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Irsgov com 1. Irsgov com   Bona Fide Residence Table of Contents Presence TestDays of Presence in the United States or Relevant Possession Significant Connection Tax HomeExceptions Closer ConnectionException for Year of Move Special Rules in the Year of a MoveYear of Moving to a Possession Year of Moving From a Possession Reporting a Change in Bona Fide ResidenceWho Must File Penalty for Not Filing Form 8898 In order to qualify for certain tax benefits (see chapter 3), you must be a bona fide resident of American Samoa, the CNMI, Guam, Puerto Rico, or the USVI for the entire tax year. Irsgov com Generally, you are a bona fide resident of one of these possessions (the relevant possession) if, during the tax year, you: Meet the presence test, Do not have a tax home outside the relevant possession, and Do not have a closer connection to the United States or to a foreign country than to the relevant possession. Irsgov com Special rule for members of the U. Irsgov com S. Irsgov com Armed Forces. Irsgov com   If you are a member of the U. Irsgov com S. Irsgov com Armed Forces who qualified as a bona fide resident of the relevant possession in an earlier tax year, your absence from that possession during the current tax year in compliance with military orders will not affect your status as a bona fide resident. Irsgov com Likewise, being in a possession solely in compliance with military orders will not qualify you for bona fide residency. Irsgov com Also see the special income source rule for members of the U. Irsgov com S. Irsgov com Armed Forces in chapter 2, under Compensation for Labor or Personal Services . Irsgov com Special rule for civilian spouse of active duty member of the U. Irsgov com S. Irsgov com Armed Forces. Irsgov com   If you are the civilian spouse of an active duty servicemember, under Military Spouses Residency Relief Act (MSRRA) you can choose to keep your prior residence or domicile for tax purposes (tax residence) when accompanying the servicemember spouse, who is relocating under military orders, to a new military duty station in one of the 50 states, the District of Columbia, or a U. Irsgov com S. Irsgov com possession. Irsgov com Before relocating, you and your spouse must have the same tax residence. Irsgov com If you are a civilian spouse and choose to keep your prior tax residence after such relocation, the source of income for services performed (for example, wages, salaries, tips, or self-employment) by you is considered to be (the jurisdiction of) the prior tax residence. Irsgov com As a result, the amount of income tax withholding (from Form(s) W-2, Wage and Tax Statement) that you are able to claim on your federal return, as well as the need to file a state or U. Irsgov com S. Irsgov com possession return, may be affected. Irsgov com For more information, consult with state, local, or U. Irsgov com S. Irsgov com possession tax authorities regarding your tax obligations under MSRRA. Irsgov com Presence Test If you are a U. Irsgov com S. Irsgov com citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions. Irsgov com You were present in the relevant possession for at least 183 days during the tax year. Irsgov com You were present in the relevant possession for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. Irsgov com During each year of the 3-year period, you must be present in the relevant possession for at least 60 days. Irsgov com You were present in the United States for no more than 90 days during the tax year. Irsgov com You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant possession than in the United States during the tax year. Irsgov com Earned income is pay for personal services performed, such as wages, salaries, or professional fees. Irsgov com You had no significant connection to the United States during the tax year. Irsgov com Special rule for nonresident aliens. Irsgov com   Conditions (1) through (5) above do not apply to nonresident aliens of the United States. Irsgov com Instead, nonresident aliens must meet the substantial presence test discussed in chapter 1 of Publication 519. Irsgov com In that discussion, substitute the name of the possession for “United States” and “U. Irsgov com S. Irsgov com ” wherever they appear. Irsgov com Disregard the discussion in that chapter about a Closer Connection to a Foreign Country. Irsgov com Days of Presence in the United States or Relevant Possession Generally, you are treated as being present in the United States or in the relevant possession on any day that you are physically present in that location at any time during the day. Irsgov com Days of presence in a possession. Irsgov com   You are considered to be present in the relevant possession on any of the following days. Irsgov com Any day you are physically present in that possession at any time during the day. Irsgov com Any day you are outside of the relevant possession in order to receive, or to accompany any of the following family members to receive, qualifying medical treatment (see Qualifying Medical Treatment , later). Irsgov com Your parent. Irsgov com Your spouse. Irsgov com Your child, who is your son, daughter, stepson, or stepdaughter. Irsgov com This includes an adopted child or child lawfully placed with you for legal adoption. Irsgov com This also includes a foster child who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Irsgov com Any day you are outside the relevant possession because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. Irsgov com   If, during a single day, you are physically present: In the United States and in the relevant possession, that day is considered a day of presence in the relevant possession; or In two possessions, that day is considered a day of presence in the possession where your tax home is located (see Tax Home , later). Irsgov com Days of presence in the United States. Irsgov com   You are considered to be present in the United States on any day that you are physically present in the United States at any time during the day. Irsgov com However, do not count the following days as days of presence in the United States. Irsgov com Any day you are temporarily present in the United States in order to receive, or to accompany a parent, spouse, or child who is receiving, qualifying medical treatment. Irsgov com “Child” is defined under item 2c earlier. Irsgov com “Qualifying medical treatment” is defined later. Irsgov com Any day you are temporarily present in the United States because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. Irsgov com Any day you are in the United States for less than 24 hours when you are traveling between two places outside the United States. Irsgov com Any day you are temporarily present in the United States as a professional athlete to compete in a charitable sports event (defined later). Irsgov com Any day you are temporarily in the United States as a student (defined later). Irsgov com Any day you are in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). Irsgov com Qualifying Medical Treatment Such treatment is generally provided by (or under the supervision of) a physician for an illness, injury, impairment, or physical or mental condition. Irsgov com The treatment generally involves: Any period of inpatient care that requires an overnight stay in a hospital or hospice, and any period immediately before or after that inpatient care to the extent it is medically necessary, or Any temporary period of inpatient care in a residential medical care facility for medically necessary rehabilitation services. Irsgov com With respect to each qualifying medical treatment, you must prepare (or obtain) and maintain documentation supporting your claim that such treatment meets the criteria to be considered days of presence in the relevant possession. Irsgov com You must be able to produce this documentation within 30 days if requested by the IRS or tax administrator for the relevant possession. Irsgov com You must keep the following documentation. Irsgov com Records that provide: The patient's name and relationship to you (if the medical treatment is provided to a person you accompany); The name and address of the hospital, hospice, or residential medical care facility where the medical treatment was provided; The name, address, and telephone number of the physician who provided the medical treatment; The date(s) on which the medical treatment was provided; and Receipt(s) of payment for the medical treatment. Irsgov com Signed certification by the providing or supervising physician that the medical treatment met the requirements for being qualified medical treatment, and setting forth: The patient's name, A reasonably detailed description of the medical treatment provided by (or under the supervision of) the physician, The dates on which the medical treatment was provided, and The medical facts that support the physician's certification and determination that the treatment was medically necessary. Irsgov com Charitable Sports Event A charitable sports event is one that meets all of the following conditions. Irsgov com The main purpose is to benefit a qualified charitable organization. Irsgov com The entire net proceeds go to charity. Irsgov com Volunteers perform substantially all the work. Irsgov com In figuring the days of presence in the United States, you can exclude only the days on which you actually competed in the charitable sports event. Irsgov com You cannot exclude the days on which you were in the United States to practice for the event, to perform promotional or other activities related to the event, or to travel between events. Irsgov com Student To qualify as a student, you must be, during some part of each of any 5 calendar months during the calendar year: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by a school described in (1) above or by a state, county, or local government agency. Irsgov com The 5 calendar months do not have to be consecutive. Irsgov com Full-time student. Irsgov com   A full-time student is a person who is enrolled for the number of hours or courses the school considers to be full-time attendance. Irsgov com However, school attendance exclusively at night is not considered full-time attendance. Irsgov com School. Irsgov com   The term “school” includes elementary schools, middle schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. Irsgov com It does not include on-the-job training courses, correspondence schools, and schools offering courses only through the Internet. Irsgov com Significant Connection One way in which you can meet the presence test is to have no significant connection to the United States during the tax year. Irsgov com This section looks at the factors that determine if a significant connection exists. Irsgov com You are treated as having a significant connection to the United States if you: Have a permanent home in the United States, Are currently registered to vote in any political subdivision of the United States, or Have a spouse or child (see item 2c under Days of presence in a possession , earlier) who is under age 18 whose main home is in the United States, other than: A child who is in the United States because he or she is the child of divorced or legally separated parents and is living with a custodial parent under a custodial decree or multiple support agreement, or A child who is in the United States as a student. Irsgov com For the purpose of determining if you have a significant connection to the United States, the term “spouse” does not include a spouse from whom you are legally separated under a decree of divorce or separate maintenance. Irsgov com Permanent home. Irsgov com   A permanent home generally includes an accommodation such as a house, an apartment, or a furnished room that is either owned or rented by you or your spouse. Irsgov com The dwelling unit must be available at all times, continuously, not only for short stays. Irsgov com Exception for rental property. Irsgov com   If you or your spouse own the dwelling unit and at any time during the tax year it is rented to someone else at fair rental value, it will be considered your permanent home only if you or your spouse use that property for personal purposes for more than the greater of: 14 days, or 10% of the number of days during that tax year that the property is rented to others at a fair rental value. Irsgov com   You are treated as using rental property for personal purposes on any day the property is not being rented to someone else at fair rental value for the entire day. Irsgov com   A day of personal use of a dwelling unit is also any day that the unit is used by any of the following persons. Irsgov com You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement. Irsgov com A member of your family or a member of the family of any other person who has an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Irsgov com Family includes only brothers and sisters, half-brothers and half-sisters, spouses, ancestors (parents, grandparents, etc. Irsgov com ), and lineal descendants (children, grandchildren, etc. Irsgov com ). Irsgov com Anyone under an arrangement that lets you use some other dwelling unit. Irsgov com Anyone at less than a fair rental price. Irsgov com   However, any day you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Irsgov com Whether your property is used mainly for this purpose is determined in light of all the facts and circumstances, such as: The amount of time you devote to repair and maintenance work, How often during the tax year you perform repair and maintenance work on this property, and The presence and activities of companions. Irsgov com   See Publication 527, Residential Rental Property, for more information about personal use of a dwelling unit. Irsgov com Example—significant connection. Irsgov com Ann Green, a U. Irsgov com S. Irsgov com citizen, is a sales representative for a company based in Guam. Irsgov com Ann lives with her spouse and young children in their house in Guam, where she is also registered to vote. Irsgov com Her business travel requires her to spend 120 days in the United States and another 120 days in foreign countries. Irsgov com When traveling on business, Ann generally stays at hotels but sometimes stays with her brother, who lives in the United States. Irsgov com Ann's stays are always of short duration and she asks her brother's permission to stay with him. Irsgov com Her brother's house is not her permanent home, nor does she have any other accommodations in the United States that would be considered her permanent home. Irsgov com Ann satisfies the presence test because she has no significant connection to the United States. Irsgov com Example—presence test. Irsgov com Eric and Wanda Brown live for part of the year in a condominium, which they own, in the CNMI. Irsgov com They also own a house in Maine where they live for 120 days every year to be near their grown children and grandchildren. Irsgov com The Browns are retired and their only income is from pension payments, dividends, interest, and social security benefits. Irsgov com In 2013, they spent only 175 days in the CNMI because of a 70-day vacation to Europe and Asia. Irsgov com Thus, in 2013, the Browns were not present in the CNMI for at least 183 days, were present in the United States for more than 90 days, and had a significant connection to the United States because of their permanent home. Irsgov com However, the Browns still satisfied the presence test with respect to the CNMI because they had no earned income in the United States and were physically present for more days in the CNMI than in the United States. Irsgov com Tax Home You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year. Irsgov com Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. Irsgov com If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Irsgov com If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Irsgov com Exceptions There are some special rules regarding tax home that provide exceptions to the general rule stated above. Irsgov com Students and Government Officials Disregard the following days when determining whether you have a tax home outside the relevant possession. Irsgov com Days you were temporarily in the United States as a student (see Student under Days of Presence in the United States or Relevant Possession, earlier). Irsgov com Days you were in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). Irsgov com Seafarers You will not be considered to have a tax home outside the relevant possession solely because you are employed on a ship or other seafaring vessel that is predominantly used in local and international waters. Irsgov com For this purpose, a vessel is considered to be predominantly used in local and international waters if, during the tax year, the total amount of time it is used in international waters and in the waters within 3 miles of the relevant possession exceeds the total amount of time it is used in the territorial waters of the United States, another possession, or any foreign country. Irsgov com Example. Irsgov com In 2013, Sean Silverman, a U. Irsgov com S. Irsgov com citizen, was employed by a fishery and spent 250 days at sea on a fishing vessel. Irsgov com When not at sea, Sean lived with his spouse at a house they own in American Samoa. Irsgov com The fishing vessel on which Sean works departs and arrives at various ports in American Samoa, other possessions, and foreign countries, but was in international or American Samoa's local waters for 225 days. Irsgov com For purposes of determining bona fide residency of American Samoa, Sean will not be considered to have a tax home outside that possession solely because of his employment on board the fishing vessel. Irsgov com Year of Move If you are moving to or from a possession during the year, you may still be able to meet the tax home test for that year. Irsgov com See Special Rules in the Year of a Move , later in this chapter. Irsgov com Closer Connection You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U. Irsgov com S. Irsgov com possession. Irsgov com You will be considered to have a closer connection to a possession than to the United States or to a foreign country if you have maintained more significant contacts with the possession(s) than with the United States or foreign country. Irsgov com In determining if you have maintained more significant contacts with the relevant possession, the facts and circumstances to be considered include, but are not limited to, the following. Irsgov com The location of your permanent home. Irsgov com The location of your family. Irsgov com The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family. Irsgov com The location of social, political, cultural, professional, or religious organizations with which you have a current relationship. Irsgov com The location where you conduct your routine personal banking activities. Irsgov com The location where you conduct business activities (other than those that go into determining your tax home). Irsgov com The location of the jurisdiction in which you hold a driver's license. Irsgov com The location of the jurisdiction in which you vote. Irsgov com The location of charitable organizations to which you contribute. Irsgov com The country of residence you designate on forms and documents. Irsgov com The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-9, Request for Taxpayer Identification Number and Certification. Irsgov com Your connections to the relevant possession will be compared to the total of your connections with the United States and foreign countries. Irsgov com Your answers to the questions on Form 8898, Part III, will help establish the jurisdiction to which you have a closer connection. Irsgov com Example—closer connection to the United States. Irsgov com Marcos Reyes, a U. Irsgov com S. Irsgov com citizen, moved to Puerto Rico in 2013 to start an investment consulting and venture capital business. Irsgov com His spouse and two teenage children remained in California to allow the children to complete high school. Irsgov com He traveled back to the United States regularly to see his spouse and children, to engage in business activities, and to take vacations. Irsgov com Marcos had an apartment available for his full-time use in Puerto Rico, but remained a joint owner of the residence in California where his spouse and children lived. Irsgov com Marcos and his family had automobiles and personal belongings such as furniture, clothing, and jewelry located at both residences. Irsgov com Although Marcos was a member of the Puerto Rico Chamber of Commerce, he also belonged to and had current relationships with social, political, cultural, and religious organizations in California. Irsgov com Marcos received mail in California, including bank and brokerage statements and credit card bills. Irsgov com He conducted his personal banking activities in California. Irsgov com He held a California driver's license and was also registered to vote there. Irsgov com Based on all of the particular facts and circumstances pertaining to Marcos, he was not a bona fide resident of Puerto Rico in 2013 because he had a closer connection to the United States than to Puerto Rico. Irsgov com Closer connection to another possession. Irsgov com   Generally, possessions are not treated as foreign countries. Irsgov com Therefore, a closer connection to a possession other than the relevant possession will not be treated as a closer connection to a foreign country. Irsgov com Example—tax home and closer connection to possession. Irsgov com Pearl Blackmon, a U. Irsgov com S. Irsgov com citizen, is a permanent employee of a hotel in Guam, but works only during the tourist season. Irsgov com For the remainder of each year, Pearl lives with her spouse and children in the CNMI, where she has no outside employment. Irsgov com Most of Pearl's personal belongings, including her automobile, are located in the CNMI. Irsgov com She is registered to vote in, and has a driver's license issued by, the CNMI. Irsgov com She does her personal banking in the CNMI and routinely lists her CNMI address as her permanent address on forms and documents. Irsgov com Pearl satisfies the presence test with respect to both Guam and the CNMI. Irsgov com She satisfies the tax home test with respect to Guam, because her regular place of business is in Guam. Irsgov com Pearl satisfies the closer connection test with respect to both Guam and the CNMI, because she does not have a closer connection to the United States or to any foreign country. Irsgov com Pearl is considered a bona fide resident of Guam, the location of her tax home. Irsgov com Exception for Year of Move If you are moving to or from a possession during the year, you may still be able to meet the closer connection test for that year. Irsgov com See Special Rules in the Year of a Move , next. Irsgov com Special Rules in the Year of a Move If you are moving to or from a possession during the year, you may still be able to meet the tax home and closer connection tests for that year. Irsgov com Year of Moving to a Possession You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant possession if you meet all of the following. Irsgov com You have not been a bona fide resident of the relevant possession in any of the 3 tax years immediately preceding your move. Irsgov com In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the last 183 days of the tax year. Irsgov com You are a bona fide resident of the relevant possession for each of the 3 tax years immediately following your move. Irsgov com Example. Irsgov com Dwight Wood, a U. Irsgov com S. Irsgov com citizen, files returns on a calendar year basis. Irsgov com He lived in the United States from January 2007 through May 2013. Irsgov com In June 2013 he moved to the USVI, purchased a house, and accepted a permanent job with a local employer. Irsgov com From July 1 through December 31, 2013 (more than 183 days), Dwight's principal place of business was in the USVI and, during that time, he did not have a closer connection to the United States or a foreign country than to the USVI. Irsgov com If he is a bona fide resident of the USVI during all of 2014 through 2016, he will satisfy the tax home and closer connection tests for 2013. Irsgov com If Dwight also satisfies the presence test in 2013, he will be considered a bona fide resident of the USVI for the entire 2013 tax year. Irsgov com Year of Moving From a Possession In the year you cease to be a bona fide resident of American Samoa, the CNMI, Guam, or the USVI, you will satisfy the tax home and closer connection tests with respect to the relevant possession if you meet all of the following. Irsgov com You have been a bona fide resident of the relevant possession for each of the 3 tax years immediately preceding your change of residence. Irsgov com In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the first 183 days of the tax year. Irsgov com You are not a bona fide resident of the relevant possession for any of the 3 tax years immediately following your move. Irsgov com Example. Irsgov com Jean Aspen, a U. Irsgov com S. Irsgov com citizen, files returns on a calendar year basis. Irsgov com From January 2010 through December 2012, Jean was a bona fide resident of American Samoa. Irsgov com Jean continued to live there until September 6, 2013, when she accepted new employment and moved to Hawaii. Irsgov com Jean's principal place of business from January 1 through September 5, 2013 (more than 183 days), was in American Samoa, and during that period Jean did not have a closer connection to the United States or a foreign country than to American Samoa. Irsgov com If Jean continues to live and work in Hawaii for the rest of 2013 and throughout years 2014 through 2016, she will satisfy the tax home and closer connection tests for 2013 with respect to American Samoa. Irsgov com If Jean also satisfies the presence test in 2013, she will be considered a bona fide resident for the entire 2013 tax year. Irsgov com Puerto Rico You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you: Are a U. Irsgov com S. Irsgov com citizen, Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move, Cease to be a bona fide resident of Puerto Rico during the tax year, Cease to have a tax home in Puerto Rico during the tax year, and Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year preceding the date on which you cease to have a tax home in Puerto Rico. Irsgov com Example. Irsgov com Randy White, a U. Irsgov com S. Irsgov com citizen, files returns on a calendar year basis. Irsgov com For all of 2011 and 2012, Randy was a bona fide resident of Puerto Rico. Irsgov com From January through April 2013, Randy continued to reside and maintain his principal place of business in and closer connection to Puerto Rico. Irsgov com On May 5, 2013, Randy moved and changed his tax home to Nevada. Irsgov com Later that year he established a closer connection to the United States than to Puerto Rico. Irsgov com Randy did not satisfy the presence test for 2013 with respect to Puerto Rico, nor the tax home or closer connection tests. Irsgov com However, because Randy was a bona fide resident of Puerto Rico for at least 2 tax years before he moved to Nevada in 2013, he was a bona fide resident of Puerto Rico from January 1 through May 4, 2013. Irsgov com Reporting a Change in Bona Fide Residence If you became or ceased to be a bona fide resident of a U. Irsgov com S. Irsgov com possession, you may need to file Form 8898. Irsgov com This applies to the U. Irsgov com S. Irsgov com possessions of American Samoa, the CNMI, Guam, Puerto Rico, and the USVI. Irsgov com Who Must File You must file Form 8898 for the tax year in which you meet both of the following conditions. Irsgov com Your worldwide gross income (defined below) in that tax year is more than $75,000. Irsgov com You meet one of the following. Irsgov com You take a position for U. Irsgov com S. Irsgov com tax purposes that you became a bona fide resident of a U. Irsgov com S. Irsgov com possession after a tax year for which you filed a U. Irsgov com S. Irsgov com income tax return as a citizen or resident alien of the United States but not as a bona fide resident of the possession. Irsgov com You are a citizen or resident alien of the United States who takes the position for U. Irsgov com S. Irsgov com tax purposes that you ceased to be a bona fide resident of a U. Irsgov com S. Irsgov com possession after a tax year for which you filed an income tax return (with the IRS, the possession tax authority, or both) as a bona fide resident of the possession. Irsgov com You take the position for U. Irsgov com S. Irsgov com tax purposes that you became a bona fide resident of Puerto Rico or American Samoa after a tax year for which you were required to file an income tax return as a bona fide resident of the CNMI, Guam, or the USVI. Irsgov com Worldwide gross income. Irsgov com   Worldwide gross income means all income you received in the form of money, goods, property, and services, including any income from sources outside the United States (even if you can exclude part or all of it) and before any deductions, credits, or rebates. Irsgov com Example. Irsgov com You are a U. Irsgov com S. Irsgov com citizen who moved to the CNMI in December 2012, but did not become a bona fide resident of that possession until the 2013 tax year. Irsgov com You must file Form 8898 for the 2013 tax year if your worldwide gross income for that year was more than $75,000. Irsgov com Penalty for Not Filing Form 8898 If you are required to file Form 8898 for any tax year and you fail to file it, you may owe a penalty of $1,000. Irsgov com You may also owe this penalty if you do not include all the information required by the form or the form includes incorrect information. Irsgov com In either case, you will not owe this penalty if you can show that such failure is due to reasonable cause and not willful neglect. Irsgov com This is in addition to any criminal penalty that may be imposed. Irsgov com Prev  Up  Next   Home   More Online Publications
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Understanding your CP71A Notice

You received this notice to remind you of the amount you owe in tax, penalty and interest.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

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

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully — it will explain how much money you owe on your taxes.

You may want to...


Answers to Common Questions

Am I charged interest on the money I owe?
Yes, interest accrues on your unpaid balance until you pay it in full.

Do I receive a penalty if I cannot pay the full amount?
Yes, you receive a late payment penalty.

What happens if I cannot pay the full amount I owe?
You can arrange to make a payment plan with us if you cannot pay the full amount you owe.

How can I set up a payment plan?
Call the toll-free number listed on the top right corner of your notice to discuss payment options or learn more about payment arrangements.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 06-Mar-2014

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Irsgov com 3. Irsgov com   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. Irsgov com Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. Irsgov com In addition, you will contribute matching or nonelective contributions. Irsgov com SIMPLE plans can only be maintained on a calendar-year basis. Irsgov com A SIMPLE plan can be set up in either of the following ways. Irsgov com Using SIMPLE IRAs (SIMPLE IRA plan). Irsgov com As part of a 401(k) plan (SIMPLE 401(k) plan). Irsgov com Many financial institutions will help you set up a SIMPLE plan. Irsgov com SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. Irsgov com Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. Irsgov com For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. Irsgov com Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. Irsgov com You meet the employee limit. Irsgov com You do not maintain another qualified plan unless the other plan is for collective bargaining employees. Irsgov com Employee limit. Irsgov com   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. Irsgov com Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. Irsgov com Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). Irsgov com   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. Irsgov com Grace period for employers who cease to meet the 100-employee limit. Irsgov com   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. Irsgov com   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. Irsgov com Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. Irsgov com Coverage under the plan has not significantly changed during the grace period. Irsgov com The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. Irsgov com    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. Irsgov com Other qualified plan. Irsgov com   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. Irsgov com Exception. Irsgov com   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. Irsgov com Who Can Participate in a SIMPLE IRA Plan? Eligible employee. Irsgov com   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. Irsgov com The term “employee” includes a self-employed individual who received earned income. Irsgov com   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. Irsgov com For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. Irsgov com However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. Irsgov com Excludable employees. Irsgov com   The following employees do not need to be covered under a SIMPLE IRA plan. Irsgov com Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Irsgov com Nonresident alien employees who have received no U. Irsgov com S. Irsgov com source wages, salaries, or other personal services compensation from you. Irsgov com Compensation. Irsgov com   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. Irsgov com Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. Irsgov com If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. Irsgov com How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. Irsgov com Each form is a model savings incentive match plan for employees (SIMPLE) plan document. Irsgov com Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. Irsgov com Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. Irsgov com Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. Irsgov com The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. Irsgov com Keep the original form. Irsgov com Do not file it with the IRS. Irsgov com Other uses of the forms. Irsgov com   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. Irsgov com Meeting employer notification requirements for the SIMPLE IRA plan. Irsgov com Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. Irsgov com Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. Irsgov com Deadline for setting up a SIMPLE IRA plan. Irsgov com   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. Irsgov com This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. Irsgov com If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. Irsgov com A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. Irsgov com Setting up a SIMPLE IRA. Irsgov com   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. Irsgov com A SIMPLE IRA must be set up for each eligible employee. Irsgov com Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. Irsgov com   A SIMPLE IRA cannot be a Roth IRA. Irsgov com Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Irsgov com Deadline for setting up a SIMPLE IRA. Irsgov com   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. Irsgov com See Time limits for contributing funds , later, under Contribution Limits. Irsgov com Credit for startup costs. Irsgov com   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. Irsgov com For more information, see Credit for startup costs under Reminders, earlier. Irsgov com Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. Irsgov com The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. Irsgov com Your decision to make either matching contributions or nonelective contributions (discussed later). Irsgov com A summary description provided by the financial institution. Irsgov com Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. Irsgov com Election period. Irsgov com   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). Irsgov com However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. Irsgov com   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. Irsgov com For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. Irsgov com Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. Irsgov com Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. Irsgov com You, as the employer, must make either matching contributions or nonelective contributions, defined later. Irsgov com No other contributions can be made to the SIMPLE IRA plan. Irsgov com These contributions, which you can deduct, must be made timely. Irsgov com See Time limits for contributing funds , later. Irsgov com Salary reduction contributions. Irsgov com   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. Irsgov com These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. Irsgov com You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. Irsgov com   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. Irsgov com Catch-up contributions. Irsgov com   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Irsgov com The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. Irsgov com Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. Irsgov com However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Irsgov com The catch-up contribution limit. Irsgov com The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. Irsgov com Employer matching contributions. Irsgov com   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. Irsgov com This requirement does not apply if you make nonelective contributions as discussed later. Irsgov com Example. Irsgov com In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. Irsgov com Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Irsgov com You make 3% matching contributions. Irsgov com The total contribution you make for John is $2,000, figured as follows. Irsgov com Salary reduction contributions ($25,000 × . Irsgov com 05) $1,250 Employer matching contribution ($25,000 × . Irsgov com 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. Irsgov com Salary reduction contributions ($40,000 × . Irsgov com 10) $4,000 Employer matching contribution ($40,000 × . Irsgov com 03) 1,200 Total contributions $5,200 Lower percentage. Irsgov com   If you choose a matching contribution less than 3%, the percentage must be at least 1%. Irsgov com You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Irsgov com You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. Irsgov com Nonelective contributions. Irsgov com   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. Irsgov com If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. Irsgov com Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). Irsgov com   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. Irsgov com Example 1. Irsgov com In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. Irsgov com Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. Irsgov com You make a 2% nonelective contribution. Irsgov com Both of you are under age 50. Irsgov com The total contribution you make for Jane is $4,320, figured as follows. Irsgov com Salary reduction contributions ($36,000 × . Irsgov com 10) $3,600 2% nonelective contributions ($36,000 × . Irsgov com 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. Irsgov com Salary reduction contributions ($50,000 × . Irsgov com 10) $5,000 2% nonelective contributions ($50,000 × . Irsgov com 02) 1,000 Total contributions $6,000 Example 2. Irsgov com Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. Irsgov com Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . Irsgov com 02) 1,500 Total contributions $13,500 Time limits for contributing funds. Irsgov com   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. Irsgov com You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. Irsgov com Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. Irsgov com When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. Irsgov com You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. Irsgov com Example 1. Irsgov com Your tax year is the fiscal year ending June 30. Irsgov com Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. Irsgov com Example 2. Irsgov com You are a sole proprietor whose tax year is the calendar year. Irsgov com Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. Irsgov com Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Irsgov com For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. Irsgov com Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Irsgov com (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. Irsgov com ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. Irsgov com SIMPLE IRA plan contributions are not subject to federal income tax withholding. Irsgov com However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Irsgov com Matching and nonelective contributions are not subject to these taxes. Irsgov com Reporting on Form W-2. Irsgov com   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. Irsgov com You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Irsgov com You must also include them in box 12. Irsgov com Mark the “Retirement plan” checkbox in box 13. Irsgov com For more information, see the Form W-2 instructions. Irsgov com Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. Irsgov com Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. Irsgov com However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. Irsgov com Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Irsgov com Early withdrawals generally are subject to a 10% additional tax. Irsgov com However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. Irsgov com More information. Irsgov com   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. Irsgov com More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. Irsgov com SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. Irsgov com A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. Irsgov com However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. Irsgov com Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. Irsgov com If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. Irsgov com See Catch-up contributions , earlier under Contribution Limits. Irsgov com You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. Irsgov com No other contributions can be made to the trust. Irsgov com No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. Irsgov com The employee's rights to any contributions are nonforfeitable. Irsgov com No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). Irsgov com Compensation is defined earlier in this chapter. Irsgov com Employee notification. Irsgov com   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. Irsgov com See Notification Requirement in this chapter. Irsgov com Credit for startup costs. Irsgov com   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. Irsgov com For more information, see Credit for startup costs under Reminders, earlier. Irsgov com Note on Forms. Irsgov com   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. Irsgov com To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. Irsgov com Prev  Up  Next   Home   More Online Publications