online Line 3—Tax Matters. Free taxes online   On their separate Forms 2848, Stan and Mary each enters “income” for the type of tax, “1040” for the form number, and “2009, 2010, and 2011” for the tax years. Free taxes online Line 4—Specific use not recorded on Centralized Authorization File (CAF). Free taxes online   On their separate Forms 2848, Stan and Mary make no entry on this line because they do not want to restrict the use of their powers of attorney to a specific use that is not recorded on the CAF. Free taxes online See Preparation of Form — Helpful Hints, earlier. Free taxes online Line 5—Acts authorized. Free taxes online   Mary wants to sign any agreement that reflects changes to her and Stan's joint 2009, 2010, and 2011 income tax liability, so she writes “Taxpayer must sign any agreement form” on line 5 of her Form 2848. Free taxes online Stan does not wish to restrict the authority of Jim Smith in this regard, so he leaves line 5 of his Form 2848 blank. Free taxes online If either Mary or Stan had chosen, they could have listed other restrictions on line 5 of their separate Forms 2848. Free taxes online Line 6—Retention/revocation of prior power(s) of attorney. Free taxes online   Stan and Mary are each filing their first powers of attorney, so they make no entry on this line. Free taxes online However, if they had filed prior powers of attorney, the filing of this current power would revoke any earlier ones for the same tax matter(s) unless they checked the box on line 6 and attached a copy of the prior power of attorney that they wanted to remain in effect. Free taxes online   If Mary later decides that she can handle the examination on her own, she can revoke her power of attorney even though Stan does not revoke his power of attorney. Free taxes online (See Revocation of Power of Attorney/Withdrawal of Representative, earlier, for the special rules that apply. Free taxes online ) Line 7—Signature of taxpayer. Free taxes online   Stan and Mary each signs and dates his or her Form 2848. Free taxes online If a taxpayer does not sign, the IRS cannot accept the form. Free taxes online Part II—Declaration of Representative. Free taxes online   Jim Smith must complete this part of Form 2848. Free taxes online If he does not sign this part, the IRS cannot accept the form. Free taxes online What Happens to the Power of Attorney When Filed? A power of attorney will be recognized after it is received, reviewed, and determined by the IRS to contain the required information. Free taxes online However, until a power of attorney is entered on the CAF system, IRS personnel may be unaware of the authority of the person you have named to represent you. Free taxes online Therefore, during this interim period, IRS personnel may request that you or your representative bring a copy to any meeting with the IRS. Free taxes online This image is too large to be displayed in the current screen. Free taxes online Please click the link to view the image. Free taxes online Filled-in Form 2848 - Page 1 This image is too large to be displayed in the current screen. Free taxes online Please click the link to view the image. Free taxes online Filled-in Form 2848 - Page 2 This image is too large to be displayed in the current screen. Free taxes online Please click the link to view the image. Free taxes online Filled-in Form 2848 - Page 1 This image is too large to be displayed in the current screen. Free taxes online Please click the link to view the image. Free taxes online Filled-in Form 2848 - Page 2 Processing and Handling How the power of attorney is processed and handled depends on whether it is a complete or incomplete document. Free taxes online Incomplete document. Free taxes online   If Form 2848 is incomplete, the IRS will attempt to secure the missing information either by writing or telephoning you or your representative. Free taxes online For example, if your signature or signature date is missing, the IRS will contact you. Free taxes online If information concerning your representative is missing and information sufficient to make a contact (such as an address and/or a telephone number) is on the document, the IRS will try to contact your representative. Free taxes online   In either case, the power of attorney is not considered valid until all required information is entered on the document. Free taxes online The individual(s) named as representative(s) will not be recognized to practice before the IRS, on your behalf, until the document is complete and accepted by the IRS. Free taxes online Complete document. Free taxes online   If the power of attorney is complete and valid, the IRS will take action to recognize the representative. Free taxes online In most instances, this includes processing the document on the CAF system. Free taxes online Recording the data on the CAF system enables the IRS to direct copies of mailings to authorized representatives and to readily recognize the scope of authority granted. Free taxes online Documents not processed on CAF. Free taxes online   Specific-use powers of attorney are not processed on the CAF system (see Preparation of Form – Helpful Hints, earlier). Free taxes online For example, a power of attorney that is a one-time or specific-issue grant of authority is not processed on the CAF system. Free taxes online These documents remain with the related case files. Free taxes online In this situation, you should check the box on line 4 of Form 2848. Free taxes online In these situations, the representative should bring a copy of the power of attorney to each meeting with the IRS. Free taxes online Dealing With the Representative After a valid power of attorney is filed, the IRS will recognize your representative. Free taxes online However, if it appears the representative is responsible for unreasonably delaying or hindering the prompt disposition of an IRS matter by failing to furnish, after repeated requests, nonprivileged information, the IRS can contact you directly. Free taxes online For example, in most instances in which a power of attorney is recognized, the IRS will contact the representative to set up appointments and to provide lists of required items. Free taxes online However, if the representative is unavailable, does not respond to repeated requests, and does not provide required items (other than items considered privileged), the IRS can bypass your representative and contact you directly. Free taxes online If a representative engages in conduct described above, the matter can be referred to the Office of Professional Responsibility for consideration of possible disciplinary action. Free taxes online Notices and other correspondence. Free taxes online   If you have a recognized representative, you and the representative will routinely receive notices and other correspondence from the IRS (either the original or a copy) if you checked the box in the left column of line 2 of Form 2848. Free taxes online If the power of attorney is processed on the CAF system, the IRS will send your representative(s) a duplicate of all computer-generated correspondence that is sent to you. Free taxes online This includes notices and letters produced either at the Martinsburg Computing Center, or other IRS centers. Free taxes online The IRS employee handling the case is responsible for ensuring that the original and any requested copies of each manually-generated correspondence are sent to you and your representative(s) in accordance with your authorization. Free taxes online How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. Free taxes online By selecting the method that is best for you, you will have quick and easy access to tax help. Free taxes online Free help with your return. Free taxes online   Free help in preparing your return is available nationwide from IRS-certified volunteers. Free taxes online The Volunteer Income Tax Assistance (VITA) program is designed to help low and moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Free taxes online Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Free taxes online To find the nearest VITA or TCE site, visit IRS. Free taxes online gov or call 1-800-906-9887 or 1-800-829-1040. Free taxes online   As part of the TCE program, AARP offers the Tax-Aide counseling program. Free taxes online To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www. Free taxes online aarp. Free taxes online org/money/taxaide. Free taxes online   For more information on these programs, go to IRS. Free taxes online gov and enter keyword “VITA” in the upper right-hand corner. Free taxes online Internet. Free taxes online You can access the IRS website at IRS. Free taxes online gov 24 hours a day, 7 days a week to: E-file your return. Free taxes online Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Free taxes online Check the status of your refund. Free taxes online Go to IRS. Free taxes online gov and click on Where's My Refund. Free taxes online Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Free taxes online If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Free taxes online Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Free taxes online Download forms, including talking tax forms, instructions, and publications. Free taxes online Order IRS products online. Free taxes online Research your tax questions online. Free taxes online Search publications online by topic or keyword. Free taxes online Use the online Internal Revenue Code, regulations, or other official guidance. Free taxes online View Internal Revenue Bulletins (IRBs) published in the last few years. Free taxes online Figure your withholding allowances using the withholding calculator online at www. Free taxes online irs. Free taxes online gov/individuals. Free taxes online Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at www. Free taxes online irs. Free taxes online gov/individuals. Free taxes online Sign up to receive local and national tax news by email. Free taxes online Get information on starting and operating a small business. Free taxes online Phone. Free taxes online Many services are available by phone. Free taxes online   Ordering forms, instructions, and publications. Free taxes online Call 1-800-TAX -FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. Free taxes online You should receive your order within 10 days. Free taxes online Asking tax questions. Free taxes online Call the IRS with your tax questions at 1-800-829-1040. Free taxes online Solving problems. Free taxes online You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. Free taxes online An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Free taxes online Call your local Taxpayer Assistance Center for an appointment. Free taxes online To find the number, go to www. Free taxes online irs. Free taxes online gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Free taxes online TTY/TDD equipment. Free taxes online If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. Free taxes online TeleTax topics. Free taxes online Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Free taxes online Refund information. Free taxes online To check the status of your refund, call 1-800-829-1954 or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Free taxes online Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Free taxes online If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Free taxes online Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Free taxes online If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. Free taxes online Other refund information. Free taxes online To check the status of a prior-year refund or amended return refund, call 1-800-829-1040. Free taxes online Evaluating the quality of our telephone services. Free taxes online To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. Free taxes online One method is for a second IRS representative to listen in on or record random telephone calls. Free taxes online Another is to ask some callers to complete a short survey at the end of the call. Free taxes online Walk-in. Free taxes online Many products and services are available on a walk-in basis. Free taxes online   Products. Free taxes online You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Free taxes online Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Free taxes online Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. Free taxes online Services. Free taxes online You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. Free taxes online An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Free taxes online If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. Free taxes online No appointment is necessary—just walk in. Free taxes online If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. Free taxes online A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. Free taxes online If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. Free taxes online All other issues will be handled without an appointment. Free taxes online To find the number of your local office, go to  www. Free taxes online irs. Free taxes online gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Free taxes online Mail. Free taxes online You can send your order for forms, instructions, and publications to the address below. Free taxes online You should receive a response within 10 days after your request is received. Free taxes online  Internal Revenue Service 1201 N. Free taxes online Mitsubishi Motorway Bloomington, IL 61705-6613 Taxpayer Advocate Service. Free taxes online   The Taxpayer Advocate Service (TAS) is your voice at the IRS. Free taxes online Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. Free taxes online We offer free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. Free taxes online Remember, the worst thing you can do is nothing at all. Free taxes online   TAS can help if you can’t resolve your problem with the IRS and: Your problem is causing financial difficulties for you, your family, or your business. Free taxes online You face (or your business is facing) an immediate threat of adverse action. Free taxes online You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised. Free taxes online   If you qualify for our help, we’ll do everything we can to get your problem resolved. Free taxes online You will be assigned to one advocate who will be with you at every turn. Free taxes online We have offices in every state, the District of Columbia, and Puerto Rico. Free taxes online Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. Free taxes online And our services are always free. Free taxes online   As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Free taxes online Our tax toolkit at www. Free taxes online TaxpayerAdvocate. Free taxes online irs. Free taxes online gov can help you understand these rights. Free taxes online   If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www. Free taxes online irs. Free taxes online gov/advocate. Free taxes online You can also call our toll-free number at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Free taxes online   TAS also handles large-scale or systemic problems that affect many taxpayers. Free taxes online If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www. Free taxes online irs. Free taxes online gov/advocate. Free taxes online Low Income Taxpayer Clinics (LITCs). Free taxes online   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. Free taxes online Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. Free taxes online These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. Free taxes online Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. Free taxes online For more information and to find a clinic near you, see the LITC page on www. Free taxes online irs. Free taxes online gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. Free taxes online This publication is also available by calling 1-800-829-3676 or at your local IRS office. Free taxes online Free tax services. Free taxes online   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Free taxes online Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Free taxes online The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Free taxes online The majority of the information and services listed in this publication are available to you free of charge. Free taxes online If there is a fee associated with a resource or service, it is listed in the publication. Free taxes online   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Free taxes online DVD for tax products. Free taxes online You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. Free taxes online Prior-year forms, instructions, and publications. Free taxes online Tax Map: an electronic research tool and finding aid. Free taxes online Tax law frequently asked questions. Free taxes online Tax Topics from the IRS telephone response system. Free taxes online Internal Revenue Code—Title 26 of the U. Free taxes online S. Free taxes online Code. Free taxes online Links to other Internet based Tax Research Materials. Free taxes online Fill-in, print, and save features for most tax forms. Free taxes online Internal Revenue Bulletins. Free taxes online Toll-free and email technical support. Free taxes online Two releases during the year. Free taxes online  – The first release will ship the beginning of January. Free taxes online  – The final release will ship the beginning of March. Free taxes online Purchase the DVD from National Technical Information Service (NTIS) at www. Free taxes online irs. Free taxes online gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). Free taxes online Prev  Up  Next   Home   More Online Publications
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Morris K. Udall and Stewart L. Udall Foundation

The Morris K. Udall and Stewart L. Udall Foundation, through the U.S. Institute for Environmental Conflict Resolution, provides assessment, mediation, and other services to resolve environmental conflicts. The Foundation also supports a variety of educational opportunities in the area of environmental policy.

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Website: Morris K. Udall and Stewart L. Udall Foundation

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Address: 130 South Scott Ave
Tucson, AZ 85701-1922

Phone Number: (520) 901-8500

The Free Taxes Online

Free taxes online 4. Free taxes online   Unrelated Business Taxable Income Table of Contents IncomeExclusions Dues of Agricultural Organizations and Business Leagues DeductionsDirectly Connected Exploitation of Exempt Activity—Advertising Sales Modifications Partnership Income or Loss S Corporation Income or Loss Special Rules for Foreign Organizations Special Rules for Social Clubs, VEBAs, SUBs, and GLSOsIncome that is set aside. Free taxes online Special Rules for Veterans' Organizations Income From Controlled OrganizationsAddition to tax for valuation misstatements. Free taxes online Net unrelated income. Free taxes online Net unrelated loss. Free taxes online Control. Free taxes online Income from property financed with qualified 501(c)(3) bonds. Free taxes online Disposition of property received from taxable subsidiary and used in unrelated business. Free taxes online Income From Debt-Financed Property Debt-Financed PropertyAcquisition Indebtedness Computation of Debt-Financed Income Deductions for Debt-Financed Property Allocation Rules How to Get Tax Help The term “unrelated business taxable income” generally means the gross income derived from any unrelated trade or business regularly conducted by the exempt organization, less the deductions directly connected with carrying on the trade or business. Free taxes online If an organization regularly carries on two or more unrelated business activities, its unrelated business taxable income is the total of gross income from all such activities less the total allowable deductions attributable to all the activities. Free taxes online In computing unrelated business taxable income, gross income and deductions are subject to the modifications and special rules explained in this chapter. Free taxes online Whether a particular item of income or expense falls within any of these modifications or special rules must be determined by all the facts and circumstances in each specific case. Free taxes online For example, if the organization received a payment termed rent that is in fact a return of profits by a person operating the property for the benefit of the organization, or that is a share of the profits retained by the organization as a partner or joint venturer, the payment is not within the income exclusion for rents, discussed later under Exclusions. Free taxes online Income Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income. Free taxes online Exclusions The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income. Free taxes online Dividends, interest, annuities and other investment income. Free taxes online   All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income. Free taxes online Exception for insurance activity income of a controlled foreign corporation. Free taxes online   This exclusion does not apply to income from certain insurance activities of an exempt organization's controlled foreign corporation. Free taxes online The income is not excludable dividend income, but instead is unrelated business taxable income to the extent it would be so treated if the exempt organization had earned it directly. Free taxes online Certain exceptions to this rule apply. Free taxes online For more information, see section 512(b)(17). Free taxes online Other exceptions. Free taxes online   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), to interest or annuities received from a controlled corporation (discussed under Income From Controlled Organizations, later). Free taxes online Income from lending securities. Free taxes online   Payments received with respect to a security loan are excluded in computing unrelated business taxable income only if the loan is made under an agreement that:    Provides for the return to the exempt organization of securities identical to the securities loaned, Requires payments to the organization of amounts equivalent to all interest, dividends, and other distributions that the owner of the securities is entitled to receive during the period of the loan, Does not reduce the organization's risk of loss or opportunity for gain on the securities, Contains reasonable procedures to implement the obligation of the borrower to furnish collateral to the organization with a fair market value each business day during the period of the loan in an amount not less than the fair market value of the securities at the close of the preceding business day, and Permits the organization to terminate the loan upon notice of not more than 5 business days. Free taxes online   Payments with respect to securities loans include: Amounts in respect of dividends, interest, and other distributions, Fees based on the period of time the loan is in effect and the fair market value of the security during that period, Income from collateral security for the loan, and Income from the investment of collateral security. Free taxes online The payments are considered to be from the securities loaned and not from collateral security or the investment of collateral security from the loans. Free taxes online Any deductions that are directly connected with collateral security for the loan, or with the investment of collateral security, are considered deductions that are directly connected with the securities loaned. Free taxes online Royalties. Free taxes online   Royalties, including overriding royalties, are excluded in computing unrelated business taxable income. Free taxes online   To be considered a royalty, a payment must relate to the use of a valuable right. Free taxes online Payments for trademarks, trade names, or copyrights are ordinarily considered royalties. Free taxes online Similarly, payments for the use of a professional athlete's name, photograph, likeness, or facsimile signature are ordinarily considered royalties. Free taxes online However, royalties do not include payments for personal services. Free taxes online Therefore, payments for personal appearances and interviews are not excluded as royalties and must be included in figuring unrelated business taxable income. Free taxes online   Unrelated business taxable income does not include royalty income received from licensees by an exempt organization that is the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties. Free taxes online   Mineral royalties are excluded whether measured by production or by gross or taxable income from the mineral property. Free taxes online However, the exclusion does not apply to royalties that stem from an arrangement whereby the organization owns a working interest in a mineral property and is liable for its share of the development and operating costs under the terms of its agreement with the operator of the property. Free taxes online To the extent they are not treated as loans under section 636 (relating to income tax treatment of mineral production payments), payments for mineral production are treated in the same manner as royalty payments for the purpose of computing unrelated business taxable income. Free taxes online To the extent they are treated as loans, any payments for production that are the equivalent of interest are treated as interest and are excluded. Free taxes online Exceptions. Free taxes online   This exclusion does not apply to debt-financed income (discussed under Income From Debt-Financed Property, later) or to royalties received from a controlled corporation (discussed under Income From Controlled Organizations, later). Free taxes online Rents. Free taxes online   Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income. Free taxes online Rents from personal property are not excluded. Free taxes online However, special rules apply to “mixed leases” of both real and personal property. Free taxes online Mixed leases. Free taxes online   In a mixed lease, all of the rents are excluded if the rents attributable to the personal property are not more than 10% of the total rents under the lease, as determined when the personal property is first placed in service by the lessee. Free taxes online If the rents attributable to personal property are more than 10% but not more than 50% of the total rents, only the rents attributable to the real property are excluded. Free taxes online If the rents attributable to the personal property are more than 50% of the total rents, none of the rents are excludable. Free taxes online   Property is placed in service when the lessee first may use it under the terms of a lease. Free taxes online For example, property subject to a lease entered into on November 1, for a term starting on January 1 of the next year, is considered placed in service on January 1, regardless of when the lessee first actually uses it. Free taxes online   If separate leases are entered into for real and personal property and the properties have an integrated use (for example, one or more leases for real property and another lease or leases for personal property to be used on the real property), all the leases will be considered as one lease. Free taxes online   The rent attributable to the personal property must be recomputed, and the treatment of the rents must be redetermined, if: The rent attributable to all the leased personal property increases by 100% or more because additional or substitute personal property is placed in service, or The lease is modified to change the rent charged (whether or not the amount of rented personal property changes). Free taxes online Any change in the treatment of rents resulting from the recomputation is effective only for the period beginning with the event that caused the recomputation. Free taxes online Exception for rents based on net profit. Free taxes online   The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales. Free taxes online Exception for income from personal services. Free taxes online   Payment for occupying space when personal services are also rendered to the occupant does not constitute rent from real property. Free taxes online Therefore, the exclusion does not apply to transactions such as renting hotel rooms, rooms in boarding houses or tourist homes, and space in parking lots or warehouses. Free taxes online Other exceptions. Free taxes online   This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later), or to interest, annuities, royalties and rents received from a controlled corporation (discussed under Income From Controlled Organizations, later), investment income (dividends, interest, rents, etc. Free taxes online ) received by organizations described in sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20). Free taxes online See Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs, discussed later for more information. Free taxes online Income from research. Free taxes online   A tax-exempt organization may exclude income from research grants or contracts from unrelated business taxable income. Free taxes online However, the extent of the exclusion depends on the nature of the organization and the type of research. Free taxes online   Income from research for the United States, any of its agencies or instrumentalities, or a state or any of its political subdivisions is excluded when computing unrelated business taxable income. Free taxes online   For a college, university, or hospital, all income from research, whether fundamental or applied, is excluded in computing unrelated business taxable income. Free taxes online   When an organization is operated primarily to conduct fundamental research (as distinguished from applied research) and the results are freely available to the general public, all income from research performed for any person is excluded in computing unrelated business taxable income. Free taxes online   The term research, for this purpose, does not include activities of a type normally conducted as an incident to commercial or industrial operations, such as testing or inspecting materials or products, or designing or constructing equipment, buildings, etc. Free taxes online In addition, the term fundamental research does not include research conducted for the primary purpose of commercial or industrial application. Free taxes online Gains and losses from disposition of property. Free taxes online   Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property other than: Stock in trade or other property of a kind that would properly be includable in inventory if on hand at the close of the tax year, Property held primarily for sale to customers in the ordinary course of a trade or business, or Cutting of timber that an organization has elected to consider as a sale or exchange of the timber. Free taxes online   It should be noted that the last exception relates only to cut timber. Free taxes online The sale, exchange, or other disposition of standing timber is excluded from the computation of unrelated business income, unless it constitutes property held for sale to customers in the ordinary course of business. Free taxes online Lapse or termination of options. Free taxes online   Any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Free taxes online The exclusion applies only if the option is written in connection with the exempt organization's investment activities. Free taxes online Therefore, this exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Free taxes online Exception. Free taxes online   This exclusion does not apply to unrelated debt-financed income, discussed later under Income From Debt-Financed Property. Free taxes online Gain or loss on disposition of certain brownfield property. Free taxes online   Gain or loss from the qualifying sale, exchange, or other disposition of a qualifying brownfield property (as defined in section 512(b)(19)(C)), which was acquired by the organization after December 31, 2005 and before January 1, 2011, is excluded from unrelated business taxable income and is excepted from the debt-financed rules for such property. Free taxes online See sections 512(b)(19) and 514(b)(1)(E). Free taxes online Income from services provided under federal license. Free taxes online   There is a further exclusion from unrelated business taxable income of income from a trade or business conducted by a religious order or by an educational organization maintained by the order. Free taxes online   This exclusion applies only if the following requirements are met. Free taxes online The trade or business must have been operated by the order or by the institution before May 27, 1959. Free taxes online The trade or business must provide services under a license issued by a federal regulatory agency. Free taxes online More than 90% of the net income from the business for the tax year must be devoted to religious, charitable, or educational purposes that constitute the basis for the religious order's exemption. Free taxes online The rates or other charges for these services must be fully competitive with the rates or other charges of similar taxable businesses. Free taxes online Rates or other charges for these services will be considered as fully competitive if they are neither materially higher nor materially lower than the rates charged by similar businesses operating in the same general area. Free taxes online Exception. Free taxes online    This exclusion does not apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property, later). Free taxes online Member income of mutual or cooperative electric companies. Free taxes online   Income of a mutual or cooperative electric company described in section 501(c)(12) which is treated as member income under subparagraph (H) of that section is excluded from unrelated business taxable income. Free taxes online Dues of Agricultural Organizations and Business Leagues Dues received from associate members by organizations exempt under section 501(c)(5) or section 501(c)(6) may be treated as gross income from an unrelated trade or business if the associate member category exists for the principal purpose of producing unrelated business income. Free taxes online For example, if an organization creates an associate member category solely to allow associate members to purchase insurance through the organization, the associate member dues may be unrelated business income. Free taxes online Exception. Free taxes online   Associate member dues received by an agricultural or horticultural organization are not treated as gross income from an unrelated trade or business, regardless of their purpose, if they are not more than the annual limit. Free taxes online The limit on dues paid by an associate member is $148 for 2011. Free taxes online   If the required annual dues are more than the limit, the entire amount is treated as income from an unrelated business unless the associate member category was formed or availed of for the principal purpose of furthering the organization's exempt purposes. Free taxes online Deductions To qualify as allowable deductions in computing unrelated business taxable income, the expenses, depreciation, and similar items generally must be allowable income tax deductions that are directly connected with carrying on an unrelated trade or business. Free taxes online They cannot be directly connected with excluded income. Free taxes online For an exception to the “directly connected” requirement, see Charitable contributions deduction, under Modifications, later. Free taxes online Directly Connected To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business. Free taxes online For an exception, see Expenses attributable to exploitation of exempt activities, later. Free taxes online Expenses attributable solely to unrelated business. Free taxes online   Expenses, depreciation, and similar items attributable solely to the conduct of an unrelated business are proximately and primarily related to that business and qualify for deduction to the extent that they are otherwise allowable income tax deductions. Free taxes online   For example, salaries of personnel employed full-time to conduct the unrelated business and depreciation of a building used entirely in the conduct of that business are deductible to the extent otherwise allowable. Free taxes online Expenses attributable to dual use of facilities or personnel. Free taxes online   When facilities or personnel are used both to conduct exempt functions and to conduct an unrelated trade or business, expenses, depreciation, and similar items attributable to the facilities or personnel must be allocated between the two uses on a reasonable basis. Free taxes online The part of an item allocated to the unrelated trade or business is proximately and primarily related to that business and is allowable as a deduction in computing unrelated business taxable income if the expense is otherwise an allowable income tax deduction. Free taxes online Example 1. Free taxes online A school recognized as a tax-exempt organization contracts with an individual to conduct a summer tennis camp. Free taxes online The school provides the tennis courts, housing, and dining facilities. Free taxes online The contracted individual hires the instructors, recruits campers, and provides supervision. Free taxes online The income the school receives from this activity is from a dual use of the facilities and personnel. Free taxes online The school, in computing its unrelated business taxable income, may deduct an allocable part of the expenses attributable to the facilities and personnel. Free taxes online Example 2. Free taxes online An exempt organization with gross income from an unrelated trade or business pays its president $90,000 a year. Free taxes online The president devotes approximately 10% of his time to the unrelated business. Free taxes online To figure the organization's unrelated business taxable income, a deduction of $9,000 ($90,000 × 10%) is allowed for the salary paid to its president. Free taxes online Expenses attributable to exploitation of exempt activities. Free taxes online   Generally, expenses, depreciation, and similar items attributable to the conduct of an exempt activity are not deductible in computing unrelated business taxable income from an unrelated trade or business that exploits the exempt activity. Free taxes online (See Exploitation of exempt functions under Not substantially related in chapter 3. Free taxes online ) This is because they do not have a proximate and primary relationship to the unrelated trade or business, and therefore, they do not qualify as directly connected with that business. Free taxes online Exception. Free taxes online   Expenses, depreciation, and similar items may be treated as directly connected with the conduct of the unrelated business if all the following statements are true. Free taxes online The unrelated business exploits the exempt activity. Free taxes online The unrelated business is a type normally conducted for profit by taxable organizations. Free taxes online The exempt activity is a type normally conducted by taxable organizations in carrying on that type of business. Free taxes online The amount treated as directly connected is the smaller of: The excess of these expenses, depreciation, and similar items over the income from, or attributable to, the exempt activity; or The gross unrelated business income reduced by all other expenses, depreciation, and other items that are actually directly connected. Free taxes online   The application of these rules to an advertising activity that exploits an exempt publishing activity is explained next. Free taxes online Exploitation of Exempt Activity—Advertising Sales The sale of advertising in a periodical of an exempt organization that contains editorial material related to the accomplishment of the organization's exempt purpose is an unrelated business that exploits an exempt activity, the circulation and readership of the periodical. Free taxes online Therefore, in addition to direct advertising costs, exempt activity costs (expenses, depreciation, and similar expenses attributable to the production and distribution of the editorial or readership content) can be treated as directly connected with the conduct of the advertising activity. Free taxes online (See Expenses attributable to exploitation of exempt activities under Directly Connected, earlier. Free taxes online ) Figuring unrelated business taxable income (UBTI). Free taxes online   The UBTI of an advertising activity is the amount shown in the following chart. Free taxes online IF gross advertising income is . Free taxes online . Free taxes online . Free taxes online THEN UBTI is . Free taxes online . Free taxes online . Free taxes online More than direct advertising costs The excess advertising income, reduced (but not below zero) by the excess, if any, of readership costs over circulation income. Free taxes online Equal to or less than direct advertising costs Zero. Free taxes online   • Circulation income and readership costs are not taken into account. Free taxes online   • Any excess advertising costs reduce (but not below zero) UBTI from any other unrelated business activity. Free taxes online   The terms used in the chart are explained in the following discussions. Free taxes online Periodical Income Gross advertising income. Free taxes online   This is all the income from the unrelated advertising activities of an exempt organization periodical. Free taxes online Circulation income. Free taxes online   This is all the income from the production, distribution, or circulation of an exempt organization's periodical (other than gross advertising income). Free taxes online It includes all amounts from the sale or distribution of the readership content of the periodical, such as income from subscriptions. Free taxes online It also includes allocable membership receipts if the right to receive the periodical is associated with a membership or similar status in the organization. Free taxes online Allocable membership receipts. Free taxes online   This is the part of membership receipts (dues, fees, or other charges associated with membership) equal to the amount that would have been charged and paid for the periodical if: The periodical was published by a taxable organization, The periodical was published for profit, and The member was an unrelated party dealing with the taxable organization at arm's length. Free taxes online   The amount used to allocate membership receipts is the amount shown in the following chart. Free taxes online   For this purpose, the total periodical costs are the sum of the direct advertising costs and the readership costs, explained under Periodical Costs, later. Free taxes online The cost of other exempt activities means the total expenses incurred by the organization in connection with its other exempt activities, not offset by any income earned by the organization from those activities. Free taxes online IF . Free taxes online . Free taxes online . Free taxes online THEN the amount used to allocate membership receipts is . Free taxes online . Free taxes online . Free taxes online 20% or more of the total circulation consists of sales to nonmembers The subscription price charged nonmembers. Free taxes online The above condition does not apply, and 20% or more of the members pay reduced dues because they do not receive the periodical The reduction in dues for a member not receiving the periodical. Free taxes online Neither of the above conditions applies The membership receipts multiplied by this fraction:   Total periodical costs Total periodical costs Plus Cost of other exempt activities Example 1. Free taxes online U is an exempt scientific organization with 10,000 members who pay annual dues of $15. Free taxes online One of U's activities is publishing a monthly periodical distributed to all of its members. Free taxes online U also distributes 5,000 additional copies of its periodical to nonmembers, who subscribe for $10 a year. Free taxes online Since the nonmember circulation of U's periodical represents one-third (more than 20%) of its total circulation, the subscription price charged to nonmembers is used to determine the part of U's membership receipts allocable to the periodical. Free taxes online Thus, U's allocable membership receipts are $100,000 ($10 times 10,000 members), and U's total circulation income for the periodical is $150,000 ($100,000 from members plus $50,000 from sales to nonmembers). Free taxes online Example 2. Free taxes online Assume the same facts except that U sells only 500 copies of its periodical to nonmembers, at a price of $10 a year. Free taxes online Assume also that U's members may elect not to receive the periodical, in which case their dues are reduced from $15 a year to $6 a year, and that only 3,000 members elect to receive the periodical and pay the full dues of $15 a year. Free taxes online U's stated subscription price of $9 to members consistently results in an excess of total income (including gross advertising income) attributable to the periodical over total costs of the periodical. Free taxes online Since the 500 copies of the periodical distributed to nonmembers represent only 14% of the 3,500 copies distributed, the $10 subscription price charged to nonmembers is not used to determine the part of membership receipts allocable to the periodical. Free taxes online Instead, since 70% of the members elect not to receive the periodical and pay $9 less per year in dues, the $9 price is used to determine the subscription price charged to members. Free taxes online Thus, the allocable membership receipts will be $9 a member, or $27,000 ($9 times 3,000 copies). Free taxes online U's total circulation income is $32,000 ($27,000 plus the $5,000 from nonmember subscriptions). Free taxes online Periodical Costs Direct advertising costs. Free taxes online   These are expenses, depreciation, and similar items of deduction directly connected with selling and publishing advertising in the periodical. Free taxes online   Examples of allowable deductions under this classification include agency commissions and other direct selling costs, such as transportation and travel expenses, office salaries, promotion and research expenses, and office overhead directly connected with the sale of advertising lineage in the periodical. Free taxes online Also included are other deductions commonly classified as advertising costs under standard account classifications, such as artwork and copy preparation, telephone, telegraph, postage, and similar costs directly connected with advertising. Free taxes online   In addition, direct advertising costs include the part of mechanical and distribution costs attributable to advertising lineage. Free taxes online For this purpose, the general account classifications of items includable in mechanical and distribution costs ordinarily employed in business-paper and consumer-publication accounting provide a guide for the computation. Free taxes online Accordingly, the mechanical and distribution costs include the part of the costs and other expenses of composition, press work, binding, mailing (including paper and wrappers used for mailing), and bulk postage attributable to the advertising lineage of the publication. Free taxes online   In the absence of specific and detailed records, the part of mechanical and distribution costs attributable to the periodical's advertising lineage can be based on the ratio of advertising lineage to total lineage in the periodical, if this allocation is reasonable. Free taxes online Readership costs. Free taxes online   These are all expenses, depreciation, and similar items that are directly connected with the production and distribution of the readership content of the periodical. Free taxes online Costs partly attributable to other activities. Free taxes online   Deductions properly attributable to exempt activities other than publishing the periodical may not be allocated to the periodical. Free taxes online When expenses are attributable both to the periodical and to the organization's other activities, an allocation must be made on a reasonable basis. Free taxes online The method of allocation will vary with the nature of the item, but once adopted, should be used consistently. Free taxes online Allocations based on dollar receipts from various exempt activities generally are not reasonable since receipts usually do not accurately reflect the costs associated with specific activities that an exempt organization conducts. Free taxes online Consolidated Periodicals If an exempt organization publishes more than one periodical to produce income, it may treat all of them (but not less than all) as one in determining unrelated business taxable income from selling advertising. Free taxes online It treats the gross income from all the periodicals, and the deductions directly connected with them, on a consolidated basis. Free taxes online Consolidated treatment, once adopted, must be followed consistently and is binding. Free taxes online This treatment can be changed only with the consent of the Internal Revenue Service. Free taxes online An exempt organization's periodical is published to produce income if: The periodical generates gross advertising income to the organization equal to at least 25% of its readership costs, and Publishing the periodical is an activity engaged in for profit. Free taxes online Whether the publication of a periodical is an activity engaged in for profit can be determined only by all the facts and circumstances in each case. Free taxes online The facts and circumstances must show that the organization carries on the activity for economic profit, although there may not be a profit in a particular year. Free taxes online For example, if an organization begins publishing a new periodical whose total costs exceed total income in the start-up years because of lack of advertising sales, that does not mean that the organization did not have as its objective an economic profit. Free taxes online The organization may establish that it had this objective by showing it can reasonably expect advertising sales to increase, so that total income will exceed costs within a reasonable time. Free taxes online Example. Free taxes online Y, an exempt trade association, publishes three periodicals that it distributes to its members: a weekly newsletter, a monthly magazine, and a quarterly journal. Free taxes online Both the monthly magazine and the quarterly journal contain advertising that accounts for gross advertising income equal to more than 25% of their respective readership costs. Free taxes online Similarly, the total income attributable to each periodical has exceeded the total deductions attributable to each periodical for substantially all the years they have been published. Free taxes online The newsletter carries no advertising and its annual subscription price is not intended to cover the cost of publication. Free taxes online The newsletter is a service that Y distributes to all of its members in an effort to keep them informed of changes occurring in the business world. Free taxes online It is not engaged in for profit. Free taxes online Under these circumstances, Y may consolidate the income and deductions from the monthly and quarterly journals in computing its unrelated business taxable income. Free taxes online It may not consolidate the income and deductions from the newsletter with the income and deductions of its other periodicals, since the newsletter is not published for the production of income. Free taxes online Modifications Net operating loss deduction. Free taxes online   The net operating loss (NOL) deduction (as provided in section 172) is allowed in computing unrelated business taxable income. Free taxes online However, the NOL for any tax year, the carrybacks and carryovers of NOLs, and the NOL deduction are determined without taking into account any amount of income or deduction that has been specifically excluded in computing unrelated business taxable income. Free taxes online For example, a loss from an unrelated trade or business is not diminished because dividend income was received. Free taxes online   If this were not done, organizations would, in effect, be taxed on their exempt income, since unrelated business losses then would be offset by dividends, interest, and other excluded income. Free taxes online This would reduce the loss that could be applied against unrelated business income of prior or future tax years. Free taxes online Therefore, to preserve the immunity of exempt income, all NOL computations are limited to those items of income and deductions that affect the unrelated business taxable income. Free taxes online   In line with this concept, an NOL carryback or carryover is allowed only from a tax year for which the organization is subject to tax on unrelated business income. Free taxes online   For example, if an organization just became subject to the tax last year, its NOL for that year is not a carryback to a prior year when it had no unrelated business taxable income, nor is its NOL carryover to succeeding years reduced by the related income of those prior years. Free taxes online   However, in determining the span of years for which an NOL may be carried back or forward, the tax years for which the organization is not subject to the tax on unrelated business income are counted. Free taxes online For example, if an organization was subject to the tax for 2009 and had an NOL for that year, the last tax year to which any part of that loss may be carried over is 2029, regardless of whether the organization was subject to the unrelated business income tax in any of the intervening years. Free taxes online   For more details on the NOL deduction, including property eligible for an extended carryback period, see sections 172 and 1400N, Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts, and Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Free taxes online Charitable contributions deduction. Free taxes online   An exempt organization is allowed to deduct its charitable contributions in computing its unrelated business taxable income whether or not the contributions are directly connected with the unrelated business. Free taxes online   To be deductible, the contribution must be paid to another qualified organization. Free taxes online For example, an exempt university that operates an unrelated business may deduct a contribution made to another university for educational work, but may not claim a deduction for contributions of amounts spent for carrying out its own educational program. Free taxes online   For purposes of the deduction, a distribution by a trust made under the trust instrument to a beneficiary, which itself is a qualified organization, is treated the same as a contribution. Free taxes online Deduction limits. Free taxes online   An exempt organization that is subject to the unrelated business income tax at corporate rates is allowed a deduction for charitable contributions up to 10% of its unrelated business taxable income computed without regard to the deduction for contributions. Free taxes online See the Instructions for Form 990-T for more information. Free taxes online    An exempt trust that is subject to the unrelated business income tax at trust rates generally is allowed a deduction for charitable contributions in the same amounts as allowed for individuals. Free taxes online However, the limit on the deduction is determined in relation to the trust's unrelated business taxable income computed without regard to the deduction, rather than in relation to adjusted gross income. Free taxes online   Contributions in excess of the limits just described may be carried over to the next 5 tax years. Free taxes online A contribution carryover is not allowed, however, to the extent that it increases an NOL carryover. Free taxes online Suspension of deduction limits for farmers and ranchers. Free taxes online   The limitations discussed above are temporarily suspended for certain qualified conservation contributions of property used in agriculture or livestock production. Free taxes online See the Instructions for Form 990-T for details. Free taxes online Specific deduction. Free taxes online   In computing unrelated business taxable income, a specific deduction of $1,000 is allowed. Free taxes online However, the specific deduction is not allowed in computing an NOL or the NOL deduction. Free taxes online   Generally, the deduction is limited to $1,000 regardless of the number of unrelated businesses in which the organization is engaged. Free taxes online Exception. Free taxes online   An exception is provided in the case of a diocese, province of a religious order, or a convention or association of churches that may claim a specific deduction for each parish, individual church, district, or other local unit. Free taxes online In these cases, the specific deduction for each local unit is limited to the lower of: $1,000, or Gross income derived from an unrelated trade or business regularly conducted by the local unit. Free taxes online   This exception applies only to parishes, districts, or other local units that are not separate legal entities, but are components of a larger entity (diocese, province, convention, or association) filing Form 990-T. Free taxes online The parent organization must file a return reporting the unrelated business gross income and related deductions of all units that are not separate legal entities. Free taxes online The local units cannot file separate returns. Free taxes online However, each local unit that is separately incorporated must file its own return and cannot include, or be included with, any other entity. Free taxes online See Title-holding corporations in chapter 1 for a discussion of the only situation in which more than one legal entity may be included on the same Form 990-T. Free taxes online Example. Free taxes online X is an association of churches and is divided into local units A, B, C, and D. Free taxes online Last year, A, B, C, and D derived gross income of, respectively, $1,200, $800, $1,500, and $700 from unrelated businesses that they regularly conduct. Free taxes online X may claim a specific deduction of $1,000 with respect to A, $800 with respect to B, $1,000 with respect to C, and $700 with respect to D. Free taxes online Partnership Income or Loss An organization may have unrelated business income or loss as a member of a partnership, rather than through direct business dealings with the public. Free taxes online If so, it must treat its share of the partnership income or loss as if it had conducted the business activity in its own capacity as a corporation or trust. Free taxes online No distinction is made between limited and general partners. Free taxes online The organization is required to notify the partnership of its tax-exempt status. Free taxes online Thus, if an organization is a member of a partnership regularly engaged in a trade or business that is an unrelated trade or business with respect to the organization, the organization must include in its unrelated business taxable income its share of the partnership's gross income from the unrelated trade or business (whether or not distributed), and the deductions attributable to it. Free taxes online The partnership income and deductions to be included in the organization's unrelated business taxable income are figured the same way as any income and deductions from an unrelated trade or business conducted directly by the organization. Free taxes online The partnership is required to provide the organization this information on Schedule K-1. Free taxes online Example. Free taxes online An exempt educational organization is a partner in a partnership that operates a factory. Free taxes online The partnership also holds stock in a corporation. Free taxes online The exempt organization must include its share of the gross income from operating the factory in its unrelated business taxable income but may exclude its share of any dividends the partnership received from the corporation. Free taxes online Different tax years. Free taxes online   If the exempt organization and the partnership of which it is a member have different tax years, the partnership items that enter into the computation of the organization's unrelated business taxable income must be based on the income and deductions of the partnership for the partnership's tax year that ends within or with the organization's tax year. Free taxes online S Corporation Income or Loss An organization that owns S corporation stock must take into account its share of the S corporation's income, deductions, or losses in figuring unrelated business taxable income, regardless of the actual source or nature of the income, deductions, and losses. Free taxes online For example, the organization's share of the S corporation's interest and dividend income will be taxable, even though interest and dividends are normally excluded from unrelated business taxable income. Free taxes online The organization must also take into account its gain or loss on the sale or other disposition of the S corporation stock in figuring unrelated business taxable income. Free taxes online Special Rules for Foreign Organizations The unrelated business taxable income of a foreign organization exempt from tax under section 501(a) consists of the organization's: Unrelated business taxable income derived from sources within the United States but not effectively connected with the conduct of a trade or business within the United States, and Unrelated business taxable income effectively connected with the conduct of a trade or business within the United States, whether or not this income is derived from sources within the United States. Free taxes online To determine whether income realized by a foreign organization is derived from sources within the United States or is effectively connected with the conduct of a trade or business within the United States, see sections 861 through 865 and the related regulations. Free taxes online Special Rules for Social Clubs, VEBAs, SUBs, and GLSOs The following discussion applies to: Social clubs described in section 501(c)(7), Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9), Supplemental unemployment compensation benefit trusts (SUBs) described in section 501(c)(17), and Group legal services organizations (GLSOs) described in section 501(c)(20). Free taxes online These organizations must figure unrelated business taxable income under special rules. Free taxes online Unlike other exempt organizations, they cannot exclude their investment income (dividends, interest, rents, etc. Free taxes online ). Free taxes online (See Exclusions under Income, earlier. Free taxes online ) Therefore, they are generally subject to unrelated business income tax on this income. Free taxes online The unrelated business taxable income of these organizations includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Free taxes online The dividends received by a corporation are not allowed in computing unrelated business taxable income because it is not an expense incurred in the production of income. Free taxes online Losses from nonexempt activities. Free taxes online   Losses from nonexempt activities of these organizations cannot be used to offset investment income unless the activities were undertaken with the intent to make a profit. Free taxes online Example. Free taxes online A private golf and country club that is a qualified tax-exempt social club has nonexempt function income from interest and from the sale of food and beverages to nonmembers. Free taxes online The club sells food and beverages as a service to members and their guests rather than for the purpose of making a profit. Free taxes online Therefore, any loss resulting from sales to nonmembers cannot be used to offset the club's interest income. Free taxes online Modifications. Free taxes online   The unrelated business taxable income is modified by any NOL or charitable contributions deduction and by the specific deduction (described earlier under Deductions). Free taxes online Exempt function income. Free taxes online   This is gross income from dues, fees, charges or similar items paid by members for goods, facilities, or services to the members or their dependents or guests, to further the organization's exempt purposes. Free taxes online Exempt function income also includes income set aside for qualified purposes. Free taxes online Income that is set aside. Free taxes online   This is income set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Free taxes online In addition, for a VEBA, SUB, or GLSO, it is income set aside to provide for the payment of life, sick, accident, or other benefits. Free taxes online   However, any amounts set aside by a VEBA or SUB that exceed the organization's qualified asset account limit (determined under section 419A) are unrelated business income. Free taxes online Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Free taxes online These rules are explained in section 512(a)(3)(E)(ii). Free taxes online   Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. Free taxes online In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income. Free taxes online   Set-aside income is generally excluded from gross income only if it is set aside in the tax year in which it is otherwise includible in gross income. Free taxes online However, income set aside on or before the date for filing Form 990-T, including extensions of time, may, at the election of the organization, be treated as having been set aside in the tax year for which the return was filed. Free taxes online The income set aside must have been includible in gross income for that earlier year. Free taxes online Nonrecognition of gain. Free taxes online   If the organization sells property used directly in performing an exempt function and purchases other property used directly in performing an exempt function, any gain on the sale is recognized only to the extent that the sales price of the old property exceeds the cost of the new property. Free taxes online The purchase of the new property must be made within 1 year before the date of sale of the old property or within 3 years after the date of sale. Free taxes online   This rule also applies to gain from an involuntary conversion of the property resulting from its destruction in whole or in part, theft, seizure, requisition, or condemnation. Free taxes online Special Rules for Veterans' Organizations Unrelated business taxable income of a veterans' organization that is exempt under section 501(c)(19) does not include the net income from insurance business that is properly set aside. Free taxes online The organization may set aside income from payments received for life, sick, accident, or health insurance for the organization's members or their dependents for the payment of insurance benefits or reasonable costs of insurance administration, or for use exclusively for religious, charitable, scientific, literary, or educational purposes, or the prevention of cruelty to children or animals. Free taxes online For details, see section 512(a)(4) and the regulations under that section. Free taxes online Income From Controlled Organizations The exclusions for interest, annuities, royalties, and rents, explained earlier in this chapter under Income, may not apply to a payment of these items received by a controlling organization from its controlled organization. Free taxes online The payment is included in the controlling organization's unrelated business taxable income to the extent it reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. Free taxes online All deductions of the controlling organization directly connected with the amount included in its unrelated business taxable income are allowed. Free taxes online Excess qualifying specified payments. Free taxes online   Excess qualifying specified payments received or accrued from a controlled entity are included in a controlling exempt organization's unrelated business taxable income only on the amount that exceeds that which would have been paid or accrued if the payments had been determined under section 482. Free taxes online Qualifying specified payments means any payments of interest, annuities, royalties, or rents received or accrued from the controlled organization pursuant to a binding written contract in effect on August 17, 2006, or to a contract which is a renewal, under substantially similar terms of a binding written contract in effect on August 17, 2006, and the payments are received or accrued before January 1, 2012. Free taxes online   If a controlled participant is not required to file a U. Free taxes online S. Free taxes online income tax return, the participant must ensure that the copy or copies of the Regulations section 1. Free taxes online 482-7 Cost Sharing Arrangement Statement and any updates are attached to Schedule M of any Form 5471, Information Return of U. Free taxes online S. Free taxes online Persons With Respect To Certain Foreign Corporations, any Form 5472, Information Return of a 25% Foreign-Owned U. Free taxes online S. Free taxes online Corporation or a Foreign Corporation Engaged in a U. Free taxes online S. Free taxes online Trade or Business, or any Form 8865, Return of U. Free taxes online S. Free taxes online Persons With Respect to Certain Foreign Partnerships, filed for that participant. Free taxes online Addition to tax for valuation misstatements. Free taxes online   Under section 512(b)(13)(E)(ii), the tax imposed on a controlling organization will be increased by 20 percent of the excess qualifying specified payments that are determined with or without any amendments or supplements, whichever is larger. Free taxes online See section 512(b)(13)(E)(ii) for more information. Free taxes online Net unrelated income. Free taxes online   This is: For an exempt organization, its unrelated business taxable income, or For a nonexempt organization, the part of its taxable income that would be unrelated business taxable income if it were exempt and had the same exempt purposes as the controlling organization. Free taxes online Net unrelated loss. Free taxes online   This is: For an exempt organization, its NOL, or For a nonexempt organization, the part of its NOL that would be its NOL if it were exempt and had the same exempt purposes as the controlling organization. Free taxes online Control. Free taxes online   An organization is controlled if: For a corporation, the controlling organization owns (by vote or value) more than 50% of the stock, For a partnership, the controlling organization owns more than 50% of the profits or capital interests, or For any other organization, the controlling organization owns more than 50% of the beneficial interest. Free taxes online For this purpose, constructive ownership of stock (determined under section 318) or other interests is taken into account. Free taxes online   As a result, an exempt parent organization is treated as controlling any subsidiary in which it holds more than 50% of the voting power or value, whether directly (as in the case of a first-tier subsidiary) or indirectly (as in the case of a second-tier subsidiary). Free taxes online Income from property financed with qualified 501(c)(3) bonds. Free taxes online If any part of a 501(c)(3) organization's property financed with qualified 501(c)(3) bonds is used in a trade or business of any person other than a section 501(c)(3) organization or a governmental unit, and such use is not consistent with the requirements for qualified 501(c)(3) bonds under section 145, the section 501(c)(3) organization is considered to have received unrelated business income in the amount of the greater of the actual rental income or the fair rental value of the property for the period it is used. Free taxes online No deduction is allowed for interest on the private activity bond. Free taxes online See sections 150(b)(3) and (c) for more information. Free taxes online Disposition of property received from taxable subsidiary and used in unrelated business. Free taxes online A taxable 80%-owned subsidiary corporation of one or more tax-exempt entities is generally subject to tax on a distribution in liquidation of its assets to its exempt parent (or parents). Free taxes online The assets are treated as if sold at fair market value. Free taxes online Tax-exempt entities include organizations described in sections 501(a), 529, and 115, charitable remainder trusts, U. Free taxes online S. Free taxes online and foreign governments, Indian tribal governments, international organizations, and similar non-taxable organizations. Free taxes online A taxable corporation that transfers substantially all of its assets to a tax-exempt entity in a transaction that otherwise qualifies for nonrecognition treatment must recognize gain on the transaction as if it sold the assets at fair market value. Free taxes online However, such a transfer is not taxable if it qualifies as a like-kind exchange under section 1031 or an involuntary conversion under section 1033. Free taxes online In such a case the built-in appreciation is preserved in the replacement property received in the transaction. Free taxes online A corporation that changes status from taxable to tax-exempt is treated generally as if it transferred all of its assets to a tax-exempt entity immediately before the change in status (thus subjecting it to the tax on a deemed sale for fair market value). Free taxes online This rule does not apply where the taxable corporation becomes exempt within 3 years of formation, or had previously been exempt and within several years (generally a period of 3 years) regains exemption, unless the principal purpose of the transactions is to avoid the tax on the change in status. Free taxes online In the transactions described above, the taxable event is deferred for property that the tax-exempt entity immediately uses in an unrelated business. Free taxes online If the parent later disposes of the property, then any gain (not in excess of the amount not recognized) is included in the parent's unrelated business taxable income. Free taxes online If there is partial use of the assets in unrelated business, then there is partial recognition of gain or loss. Free taxes online Property is treated as disposed if the tax-exempt entity no longer uses it in an unrelated business. Free taxes online Losses on the transfer of assets to a tax-exempt entity are disallowed if part of a plan with a principal purpose of recognizing losses. Free taxes online Income From Debt-Financed Property Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. Free taxes online The amount of income included is proportionate to the debt on the property. Free taxes online Debt-Financed Property In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). Free taxes online It includes rental real estate, tangible personal property, and corporate stock. Free taxes online Acquisition Indebtedness For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization: When acquiring or improving the property, Before acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement, and After acquiring or improving the property if: The debt would not have been incurred except for the acquisition or improvement, and Incurring the debt was reasonably foreseeable when the property was acquired or improved. Free taxes online The facts and circumstances of each situation determine whether incurring a debt was reasonably foreseeable. Free taxes online That an organization may not have foreseen the need to incur a debt before acquiring or improving the property does not necessarily mean that incurring the debt later was not reasonably foreseeable. Free taxes online Example 1. Free taxes online Y, an exempt scientific organization, mortgages its laboratory to replace working capital used in remodeling an office building that Y rents to an insurance company for nonexempt purposes. Free taxes online The debt is acquisition indebtedness since the debt, though incurred after the improvement of the office building, would not have been incurred without the improvement, and the debt was reasonably foreseeable when, to make the improvement, Y reduced its working capital below the amount necessary to continue current operations. Free taxes online Example 2. Free taxes online X, an exempt organization, forms a partnership with A and B. Free taxes online The partnership agreement provides that all three partners will share equally in the profits of the partnership, each will invest $3 million, and X will be a limited partner. Free taxes online X invests $1 million of its own funds in the partnership and $2 million of borrowed funds. Free taxes online The partnership buys as its sole asset an office building that it leases to the public for nonexempt purposes. Free taxes online The office building costs the partnership $24 million, of which $15 million is borrowed from Y bank. Free taxes online The loan is secured by a mortgage on the entire office building. Free taxes online By agreement with Y bank, X is not personally liable for payment of the mortgage. Free taxes online X has acquisition indebtedness of $7 million. Free taxes online This amount is the $2 million debt X incurred in acquiring the partnership interest, plus the $5 million that is X's allocable part of the partnership's debt incurred to buy the office building (one-third of $15 million). Free taxes online Example 3. Free taxes online A labor union advanced funds, from existing resources and without any borrowing, to its tax-exempt subsidiary title-holding company. Free taxes online The subsidiary used the funds to pay a debt owed to a third party that was previously incurred in acquiring two income-producing office buildings. Free taxes online Neither the union nor the subsidiary has incurred any further debt in acquiring or improving the property. Free taxes online The union has no outstanding debt on the property. Free taxes online The subsidiary's debt to the union is represented by a demand note on which the subsidiary makes payments whenever it has the available cash. Free taxes online The books of the union and the subsidiary list the outstanding debt as interorganizational indebtedness. Free taxes online Although the subsidiary's books show a debt to the union, it is not the type subject to the debt-financed property rules. Free taxes online In this situation, the very nature of the title-holding company and the parent-subsidiary relationship shows this debt to be merely a matter of accounting between the two organizations. Free taxes online Accordingly, the debt is not acquisition indebtedness. Free taxes online Change in use of property. Free taxes online   If an organization converts property that is not debt-financed property to a use that results in its treatment as debt-financed property, the outstanding principal debt on the property is thereafter treated as acquisition indebtedness. Free taxes online Example. Free taxes online Four years ago a university borrowed funds to acquire an apartment building as housing for married students. Free taxes online Last year, the university rented the apartment building to the public for nonexempt purposes. Free taxes online The outstanding principal debt becomes acquisition indebtedness as of the time the building was first rented to the public. Free taxes online Continued debt. Free taxes online   If an organization sells property and, without paying off debt that would be acquisition indebtedness if the property were debt-financed property, buys property that is otherwise debt-financed property, the unpaid debt is acquisition indebtedness for the new property. Free taxes online This is true even if the original property was not debt-financed property. Free taxes online Example. Free taxes online To house its administration offices, an exempt organization bought a building using $600,000 of its own funds and $400,000 of borrowed funds secured by a pledge of its securities. Free taxes online The office building was not debt-financed property. Free taxes online The organization later sold the building for $1 million without repaying the $400,000 loan. Free taxes online It used the sale proceeds to buy an apartment building it rents to the general public. Free taxes online The unpaid debt of $400,000 is acquisition indebtedness with respect to the apartment building. Free taxes online Property acquired subject to mortgage or lien. Free taxes online   If property (other than certain gifts, bequests, and devises) is acquired subject to a mortgage, the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even if the organization did not assume or agree to pay the debt. Free taxes online Example. Free taxes online An exempt organization paid $50,000 for real property valued at $150,000 and subject to a $100,000 mortgage. Free taxes online The $100,000 of outstanding principal debt is acquisition indebtedness, as though the organization had borrowed $100,000 to buy the property. Free taxes online Liens similar to a mortgage. Free taxes online   In determining acquisition indebtedness, a lien similar to a mortgage is treated as a mortgage. Free taxes online A lien is similar to a mortgage if title to property is encumbered by the lien for a creditor's benefit. Free taxes online However, when state law provides that a lien for taxes or assessments attaches to property before the taxes or assessments become due and payable, the lien is not treated as a mortgage until after the taxes or assessments have become due and payable and the organization has had an opportunity to pay the lien in accordance with state law. Free taxes online Liens similar to mortgages include (but are not limited to): Deeds of trust, Conditional sales contracts, Chattel mortgages, Security interests under the Uniform Commercial Code, Pledges, Agreements to hold title in escrow, and Liens for taxes or assessments (other than those discussed earlier in this paragraph). Free taxes online Exception for property acquired by gift, bequest, or devise. Free taxes online   If property subject to a mortgage is acquired by gift, bequest, or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property. Free taxes online However, this applies to a gift of property only if:    The mortgage was placed on the property more than 5 years before the date the organization received it, and The donor held the property for more than 5 years before the date the organization received it. Free taxes online   This exception does not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than a payment under an annuity obligation excluded from the definition of acquisition indebtedness, discussed under Debt That Is Not Acquisition Indebtedness, later). Free taxes online   Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation. Free taxes online Modifying existing debt. Free taxes online   Extending, renewing, or refinancing an existing debt is considered a continuation of that debt to the extent its outstanding principal does not increase. Free taxes online When the principal of the modified debt is more than the outstanding principal of the old debt, the excess is treated as a separate debt. Free taxes online Extension or renewal. Free taxes online   In general, any modification or substitution of the terms of a debt by an organization is considered an extension or renewal of the original debt, rather than the start of a new one, to the extent that the outstanding principal of the debt does not increase. Free taxes online   The following are examples of acts resulting in the extension or renewal of a debt: Substituting liens to secure the debt, Substituting obligees whether or not with the organization's consent, Renewing, extending, or accelerating the payment terms of the debt, and Adding, deleting, or substituting sureties or other primary or secondary obligors. Free taxes online Debt increase. Free taxes online   If the outstanding principal of a modified debt is more than that of the unmodified debt, and only part of the refinanced debt is acquisition indebtedness, the payments on the refinanced debt must be allocated between the old debt and the excess. Free taxes online Example. Free taxes online An organization has an outstanding principal debt of $500,000 that is treated as acquisition indebtedness. Free taxes online The organization borrows another $100,000, which is not acquisition indebtedness, from the same lender, resulting in a $600,000 note for the total obligation. Free taxes online A payment of $60,000 on the total obligation would reduce the acquisition indebtedness by $50,000 ($60,000 x $500,000/$600,000) and the excess debt by $10,000. Free taxes online Debt That Is Not Acquisition Indebtedness Certain debt and obligations are not acquisition indebtedness. Free taxes online These include the following. Free taxes online Debts incurred in performing an exempt purpose. Free taxes online Annuity obligations. Free taxes online Securities loans. Free taxes online Real property debts of qualified organizations. Free taxes online Certain Federal financing. Free taxes online Debt incurred in performing exempt purpose. Free taxes online   A debt incurred in performing an exempt purpose is not acquisition indebtedness. Free taxes online For example, acquisition indebtedness does not include the debt an exempt credit union incurs in accepting deposits from its members or the debt an exempt organization incurs in accepting payments from its members to provide them with insurance, retirement, or other benefits. Free taxes online Annuity obligation. Free taxes online   The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements. Free taxes online It must be the sole consideration (other than a mortgage on property acquired by gift, bequest, or devise that meets the exception discussed under Property acquired subject to mortgage or lien, earlier in this chapter) issued in exchange for the property received. Free taxes online Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received. Free taxes online It must be payable over the lives of either one or two individuals living when issued. Free taxes online It must be payable under a contract that: Does not guarantee a minimum nor specify a maximum number of payments, and Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property. Free taxes online Example. Free taxes online X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. Free taxes online In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. Free taxes online The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. Free taxes online The present value of this annuity is $81,156, determined from IRS valuation tables. Free taxes online Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness. Free taxes online Securities loans. Free taxes online   Acquisition indebtedness does not include an obligation of the exempt organization to return collateral security provided by the borrower of the exempt organization's securities under a securities loan agreement (discussed under Exclusions earlier in this chapter). Free taxes online This transaction is not treated as the borrowing by the exempt organization of the collateral furnished by the borrower (usually a broker) of the securities. Free taxes online   However, if the exempt organization incurred debt to buy the loaned securities, any income from the securities (including income from