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H&r online Publication 54 - Introductory Material Table of Contents Future Developments What's New Reminders IntroductionOrdering forms and publications. H&r online Tax questions. H&r online Future Developments For the latest information about developments related to Publication 54, such as legislation enacted after it was published, go to www. H&r online irs. H&r online gov/pub54. H&r online What's New Exclusion amount. H&r online  The maximum foreign earned income exclusion is adjusted annually for inflation. H&r online For 2013, the maximum exclusion has increased to $97,600. H&r online See Limit on Excludable Amount under Foreign Earned Income Exclusion in chapter 4. H&r online Housing expenses — base amount. H&r online  The computation of the base housing amount (line 32 of Form 2555) is tied to the maximum foreign earned income exclusion. H&r online The amount is 16 percent of the exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your 2013 tax year. H&r online For 2013, this amount is $42. H&r online 78 per day ($15,616 per year). H&r online See Housing Amount under Foreign Housing Exclusion and Deduction in chapter 4. H&r online Housing expenses — maximum amount. H&r online  The amount of qualified housing expenses eligible for the housing exclusion and housing deduction has changed for some locations. H&r online See Limit on housing expenses under Foreign Housing Exclusion and Deduction in chapter 4. H&r online Filing requirements. H&r online  Generally, the amount of income you can receive before you must file an income tax return has increased. H&r online These amounts are shown in chapter 1 under Filing Requirements . H&r online Self-employment tax rate. H&r online  For 2013, the self-employment tax rate of 13. H&r online 3% has increased to 15. H&r online 3%. H&r online The maximum amount of net earnings from self-employment that is subject to the social security part of the self-employment tax has increased to $113,700. H&r online All net earnings are subject to the Medicare part of the tax. H&r online For more information, see chapter 3. H&r online IRA limitations for 2013. H&r online . H&r online  The 2013 contribution limit to an IRA has increased to $5,500 ($6,500 if age 50 or older). H&r online You may be able to take an IRA deduction if you were covered by a retirement plan and your 2013 modified adjusted gross income (AGI) is less than $69,000 ($115,000 if married filing jointly or a qualifying widow(er)). H&r online If your spouse was covered by a retirement plan, but you were not, you may be able to take an IRA deduction if your 2013 modified AGI is less than $188,000. H&r online See the Instructions for Form 1040 or the Instructions for Form 1040A for details and exceptions. H&r online Reminders Figuring tax on income not excluded. H&r online  If you claim the foreign earned income exclusion, the housing exclusion, or both, you must figure the tax on your nonexcluded income using the tax rates that would have applied had you not claimed the exclusions. H&r online See the Instructions for Form 1040 and complete the Foreign Earned Income Tax Worksheet to figure the amount of tax to enter on Form 1040, line 44. H&r online If you must attach Form 6251 to your return, use the Foreign Earned Income Tax Worksheet provided in the Instructions for Form 6251. H&r online Form 8938. H&r online  If you had foreign financial assets in 2013, you may have to file Form 8938 with your return. H&r online See Form 8938 in chapter 1. H&r online Change of address. H&r online  If you change your home mailing address, notify the Internal Revenue Service using Form 8822, Change of Address. H&r online If you are changing your business address, use Form 8822-B, Change of Address or Responsible Party—Business. H&r online Photographs of missing children. H&r online  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. H&r online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. H&r online You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. H&r online Introduction This publication discusses special tax rules for U. H&r online S. H&r online citizens and resident aliens who work abroad or who have income earned in foreign countries. H&r online If you are a U. H&r online S. H&r online citizen or resident alien, your worldwide income generally is subject to U. H&r online S. H&r online income tax, regardless of where you are living. H&r online Also, you are subject to the same income tax filing requirements that apply to U. H&r online S. H&r online citizens or resident aliens living in the United States. H&r online Expatriation tax provisions apply to U. H&r online S. H&r online citizens who have renounced their citizenship and long-term residents who have ended their residency. H&r online These provisions are discussed in chapter 4 of Publication 519, U. H&r online S. H&r online Tax Guide for Aliens. H&r online Resident alien. H&r online   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. H&r online Green card test. H&r online You are a U. H&r online S. H&r online resident if you were a lawful permanent resident of the United States at any time during the calendar year. H&r online This is known as the green card test because resident aliens hold immigrant visas (also known as green cards). H&r online Substantial presence test. H&r online You are considered a U. H&r online S. H&r online resident if you meet the substantial presence test for the calendar year. H&r online To meet this test, you must be physically present in the United States on at least: 31 days during the current calendar year, and A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. H&r online Example. H&r online You were physically present in the United States on 120 days in each of the years 2011, 2012, and 2013. H&r online To determine if you meet the substantial presence test for 2013, count the full 120 days of presence in 2013, 40 days in 2012 (1/3 of 120), and 20 days in 2011 (1/6 of 120). H&r online Because the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2013. H&r online   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. H&r online Filing information. H&r online    Chapter 1 contains general filing information, such as: Whether you must file a U. H&r online S. H&r online tax return, When and where to file your return, How to report your income if it is paid in foreign currency, How to treat a nonresident alien spouse as a U. H&r online S. H&r online resident, and Whether you must pay estimated tax. H&r online Withholding tax. H&r online    Chapter 2 discusses the withholding of income, social security, and Medicare taxes from the pay of U. H&r online S. H&r online citizens and resident aliens. H&r online Self-employment tax. H&r online    Chapter 3 discusses who must pay self-employment tax. H&r online Foreign earned income exclusion and housing exclusion and deduction. H&r online    Chapter 4 discusses income tax benefits that apply if you meet certain requirements while living abroad. H&r online You may qualify to treat up to $97,600 of your income as not taxable by the United States. H&r online You also may be able to either deduct part of your housing expenses from your income or treat a limited amount of income used for housing expenses as not taxable by the United States. H&r online These benefits are called the foreign earned income exclusion and the foreign housing deduction and exclusion. H&r online   To qualify for either of the exclusions or the deduction, you must have a tax home in a foreign country and earn income from personal services performed in a foreign country. H&r online These rules are explained in chapter 4. H&r online   If you are going to exclude or deduct your income as discussed above, you must file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion. H&r online Exemptions, deductions, and credits. H&r online    Chapter 5 discusses exemptions, deductions, and credits you may be able to claim on your return. H&r online These are generally the same as if you were living in the United States. H&r online However, if you choose to exclude foreign earned income or housing amounts, you cannot deduct or exclude any item or take a credit for any item that is related to the amounts you exclude. H&r online Among the topics discussed in chapter 5 are: Exemptions, Contributions to foreign organizations, Foreign moving expenses, Contributions to individual retirement arrangements (IRAs), and Foreign taxes. H&r online Tax treaty benefits. H&r online    Chapter 6 discusses some benefits that are common to most tax treaties and explains how to get help if you think you are not receiving a treaty benefit to which you are entitled. H&r online It also explains how to get copies of tax treaties. H&r online How to get tax help. H&r online    Chapter 7 is an explanation of how to get information and assistance from the IRS. H&r online Questions and answers. H&r online   Frequently asked questions and answers to those questions are presented in the back of the publication. H&r online Comments and suggestions. H&r online   We welcome your comments about this publication and your suggestions for future editions. H&r online   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. H&r online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. H&r online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. H&r online   You can send us comments from www. H&r online irs. H&r online gov/formspubs/. H&r online Click on “More Information” and then on “Comment on Tax Forms and Publications. H&r online ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. H&r online Ordering forms and publications. H&r online   Visit www. H&r online irs. H&r online gov/formspubs/ to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. H&r online Internal Revenue Service 1201 N. H&r online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. H&r online   If you have a tax question, check the information available on IRS. H&r online gov or call 1-800-TAX–FORM (1-800-829-1040). H&r online We cannot answer tax questions sent to either of the above addresses. H&r online Prev  Up  Next   Home   More Online Publications
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H&r online 2. H&r online   Tax Shelters and Other Reportable Transactions Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Abusive Tax SheltersRules To Curb Abusive Tax Shelters Investor Reporting Penalties Whether To Invest Introduction Investments that yield tax benefits are sometimes called “tax shelters. H&r online ” In some cases, Congress has concluded that the loss of revenue is an acceptable side effect of special tax provisions designed to encourage taxpayers to make certain types of investments. H&r online In many cases, however, losses from tax shelters produce little or no benefit to society, or the tax benefits are exaggerated beyond those intended. H&r online Those cases are called “abusive tax shelters. H&r online ” An investment that is considered a tax shelter is subject to restrictions, including the requirement that it be disclosed, as discussed later. H&r online Topics - This chapter discusses: Abusive Tax Shelters , Rules To Curb Abusive Tax Shelters , Investor Reporting , Penalties , and Whether To Invest . H&r online Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 556 Examination of Returns, Appeal Rights, and Claims for Refund 561 Determining the Value of Donated Property 925 Passive Activity and At-Risk Rules Form (and Instructions) 8275 Disclosure Statement 8275-R Regulation Disclosure Statement 8283 Noncash Charitable Contributions 8886 Reportable Transaction Disclosure Statement See chapter 5, How To Get Tax Help , for information about getting these publications and forms. H&r online Abusive Tax Shelters Abusive tax shelters are marketing schemes involving artificial transactions with little or no economic reality. H&r online They often make use of unrealistic allocations, inflated appraisals, losses in connection with nonrecourse loans, mismatching of income and deductions, financing techniques that do not conform to standard commercial business practices, or mischaracterization of the substance of the transaction. H&r online Despite appearances to the contrary, the taxpayer generally risks little. H&r online Abusive tax shelters commonly involve package deals designed from the start to generate losses, deductions, or credits that will be far more than present or future investment. H&r online Or, they may promise investors from the start that future inflated appraisals will enable them, for example, to reap charitable contribution deductions based on those appraisals. H&r online (But see the appraisal requirements discussed under Rules To Curb Abusive Tax Shelters , later. H&r online ) They are commonly marketed in terms of the ratio of tax deductions allegedly available to each dollar invested. H&r online This ratio (or “write-off”) is frequently said to be several times greater than one-to-one. H&r online Because there are many abusive tax shelters, it is not possible to list all the factors you should consider in determining whether an offering is an abusive tax shelter. H&r online However, you should ask the following questions, which might provide a clue to the abusive nature of the plan. H&r online Do the tax benefits far outweigh the economic benefits? Is this a transaction you would seriously consider, apart from the tax benefits, if you hoped to make a profit? Do shelter assets really exist and, if so, are they insured for less than their purchase price? Is there a nontax justification for the way profits and losses are allocated to partners? Do the facts and supporting documents make economic sense? In that connection, are there sales and resales of the tax shelter property at ever increasing prices? Does the investment plan involve a gimmick, device, or sham to hide the economic reality of the transaction? Does the promoter offer to backdate documents after the close of the year? Are you instructed to backdate checks covering your investment? Is your debt a real debt or are you assured by the promoter that you will never have to pay it? Does this transaction involve laundering United States source income through foreign corporations incorporated in a tax haven and owned by United States shareholders? Rules To Curb Abusive Tax Shelters Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters. H&r online These provisions include the following. H&r online Disclosure of reportable transactions. H&r online   You must disclose information for each reportable transaction in which you participate. H&r online See Reportable Transaction Disclosure Statement , later. H&r online   Material advisors with respect to any reportable transaction must disclose information about the transaction on Form 8918, Material Advisor Disclosure Statement. H&r online To determine whether you are a material advisor to a transaction, see the Instructions for Form 8918. H&r online   Material advisors will receive a reportable transaction number for the disclosed reportable transaction. H&r online They must provide this number to all persons to whom they acted as a material advisor. H&r online They must provide the number at the time the transaction is entered into. H&r online If they do not have the number at that time, they must provide it within 60 days from the date the number is mailed to them. H&r online For information on penalties for failure to disclose and failure to maintain lists, see Internal Revenue Code sections 6707, 6707A, and 6708. H&r online Requirement to maintain list. H&r online   Material advisors must maintain a list of persons to whom they provide material aid, assistance, or advice on any reportable transaction. H&r online The list must be available for inspection by the IRS, and the information required to be included on the list generally must be kept for 7 years. H&r online See Regulations section 301. H&r online 6112-1 for more information (including what information is required to be included on the list). H&r online Confidentiality privilege. H&r online   The confidentiality privilege between you and a federally authorized tax practitioner does not apply to written communications made after October 21, 2004, regarding the promotion of your direct or indirect participation in any tax shelter. H&r online Appraisal requirement for donated property. H&r online   If you claim a deduction of more than $5,000 for an item or group of similar items of donated property, you generally must get a qualified appraisal from a qualified appraiser and complete and attach section B of Form 8283 to your return. H&r online If you claim a deduction of more than $500,000 for the donated property, you generally must attach the qualified appraisal to your return. H&r online If you file electronically, see Form 8453, U. H&r online S. H&r online Individual Income Tax Transmittal for an IRS e-file Return, and its instructions. H&r online For more information about appraisals, including exceptions, see Publication 561. H&r online Passive activity loss and credit limits. H&r online   The passive activity loss and credit rules limit the amount of losses and credits that can be claimed from passive activities and limit the amount that can offset nonpassive income, such as certain portfolio income from investments. H&r online For more detailed information about determining and reporting income, losses, and credits from passive activities, see Publication 925. H&r online Interest on penalties. H&r online   If you are assessed an accuracy-related or civil fraud penalty (as discussed under Penalties , later), interest will be imposed on the amount of the penalty from the due date of the return (including any extensions) to the date you pay the penalty. H&r online Accounting method restriction. H&r online   Tax shelters generally cannot use the cash method of accounting. H&r online Uniform capitalization rules. H&r online   The uniform capitalization rules generally apply to producing property or acquiring it for resale. H&r online Under those rules, the direct cost and part of the indirect cost of the property must be capitalized or included in inventory. H&r online For more information, see Publication 538. H&r online Denial of deduction for interest on an underpayment due to a reportable transaction. H&r online   You cannot deduct any interest you paid or accrued on any part of an underpayment of tax due to an understatement arising from a reportable transaction (discussed later) if the relevant facts affecting the tax treatment of the item are not adequately disclosed. H&r online This rule applies to reportable transactions entered into in tax years beginning after October 22, 2004. H&r online Authority for Disallowance of Tax Benefits The IRS has published guidance concluding that the claimed tax benefits of various abusive tax shelters should be disallowed. H&r online The guidance is the conclusion of the IRS on how the law is applied to a particular set of facts. H&r online Guidance is published in the Internal Revenue Bulletin for taxpayers' information and also for use by IRS officials. H&r online So, if your return is examined and an abusive tax shelter is identified and challenged, published guidance dealing with that type of shelter, which disallows certain claimed tax shelter benefits, could serve as the basis for the examining official's challenge of the tax benefits you claimed. H&r online In such a case, the examiner will not compromise even if you or your representative believes you have authority for the positions taken on your tax return. H&r online The courts have generally been unsympathetic to taxpayers involved in abusive tax shelter schemes and have ruled in favor of the IRS in the majority of the cases in which these shelters have been challenged. H&r online Investor Reporting You may be required to file a reportable transaction disclosure statement. H&r online Reportable Transaction Disclosure Statement Use Form 8886 to disclose information for each reportable transaction (discussed later) in which you participated. H&r online Generally, you must attach Form 8886 to your return for each tax year in which you participated in the transaction. H&r online Under certain circumstances, a transaction must be disclosed within 90 days of the transaction being identified as a listed transaction or a transaction of interest (discussed later). H&r online In addition, for the first year Form 8886 is attached to your return, you must send a copy of the form to: Internal Revenue Service OTSA Mail Stop 4915 1973 North Rulon White Blvd. H&r online  Ogden, UT 84404 If you file your return electronically, the copy sent to OTSA must show exactly the same information, word for word, provided with the electronically filed return and it must be provided on the official IRS Form 8886 or an exact copy of the form. H&r online If you use a computer-generated or substitute Form 8886, it must be an exact copy of the official IRS form. H&r online If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. H&r online See Penalty for failure to disclose a reportable transaction , later under Penalties. H&r online The following discussion briefly describes reportable transactions. H&r online For more details, see the Instructions for Form 8886. H&r online Reportable transaction. H&r online   A reportable transaction is any of the following. H&r online A listed transaction. H&r online A confidential transaction. H&r online A transaction with contractual protection. H&r online A loss transaction. H&r online A transaction of interest entered into after November 1, 2006. H&r online Note. H&r online Transactions with a brief asset holding period were removed from the definition of reportable transaction for transactions entered into after August 2, 2007. H&r online Listed transaction. H&r online   A listed transaction is the same as, or substantially similar to, one of the types of transactions the IRS has determined to be a tax-avoidance transaction. H&r online These transactions have been identified in notices, regulations, and other published guidance issued by the IRS. H&r online For a list of existing guidance, see Notice 2009-59 in Internal Revenue Bulletin 2009-31, available at www. H&r online irs. H&r online gov/irb/2009-31_IRB/ar07. H&r online html. H&r online Confidential transaction. H&r online   A confidential transaction is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. H&r online A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on your disclosure of the tax treatment or tax structure of the transaction and the limit protects the confidentiality of the advisor's tax strategies. H&r online The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you. H&r online Transaction with contractual protection. H&r online   Generally, a transaction with contractual protection is one in which you or a related party has the right to a full or partial refund of fees if all or part of the intended tax consequences of the transaction are not sustained, or a transaction for which the fees are contingent on your realizing the tax benefits from the transaction. H&r online For information on exceptions, see Revenue Procedure 2007-20 in Internal Revenue Bulletin 2007-7, available at www. H&r online irs. H&r online gov/irb/2007-07_IRB/ar15. H&r online html. H&r online Loss transaction. H&r online   For individuals, a loss transaction is one that results in a deductible loss if the gross amount of the loss is at least $2 million in a single tax year or $4 million in any combination of tax years. H&r online A loss from a foreign currency transaction under Internal Revenue Code section 988 is a loss transaction if the gross amount of the loss is at least $50,000 in a single tax year, whether or not the loss flows through from an S corporation or partnership. H&r online   Certain losses (such as losses from casualties, thefts, and condemnations) are excepted from this category and do not have to be reported on Form 8886. H&r online For information on other exceptions, see Revenue Procedure 2004-66 in Internal Revenue Bulletin 2004-50, as modified and superseded by Revenue Procedure 2013-11, (or future published guidance) available at www. H&r online irs. H&r online gov/irb/2004-50_IRB/ar11. H&r online html. H&r online Transaction of interest. H&r online   A transaction of interest is a transaction entered into after November 1, 2006, that is the same as, or substantially similar to, one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest. H&r online The IRS has identified the following transactions of interest. H&r online “Toggling” grantor trusts as described in Notice 2007-73, 2007-36 I. H&r online R. H&r online B. H&r online 545, available at www. H&r online irs. H&r online gov/irb/2007-36_IRB/ar20. H&r online html. H&r online Certain transactions involving contributions of a successor member interest in a limited liability company as described in Notice 2007-72, 2007-36 I. H&r online R. H&r online B. H&r online 544, available at www. H&r online irs. H&r online gov/irb/2007-36_IRB/ar19. H&r online html. H&r online Certain transactions involving the sale or other disposition of all interests in a charitable remainder trust and claiming little or no taxable gain as described in Notice 2008-99, 2008-47 I. H&r online R. H&r online B. H&r online 1194, available at www. H&r online irs. H&r online gov/irb/2008-47_IRB/ar11. H&r online html. H&r online Certain transactions involving a U. H&r online S. H&r online taxpayer owning controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership to avoid reporting income as described in Notice 2009-7, 2009-3 I. H&r online R. H&r online B. H&r online 312, available at www. H&r online irs. H&r online gov/irb/2009-03_IRB/ar10. H&r online html. H&r online   For updates to this list, go to www. H&r online irs. H&r online gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions. H&r online Penalties Investing in an abusive tax shelter may lead to substantial expenses. H&r online First, the promoter generally charges a substantial fee. H&r online If your return is examined by the IRS and a tax deficiency is determined, you will be faced with payment of more tax, interest on the underpayment, possibly a 20%, 30%, or even 40% accuracy-related penalty, or a 75% civil fraud penalty. H&r online You may also be subject to the penalty for failure to pay tax. H&r online These penalties are explained in the following paragraphs. H&r online Accuracy-related penalties. H&r online   An accuracy-related penalty of 20% can be imposed for underpayments of tax due to: Negligence or disregard of rules or regulations, Substantial understatement of tax, Substantial valuation misstatement (increased to 40% for gross valuation misstatement), Transaction lacking economic substance (increased to 40% for undisclosed transaction lacking economic substance), or Undisclosed foreign financial asset understatement (40% in all cases). H&r online Except for a transaction lacking economic substance, this penalty will not be imposed if you can show you had reasonable cause for any understatement of tax and that you acted in good faith. H&r online Your failure to disclose a reportable transaction is a strong indication that you failed to act in good faith. H&r online   If you are charged an accuracy-related penalty, interest will be imposed on the amount of the penalty from the due date of the return (including extensions) to the date you pay the penalty. H&r online   The 20% penalties do not apply to any underpayment attributable to a reportable transaction understatement subject to an accuracy-related penalty (discussed later). H&r online Negligence or disregard of rules or regulations. H&r online   The penalty for negligence or disregard of rules or regulations is imposed only on the part of the underpayment due to negligence or disregard of rules or regulations. H&r online The penalty will not be charged if you can show you had reasonable cause for understating your tax and that you acted in good faith. H&r online    Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. H&r online It also includes any failure to keep adequate books and records. H&r online A return position that has a reasonable basis is not negligence. H&r online   Disregard includes any careless, reckless, or intentional disregard of rules or regulations. H&r online   The penalty for disregard of rules and regulations can be avoided if all the following are true. H&r online You keep adequate books and records. H&r online You have a reasonable basis for your position on the tax issue. H&r online You make an adequate disclosure of your position. H&r online Use Form 8275 to make your disclosure and attach it to your return. H&r online To disclose a position contrary to a regulation, use Form 8275-R. H&r online Use Form 8886 to disclose a reportable transaction (discussed earlier). H&r online Substantial understatement of tax. H&r online   An understatement is considered to be substantial if it is more than the greater of: 10% of the tax required to be shown on the return, or $5,000. H&r online An “understatement” is the amount of tax required to be shown on your return for a tax year minus the amount of tax shown on the return, reduced by any rebates. H&r online The term “rebate” generally means a decrease in the tax shown on your original return as the result of your filing an amended return or claim for refund. H&r online   For items other than tax shelters, you can file Form 8275 or Form 8275-R to disclose items that could cause a substantial understatement of income tax. H&r online In that way, you can avoid the substantial understatement penalty if you have a reasonable basis for your position on the tax issue. H&r online Disclosure of the tax shelter item on a tax return does not reduce the amount of the understatement. H&r online   Also, the understatement penalty will not be imposed if you can show there was reasonable cause for the underpayment caused by the understatement and that you acted in good faith. H&r online An important factor in establishing reasonable cause and good faith will be the extent of your effort to determine your proper tax liability under the law. H&r online Substantial valuation misstatement. H&r online   In general, you are liable for a 20% penalty for a substantial valuation misstatement if all the following are true. H&r online The value or adjusted basis of any property claimed on the return is 150% or more of the correct amount. H&r online You underpaid your tax by more than $5,000 because of the misstatement. H&r online You cannot establish that you had reasonable cause for the underpayment and that you acted in good faith. H&r online   You may be assessed a penalty of 40% for a gross valuation misstatement. H&r online If you misstate the value or the adjusted basis of property by 200% or more of the amount determined to be correct, you will be assessed a penalty of 40%, instead of 20%, of the amount you underpaid because of the gross valuation misstatement. H&r online The penalty rate is also 40% if the property's correct value or adjusted basis is zero. H&r online Transaction lacking economic substance. H&r online   The economic substance doctrine only applies to an individual that entered into a transaction in connection with a trade or business or an activity engaged in for the production of income. H&r online For transactions entered into after March 30, 2010, a transaction has economic substance for you as an individual taxpayer only if: The transaction changes your economic position in a meaningful way (apart from federal income tax effects), or You have a substantial purpose (apart from federal income tax effects) for entering into the transaction. H&r online   For purposes of determining whether economic substance exists, a transaction's profit potential will only be taken into account if the present value of the reasonably expected pre-tax profit from the transaction is substantial compared to the present value of the expected net tax benefits that would be allowed if the transaction were respected. H&r online   If any part of your underpayment is due to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance or failing to meet the requirements of any similar rule of law, that part of your underpayment will be subject to the 20% accuracy-related penalty even if you had a reasonable cause and acted in good faith concerning that part. H&r online   Additionally, the penalty increases to 40% if you do not adequately disclose on your return or in a statement attached to your return the relevant facts affecting the tax treatment of a transaction that lacks economic substance. H&r online Relevant facts include any facts affecting the tax treatment of the transaction. H&r online    Any excessive amount of an erroneous claim for an income tax refund or credit (other than a refund or credit related to the earned income credit) that results from a transaction found to be lacking economic substance will not be treated as having a reasonable basis and could be subject to a 20% penalty. H&r online Undisclosed foreign financial asset understatement. H&r online   For tax years beginning after March 18, 2010, you may be liable for a 40% penalty for an understatement of your tax liability due to an undisclosed foreign financial asset. H&r online An undisclosed foreign financial asset is any asset for which an information return, required to be provided under Internal Revenue Code section 6038, 6038B, 6038D, 6046A, or 6048 for any taxable year, is not provided. H&r online The penalty applies to any part of an underpayment related to the following undisclosed foreign financial assets. H&r online Any foreign business you control, reportable on Form 5471, Information Return of U. H&r online S. H&r online Persons With Respect To Certain Foreign Corporations, or Form 8865, Return of U. H&r online S. H&r online Persons With Respect to Certain Foreign Partnerships. H&r online Certain transfers of property to a foreign corporation or partnership, reportable on Form 926, Return by a U. H&r online S. H&r online Transferor of Property to a Foreign Corporation, or certain distributions to a foreign person, reportable on Form 8865. H&r online Your ownership interest in certain foreign financial assets, temporarily reportable on Form 8275 or 8275-R. H&r online    Instead of, or in addition to, Form 8275 or 8275-R, you may have to file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return. H&r online See the Instructions for Form 8938 for details. H&r online    Your acquisition, disposition, or substantial change in ownership interest in a foreign partnership, reportable on Form 8865. H&r online Creation or transfer of money or property to certain foreign trusts, reportable on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. H&r online Penalty for incorrect appraisals. H&r online   The person who prepares an appraisal of the value of property may have to pay a penalty if: He or she knows, or reasonably should have known, that the appraisal would be used in connection with a return or claim for refund; and The claimed value of the property on a return or claim for refund based on that appraisal results in a substantial valuation misstatement or a gross valuation misstatement as discussed earlier. H&r online For details on the penalty amount and exceptions, see Publication 561. H&r online Penalty for failure to disclose a reportable transaction. H&r online   If you fail to include any required information regarding a reportable transaction (discussed earlier) on a return or statement, you may have to pay a penalty of 75% of the decrease in tax shown on your return as a result of such transaction (or that would have resulted if the transaction were respected for federal tax purposes). H&r online For an individual, the minimum penalty is $5,000 and the maximum is $10,000 (or $100,000 for a listed transaction). H&r online This penalty is in addition to any other penalty that may be imposed. H&r online   The IRS may rescind or abate the penalty for failing to disclose a reportable transaction under certain limited circumstances but cannot rescind the penalty for failing to disclose a listed transaction. H&r online For information on rescission, see Revenue Procedure 2007-21 in Internal Revenue Bulletin 2007-9 available at www. H&r online irs. H&r online gov/irb/2007-09_IRB/ar12. H&r online html. H&r online Accuracy-related penalty for a reportable transaction understatement. H&r online   If you have a reportable transaction understatement, you may have to pay a penalty equal to 20% of the amount of that understatement. H&r online This applies to any item due to a listed transaction or other reportable transaction with a significant purpose of avoiding or evading federal income tax. H&r online The penalty is 30% rather than 20% for the part of any reportable transaction understatement if the transaction was not properly disclosed. H&r online You may not have to pay the 20% penalty if you meet the strengthened reasonable cause and good faith exception. H&r online The reasonable cause and good faith exception does not apply to any part of a reportable transaction understatement attributable to one or more transactions that lack economic substance. H&r online   This penalty does not apply to the part of an understatement on which the fraud penalty, gross valuation misstatement penalty, or penalty for nondisclosure of noneconomic substance transactions is imposed. H&r online Civil fraud penalty. H&r online   If any underpayment of tax on your return is due to fraud, a penalty of 75% of the underpayment will be added to your tax. H&r online Joint return. H&r online   The fraud penalty on a joint return applies to a spouse only if some part of the underpayment is due to the fraud of that spouse. H&r online Failure to pay tax. H&r online   If a deficiency is assessed and is not paid within 10 days of the demand for payment, an investor can be penalized with up to a 25% addition to tax if the failure to pay continues. H&r online Whether To Invest In light of the adverse tax consequences and the substantial amount of penalties and interest that will result if the claimed tax benefits are disallowed, you should consider tax shelter investments carefully and seek competent legal and financial advice. H&r online Prev  Up  Next   Home   More Online Publications