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Tax forms download ez 1040 Listed Property Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Listed Property DefinedPassenger Automobile Defined Dwelling Unit Other Property Used for Transportation Computers and Related Peripheral Equipment Predominant Use TestMeeting the Predominant Use Test Qualified Business Use Method of Allocating Use Applying the Predominant Use Test Deductions After Recovery Period Leased PropertyLessor Lessee What Records Must Be KeptAdequate Records Reporting Information on Form 4562 Deductions in Later Years Appendix Topics - This chapter discusses: Listed property defined The predominant use test What records must be kept Useful Items - You may want to see: Publication 463 Travel, Entertainment, and Gift Expenses 587 Business Use of Your Home (Including Use by Day-Care Providers) 917 Business Use of a Car 946 How To Depreciate Property Form (and Instructions) 2106–EZ Unreimbursed Employee Business Expenses 2106 Employee Business Expenses 4255 Recapture of Investment Credit 4562 Depreciation and Amortization This chapter discusses some special rules and recordkeeping requirements for listed property. Tax forms download ez 1040 For complete coverage of the rules, including the rules concerning passenger automobiles, see Publication 946. Tax forms download ez 1040 If listed property is not used predominantly (more than 50%) in a qualified business use as discussed inPredominant Use Test, later, the section 179 deduction is not allowable and the property must be depreciated using the straight line method. Tax forms download ez 1040 Listed Property Defined Listed property is any of the following: Any passenger automobile (defined later), Any other property used for transportation, Any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment), Any computer and related peripheral equipment, defined later, unless it is used only at a regular business establishment and owned or leased by the person operating the establishment. Tax forms download ez 1040 A regular business establishment includes a portion of a dwelling unit (defined later), if, and only if, that portion is used both regularly and exclusively for business as discussed in Publication 587. Tax forms download ez 1040 Any cellular telephone (or similar telecommunication equipment) placed in service or leased in a tax year beginning after 1989. Tax forms download ez 1040 Passenger Automobile Defined A passenger automobile is any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). Tax forms download ez 1040 It includes any part, component, or other item physically attached to the automobile or usually included in the purchase price of an automobile. Tax forms download ez 1040 A passenger automobile does not include: An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business, and A vehicle used directly in the trade or business of transporting persons or property for compensation or hire. Tax forms download ez 1040 Dwelling Unit A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. Tax forms download ez 1040 It does not include a unit in a hotel, motel, inn, or other establishment where more than half the units are used on a transient basis. Tax forms download ez 1040 Other Property Used for Transportation Other property used for transportation includes trucks, buses, boats, airplanes, motorcycles, and any other vehicles for transporting persons or goods. Tax forms download ez 1040 Listed property does not include: Any vehicle which, by reason of its design, is not likely to be used more than a minimal amount for personal purposes, such as clearly marked police and fire vehicles, ambulances, or hearses used for those purposes, Any vehicle that is designed to carry cargo and that has a loaded gross vehicle weight over 14,000 pounds, bucket trucks (cherry pickers), cement mixers, combines, cranes and derricks, delivery trucks with seating only for the driver (or only for the driver plus a folding jump seat), dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks, Any passenger bus used for that purpose with a capacity of at least 20 passengers and school buses, Any tractor or other special purpose farm vehicle, and unmarked vehicles used by law enforcement officers if the use is officially authorized, and Any vehicle, such as a taxicab, if substantially all its use is in the trade or business of providing services to transport persons or property for compensation or hire by unrelated persons. Tax forms download ez 1040 Computers and Related Peripheral Equipment A computer is a programmable electronically activated device that: Is capable of accepting information, applying prescribed processes to the information, and supplying the results of those processes with or without human intervention, and Consists of a central processing unit with extensive storage, logic, arithmetic, and control capabilities. Tax forms download ez 1040 Related peripheral equipment is any auxiliary machine which is designed to be controlled by the central processing unit of a computer. Tax forms download ez 1040 Computer or peripheral equipment does not include: Any equipment which is an integral part of property which is not a computer, Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and Equipment of a kind, used primarily for the user's amusement or entertainment, such as video games. Tax forms download ez 1040 Predominant Use Test If “listed property,” defined earlier, placed in service after June 18, 1984, is not used predominantly (more than 50%) in a qualified business use during any tax year: The section 179 deduction on the property is not allowable, and You must depreciate the property using the straight line method. Tax forms download ez 1040 Listed property placed in service before 1987. Tax forms download ez 1040   For listed property placed in service before 1987, depreciate the property over the following period: Class of Property Listed Property Recovery Period 3-year property 5 years 5-year property 12 years 10-year property 25 years 18-year real property 40 years 19-year real property 40 years If you must use the above recovery periods for listed property not used predominantly in a trade or business, use the percentages from Table 16 titled Listed Property Not Used Predominantly (Other Than 18- or 19-year Real Property), and Table 17 for 18- or 19-year real property, near the end of this publication in the Appendix. Tax forms download ez 1040 Listed property placed in service after 1986. Tax forms download ez 1040   For information on listed property placed in service after 1986, see Publication 946. Tax forms download ez 1040 Meeting the Predominant Use Test Listed property meets the predominant use test for any tax year if its business use is more than 50% of its total use. Tax forms download ez 1040 You must allocate the use of any item of listed property used for more than one purpose during the tax year among its various uses. Tax forms download ez 1040 The percentage of investment use of listed property cannot be used as part of the percentage of qualified business use to meet the predominant use test. Tax forms download ez 1040 However, the combined total of business and investment use is taken into account to figure your depreciation deduction for the property. Tax forms download ez 1040 Note: Property does not stop being predominantly used in a qualified business use because of a transfer at death. Tax forms download ez 1040 Example. Tax forms download ez 1040 Sarah Bradley uses a home computer 50% of the time to manage her investments. Tax forms download ez 1040 She also uses the computer 40% of the time in her part-time consumer research business. Tax forms download ez 1040 Sarah's home computer is listed property because it is not used at a regular business establishment. Tax forms download ez 1040 Because her business use of the computer does not exceed 50%, the computer is not predominantly used in a qualified business use for the tax year. Tax forms download ez 1040 Because she does not meet the predominant use test, she cannot elect a section 179 deduction for this property. Tax forms download ez 1040 Her combined rate of business/investment use for determining her depreciation deduction is 90%. Tax forms download ez 1040 Qualified Business Use A qualified business use is any use in your trade or business. Tax forms download ez 1040 However, it does not include: The use of property held merely to produce income (investment use), The leasing of property to any 5% owner or related person (to the point that the property is used by a 5% owner or person related to the owner or lessee of the property), The use of property as compensation for the performance of services by a 5% owner or related person, or The use of property as compensation for the performance of services by any person (other than a5% owner or related person) unless the value of the use is included in that person's gross income for the use of the property and income tax is withheld on that amount where required. Tax forms download ez 1040 See Employees, later. Tax forms download ez 1040 5% owner. Tax forms download ez 1040   A 5% owner of a business, other than a corporation, is any person who owns more than 5% of the capital or profits interest in the business. Tax forms download ez 1040   A 5% owner of a corporation is any person who owns, or is considered to own: More than 5% of the outstanding stock of the corporation, or Stock possessing more than 5% of the total combined voting power of all stock in the corporation. Tax forms download ez 1040 Related person. Tax forms download ez 1040   A related person is anyone related to a taxpayer as discussed under Related persons, in chapter 2 under Nonqualifying Property in Publication 946. Tax forms download ez 1040 Entertainment Use The use of listed property for entertainment, recreation, or amusement purposes is treated as a qualified business use only to the extent that expenses (other than interest and property tax expenses) for its use are deductible as ordinary and necessary business expenses. Tax forms download ez 1040 See Publication 463. Tax forms download ez 1040 Leasing or Compensatory Use of Aircraft If at least 25% of the total use of any aircraft during the tax year is for a qualified business use, the leasing or compensatory use of the aircraft by a 5% owner or related person is treated as a qualified business use. Tax forms download ez 1040 Commuting The use of a vehicle for commuting is not business use, regardless of whether work is performed during the trip. Tax forms download ez 1040 Use of Your Passenger Automobile by Another Person If someone else uses your automobile, that use is not business use unless: That use is directly connected with your business, The value of the use is property reported by you as income to the other person and tax is withheld on the income where required, or The value of the use results in a payment of fair market rent. Tax forms download ez 1040 Any payment to you for the use of the automobile is treated as a rent payment for 3). Tax forms download ez 1040 Employees Any use by an employee of his or her own listed property (or listed property rented by an employee) in performing services as an employee is not business use unless: The use is for the employer's convenience, and The use is required as a condition of employment. Tax forms download ez 1040 Use for the employer's convenience. Tax forms download ez 1040   Whether the use of listed property is for the employer's convenience must be determined from all the facts. Tax forms download ez 1040 The use is for the employer's convenience if it is for a substantial business reason of the employer. Tax forms download ez 1040 The use of listed property during the employee's regular working hours to carry on the employer's business is generally for the employer's convenience. Tax forms download ez 1040 Use required as a condition of employment. Tax forms download ez 1040   Whether the use of listed property is a condition of employment depends on all the facts and circumstances. Tax forms download ez 1040 The use of property must be required for the employee to perform duties properly. Tax forms download ez 1040 The employer need not explicitly require the employee to use the property. Tax forms download ez 1040 A mere statement by the employer that the use of the property is a condition of employment is not sufficient. Tax forms download ez 1040 Example 1. Tax forms download ez 1040 Virginia Sycamore is employed as a courier with We Deliver which provides local courier services. Tax forms download ez 1040 She owns and uses a motorcycle to deliver packages to downtown offices. Tax forms download ez 1040 We Deliver explicitly requires all delivery persons to own a small car or motorcycle for use in their employment. Tax forms download ez 1040 The company reimburses delivery persons for their costs. Tax forms download ez 1040 Virginia's use of the motorcycle is for the convenience of We Deliver and is required as a condition of employment. Tax forms download ez 1040 Example 2. Tax forms download ez 1040 Bill Nelson is an inspector for Uplift, a construction company with many sites in the local area. Tax forms download ez 1040 He must travel to these sites on a regular basis. Tax forms download ez 1040 Uplift does not furnish an automobile or explicitly require him to use his own automobile. Tax forms download ez 1040 However, it reimburses him for any costs he incurs in traveling to the various sites. Tax forms download ez 1040 The use of his own automobile or a rental automobile is for the convenience of Uplift and is required as a condition of employment. Tax forms download ez 1040 Method of Allocating Use For passenger automobiles and other means of transportation, allocate the property's use on the basis of mileage. Tax forms download ez 1040 You determine the percentage of qualified business use by dividing the number of miles the vehicle is driven for business purposes during the year by the total number of miles the vehicle is driven for all purposes (including business miles) during the year. Tax forms download ez 1040 For other items of listed property, allocate the property's use on the basis of the most appropriate unit of time. Tax forms download ez 1040 For example, you can determine the percentage of business use of a computer by dividing the number of hours the computer is used for business purposes during the year by the total number of hours the computer is used for all purposes (including business hours) during the year. Tax forms download ez 1040 Applying the Predominant Use Test You must apply the predominant use test for an item of listed property each year of the recovery period. Tax forms download ez 1040 First Recovery Year If any item of listed property is not used predominantly in a qualified business use in the year it is placed in service: The property is not eligible for a section 179 deduction, and The depreciation deduction must be figured using the straight line method. Tax forms download ez 1040 Note: The required use of the straight line method for an item of listed property that does not meet the predominant use test is not the same as electing the straight line method. Tax forms download ez 1040 It does not mean that you have to use the straight line method for other property in the same class as the item of listed property. Tax forms download ez 1040 Years After the First Recovery Year If you use listed property predominantly (more than 50%) in a qualified business use in the tax year you place it in service, but not in a subsequent tax year during the recovery period, the following rules apply: Figure depreciation using the straight line method. Tax forms download ez 1040 Do this for each year, beginning with the year you no longer use the property predominantly in a qualified business use, and Figure any excess depreciation on the property and add it to: Your gross income, and The adjusted basis of your property. Tax forms download ez 1040 See Recapture of excess depreciation, next. Tax forms download ez 1040 Recapture of excess depreciation. Tax forms download ez 1040   You must include any excess depreciation in your gross income for the first tax year the property is not predominantly used in a qualified business use. Tax forms download ez 1040 Any excess depreciation must also be added to the adjusted basis of your property. Tax forms download ez 1040 Excess depreciation is the excess (if any) of: The amount of depreciation allowable for the property (including any section 179 deduction claimed) for tax years before the first tax year the property was not predominantly used in a qualified business use, over The amount of depreciation that would have been allowable for those years if the property were not used predominantly in a qualified business use for the year it was placed in service. Tax forms download ez 1040 This means you figure your depreciation using the percentages fromTable 16 or 17. Tax forms download ez 1040 For information on investment credit recapture, see the instructions for Form 4255. Tax forms download ez 1040 Deductions After Recovery Period When listed property (other than passenger automobiles) is used for business, investment, and personal purposes, no deduction is ever allowable for the personal use. Tax forms download ez 1040 In tax years after the recovery period, you must determine if there is any unrecovered basis remaining before you compute the depreciation deduction for that tax year. Tax forms download ez 1040 To make this determination, figure the depreciation for earlier tax years as if your property were used 100% for business or investment purposes, beginning with the first tax year in which some or all use is for business or investment. Tax forms download ez 1040 See Car Used 50% or Less for Business in Publication 917. Tax forms download ez 1040 Leased Property The limitations on cost recovery deductions apply to the rental of listed property. Tax forms download ez 1040 The following discussion covers the rules that apply to the lessor (the owner of the property) and the lessee (the person who rents the property from the owner). Tax forms download ez 1040 SeeLeasing a Car in Publication 917 for a discussion of leased passenger automobiles. Tax forms download ez 1040 Lessor The limitations on cost recovery generally do not apply to any listed property leased or held for leasing by anyone regularly engaged in the business of leasing listed property. Tax forms download ez 1040 A person is considered regularly engaged in the business of leasing listed property only if contracts for leasing of listed property are entered into with some frequency over a continuous period of time. Tax forms download ez 1040 This determination is made on the basis of the facts and circumstances in each case and takes into account the nature of the person's business in its entirety. Tax forms download ez 1040 Occasional or incidental leasing activity is insufficient. Tax forms download ez 1040 For example, a person leasing only one passenger automobile during a tax year is not regularly engaged in the business of leasing automobiles. Tax forms download ez 1040 An employer who allows an employee to use the employer's property for personal purposes and charges the employee for the use is not regularly engaged in the business of leasing the property used by the employee. Tax forms download ez 1040 Lessee A lessee of listed property (other than passenger automobiles), must include an amount in gross income called the inclusion amount for the first tax year the property is not used predominantly in a qualified business use. Tax forms download ez 1040 Inclusion amount for property leased before 1987. Tax forms download ez 1040   You determine the inclusion amount for property leased after June 18, 1984 and before 1987 by multiplying the fair market value of the property by both the average business/investment use percentage and the applicable percentage. Tax forms download ez 1040 You can find the applicable percentages for listed property that is 5- or 10-year recovery property in Tables 19 or 20 in Appendix A of Publication 946. Tax forms download ez 1040   The lease term for listed property other than 18- or 19-year real property, and residential rental or nonresidential real property, includes options to renew. Tax forms download ez 1040 For 18- or 19-year real property and residential rental or nonresidential real property that is listed property, the period of the lease does not include any option to renew at fair market value, determined at the time of renewal. Tax forms download ez 1040 You treat two or more successive leases that are part of the same transaction (or a series of related transactions) for the same or substantially similar property as one lease. Tax forms download ez 1040 Special rules. Tax forms download ez 1040   The lessee adds the inclusion amount to gross income in the next tax year if: The lease term begins within 9 months before the close of the lessee's tax year, The lessee does not use the property predominantly in a qualified business use during that portion of the tax year, and The lease term continues into the lessee's next tax year. Tax forms download ez 1040 The lessee determines the inclusion amount by taking into account the average of the business/investment use for both tax years and the applicable percentage for the tax year the lease term begins. Tax forms download ez 1040   If the lease term is less than one year, the amount included in gross income is the amount that bears the same ratio to the additional inclusion amount as the number of days in the lease term bears to 365. Tax forms download ez 1040 Maximum inclusion amount. Tax forms download ez 1040   The inclusion amount cannot be more than the sum of the deductible amounts of rent allocable to the lessee's tax year in which the amount must be included in gross income. Tax forms download ez 1040 What Records Must Be Kept You cannot take any depreciation or section 179 deduction for the use of listed property (including passenger automobiles) unless you can prove business/investment use with adequate records or sufficient evidence to support your own statements. Tax forms download ez 1040 How long to keep records. Tax forms download ez 1040   For listed property, records must be kept for as long as any excess depreciation can be recaptured (included in income). Tax forms download ez 1040 Adequate Records To meet the adequate records requirement, you must maintain an account book, diary, log, statement of expense, trip sheet, or similar record or other documentary evidence that, together with the receipt, is sufficient to establish each element of an expenditure or use. Tax forms download ez 1040 It is not necessary to record information in an account book, diary, or similar record if the information is already shown on the receipt. Tax forms download ez 1040 However, your records should back up your receipts in an orderly manner. Tax forms download ez 1040 Elements of Expenditure or Use The records or other documentary evidence must support: The amount of each separate expenditure, such as the cost of acquiring the item, maintenance and repair costs, capital improvement costs, lease payments, and any other expenses, The amount of each business and investment use (based on an appropriate measure, such as mileage for vehicles and time for other listed property), and the total use of the property for the tax year, The date of the expenditure or use, and The business or investment purpose for the expenditure or use. Tax forms download ez 1040 Written documents of your expenditure or use are generally better evidence than oral statements alone. Tax forms download ez 1040 A written record prepared at or near the time of the expenditure or use has greater value as proof of the expenditure or use. Tax forms download ez 1040 A daily log is not required. Tax forms download ez 1040 However, some type of record containing the elements of an expenditure or the business or investment use of listed property made at or near the time and backed up by other documents is preferable to a statement prepared later. Tax forms download ez 1040 Timeliness The elements of an expenditure or use must be recorded at the time you have full knowledge of the elements. Tax forms download ez 1040 An expense account statement made from an account book, diary, or similar record prepared or maintained at or near the time of the expenditure or use is generally considered a timely record if in the regular course of business: The statement is submitted by an employee to the employer, or The statement is submitted by an independent contractor to the client or customer. Tax forms download ez 1040 For example, a log maintained on a weekly basis, which accounts for use during the week, will be considered a record made at or near the time of use. Tax forms download ez 1040 Business Purpose Supported An adequate record of business purpose must generally be in the form of a written statement. Tax forms download ez 1040 However, the amount of backup necessary to establish a business purpose depends on the facts and circumstances of each case. Tax forms download ez 1040 A written explanation of the business purpose will not be required if the purpose can be determined from the surrounding facts and circumstances. Tax forms download ez 1040 For example, a salesperson visiting customers on an established sales route will not normally need a written explanation of the business purpose of his or her travel. Tax forms download ez 1040 Business Use Supported An adequate record contains enough information on each element of every business or investment use. Tax forms download ez 1040 The amount of detail required to support the use depends on the facts and circumstances. Tax forms download ez 1040 For example, a taxpayer whose only business use of a truck is to make customer deliveries on an established route can satisfy the requirement by recording the length of the route, including the total number of miles driven during the tax year and the date of each trip at or near the time of the trips. Tax forms download ez 1040 Although an adequate record generally must be written, a record of the business use of listed property, such as a computer or automobile, can be prepared in a computer memory device using a logging program. Tax forms download ez 1040 Separate or Combined Expenditures or Uses Each use by you is normally considered a separate use. Tax forms download ez 1040 However, repeated uses can be combined as a single item. Tax forms download ez 1040 Each expenditure is recorded as a separate item and not combined with other expenditures. Tax forms download ez 1040 If you choose, however, amounts spent for the use of listed property during a tax year, such as for gasoline or automobile repairs, can be combined. Tax forms download ez 1040 If these expenses are combined, you do not need to support the business purpose of each expense. Tax forms download ez 1040 Instead, you can divide the expenses based on the total business use of the listed property. Tax forms download ez 1040 Uses which can be considered part of a single use, such as a round trip or uninterrupted business use, can be accounted for by a single record. Tax forms download ez 1040 For example, use of a truck to make deliveries at several locations which begin and end at the business premises and can include a stop at the business in between deliveries can be accounted for by a single record of miles driven. Tax forms download ez 1040 Use of a passenger automobile by a salesperson for a business trip away from home over a period of time can be accounted for by a single record of miles traveled. Tax forms download ez 1040 Minimal personal use (such as a stop for lunch between two business stops) is not an interruption of business use. Tax forms download ez 1040 Confidential Information If any of the information on the elements of an expenditure or use is confidential, it does not need to be in the account book or similar record if it is recorded at or near the time of the expenditure or use. Tax forms download ez 1040 It must be kept elsewhere and made available as support to the district director on request. Tax forms download ez 1040 Substantial Compliance If you have not fully supported a particular element of an expenditure or use, but have complied with the adequate records requirement for the expenditure or use to the district director's satisfaction, you can establish this element by any evidence the district director deems adequate. Tax forms download ez 1040 If you fail to establish that you have substantially complied with the adequate records requirement for an element of an expenditure or use to the district director's satisfaction, you must establish the element: By your own oral or written statement containing detailed information as to the element, and By other evidence sufficient to establish the element. Tax forms download ez 1040 If the element is the cost or amount, time, place, or date of an expenditure or use, its supporting evidence must be direct, such as oral testimony by witnesses or a written statement setting forth detailed information about the element or the documentary evidence. Tax forms download ez 1040 If the element is the business purpose of an expenditure, its supporting evidence can be circumstantial evidence. Tax forms download ez 1040 Sampling You can maintain an adequate record for portions of a tax year and use that record to support your business and investment use for the entire tax year if it can be shown by other evidence that the periods for which an adequate record is maintained are representative of use throughout the year. Tax forms download ez 1040 Loss of Records When you establish that failure to produce adequate records is due to loss of the records through circumstances beyond your control, such as through fire, flood, earthquake, or other casualty, you have the right to support a deduction by reasonable reconstruction of your expenditures and use. Tax forms download ez 1040 Reporting Information on Form 4562 If you claim a deduction for any listed property, you must provide the requested information on page 2, Section B of Form 4562. Tax forms download ez 1040 If you claim a deduction for any vehicle, you must answer certain questions onpage 2 of Form 4562 to provide information about the vehicle use. Tax forms download ez 1040 Employees. Tax forms download ez 1040   Employees claiming the standard mileage rate or actual expenses (including depreciation) must use Form 2106 instead of Part V of Form 4562. Tax forms download ez 1040 Employees claiming the standard mileage rate may be able to use Form 2106–EZ. Tax forms download ez 1040 Employer who provides vehicles to employees. Tax forms download ez 1040   An employer who provides vehicles to employees must obtain enough information from those employees to provide the requested information onForm 4562. Tax forms download ez 1040   An employer who provides more than five vehicles to employees need not include any information on his or her tax return. Tax forms download ez 1040 Instead, the employer must obtain the information from his or her employees and indicate on his or her return that the information was obtained and is being retained. Tax forms download ez 1040   You do not need to provide the information requested on page 2 of Form 4562 if, as an employer: You can satisfy the requirements of a written policy statement for vehicles either not used for personal purposes, or not used for personal purposes other than commuting, or You treat all vehicle use by employees as personal use. Tax forms download ez 1040 See the instructions for Form 4562. Tax forms download ez 1040 Deductions in Later Years When listed property is used for business, investment, and personal purposes, no deduction is allowable for its personal use either in the current year or any later tax year. Tax forms download ez 1040 In later years, you must determine if there is any remaining unadjusted or unrecovered basis before you compute the depreciation deduction for that tax year. Tax forms download ez 1040 In making this determination, figure the depreciation deductions for earlier tax years as if the listed property were used 100% for business or investment purposes in those years, beginning with the first tax year in which some or all of the property use is for business or investment. Tax forms download ez 1040 For more information about deductions after the recovery period for automobiles, see Publication 917. Tax forms download ez 1040 Appendix The following tables are for use in figuring depreciation deductions under the ACRS system. Tax forms download ez 1040 Table 1. Tax forms download ez 1040 15-Year Real Property* (Other Than Low-Inclome Housing) Table 3. Tax forms download ez 1040 Low-Income Housing* Table 6 - Table 9 Table 6 - Table 9 Table 10 - Table 13 Table 14 - Table 17 Prev  Up  Next   Home   More Online Publications
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IRS Releases the Dirty Dozen Tax Scams for 2012

IR-2012-23, Feb. 16, 2012

WASHINGTON –– The Internal Revenue Service today issued its annual “Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

The following is the Dirty Dozen tax scams for 2012:

Identity Theft

Topping this year’s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.
 
An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized. 

The IRS has a robust screening process with measures in place to stop fraudulent returns. While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft.  Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit.  For more information, visit the special identity theft page at www.IRS.gov/identitytheft

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.  The IRS has information that can help you protect yourself from email scams.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

  • Do not sign the return or place a Preparer Tax identification Number on it.
  • Do not give you a copy of your tax return.
  • Promise larger than normal tax refunds.
  • Charge a percentage of the refund amount as preparation fee.
  • Require you to split the refund to pay the preparation fee.
  • Add forms to the return you have never filed before.
  • Encourage you to place false information on your return, such as false income, expenses and/or credits.

For advice on how to find a competent tax professional, see  Tips for Choosing a Tax Preparer.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
 
Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return. 

Beware. Intentional mistakes of this kind can result in a $5,000 penalty.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions.  This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution. 

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
 

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Page Last Reviewed or Updated: 11-Feb-2014

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