IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 19. Liability Determination

Section 7. IMF Automated Underreporter (AUR) Technical System Procedures (Cont. 1)

4.19.7  IMF Automated Underreporter (AUR) Technical System Procedures (Cont. 1)

4.19.7.8 
Case Analysis Overview

4.19.7.8.21  (10-01-2004)
Computing Worksheet Windows

  1. The following are worksheet windows to assist with screening and recomputing cases:

    • Self-Employment Tax

    • IRA Contributions

    • Withholding

    • Excess Social Security and Railroad Retirement Tax

    • State and Local Income Tax Refunds

    • Social Security and Railroad Retirement Benefits

    • Social Security Tax on Tips

    • Lump Sum Tax

    • SEP/Keogh Deduction

    • Dependent Care Benefits

    • Employee-Provided Adoption Benefits

    • Savings Bond Exclusion

    • FICA Tax

    • Schedule D Loss

    • Miscellaneous Adjustment/Schedule C Expense

    • Student Loan Interest Deduction

    • Tuition and Fees Deduction.

     

    Note:

    Refer to the hint text line provided on the AUR screen for specific line numbers.

     

4.19.7.8.21.1  (10-01-2004)
Adjusted Gross Income (AGI) Window

  1. The AGI window will appear at various phases of case analysis if the infomation is needed to compute a subsequent window. When it appears, verify the tax return values. Once the window is committed <F12>, the window will not display unless it is selected from the menu.

    Adjusted Gross Income Window

     

4.19.7.8.21.2  (10-01-2004)
Self-Employment Tax

  1. The Self-Employment Tax window is used to compute or recompute self-employment tax. There are specific fields for computing/recomputing self-employment tax for the primary and/or the secondary taxpayer.

    Self-Employment Tax Window

  2. From the ca Tax comp menu, select Se tax.

    Note:

    Be sure to input or verify all fields in every worksheet window. Make sure that you don't just "Enter" through the fields.

     

  3. Use the following steps to compute/recompute the Self-Employment Tax:

    CAUTION: Be sure to enter the information for each taxpayer (primary and/or secondary), in the appropriate fields.

     

    Note:

    To allow the system to recompute the self-employment tax, the PRIMARY and/or SECONDARY SE TAX NOW field(s) must be blank. If an amount is entered, the system will use the amount entered. During responses, a zero must be entered in the primary and/or secondary SE TAX NOW field(s), as applicable, when computing FICA tax in lieu of self-employment tax.

     

    Step Action
    1 Verify/enter the amount(s) from Schedule SE for the PRIMARY and/or SECONDARY SE TAX PER RETURN field(s).
    2 Verify/enter the amount(s) of total self-employment income from Schedule SE in the PRIMARY and/or SECONDARY reported SE INCOME field(s). Note: This amount must be verified, even if the optional method is used. Negative amounts are entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME fields(s) in the SE Tax window. This amount should include (but is not limited to) the net totals of Schedule C and Schedule F.

    Verify that the taxpayer reported the correct amount of wages/tips subject to Social Security or Railroad Retirement (Tier1) Tax. Correct the amount if necessary using the following steps.

    Note:

    The amount(s), shown in the SCHEDULE C EXPENSE WINDOW PRIMARY and/or SECONDARY SCHEDULE C EXPENSE CHANGE, will automatically carry to the SELF-EMPLOYMENT TAX WINDOW.

     

    Step Action
    1 Verify/enter the amount(s) from Schedule SE as reported or corrected, in the PRIMARY and/or SECONDARY SS/RR WAGES/TIPS field(s) including underreported social security/railroad retirement wages. Note: Do not include any underreported SS/RR allocated tips, any unreported tips from Form 4137, or SE income identified in responses as being subject to FICA tax; the system adds these amounts automatically.
    2 Verify/enter the amount(s) from Schedule SE in the PRIMARY and/or SECONDARY CHURCH WAGES field(s).
    3 Enter self-employment income reported elsewhere on the return, on which self-employment tax has not been paid and is not included in the other fields, in the PRIM and/or SEC REPRTD SE INC NOT ON SCH SE field.

    Note:

    Include amounts from Schedule C or F (net profit) that were not previously subject to SE Tax since the total was less than $400.

    Do not enter a negative amount.
    4 Verify/enter the amount of the Self-Employment Health Insurance Deduction from Form 1040 in the Self-Employment Health Insurance Deduction field.
    5 After entering/verifying the appropriated entries, click on "COMPUTE" (to view the changes before committing) AND press <F12> to commit the changes and exit.

     

  4. Use the following steps, to compute/recompute self-employment tax, when the taxpayer used the optional method.

    Note:

    Be sure to enter the information for each taxpayer (primary and/or secondary) in the appropriate field(s).

     

    Step Action
    1 Enter "Y" in the OPTIONAL METHOD INDICATOR field(s).
    2 Enter the total reported net farm income from Schedule F and/or Schedule K-1 in the PRIMARY and/or SECONDARY NET FARM P/L field(s).
    3 Enter the total reported gross farm income from Schedule F and/or Schedule K-1 in the PRIMARY and/or SECONDARY GROSS FARM INCOME field(s).
    4 Enter the total reported net nonfarm income from Schedule C, Schedule C-EZ and/or Schedule K-1 in the PRIMARY and/or SECONDARY NET NONFARM P/L field(s).
    5 Enter the total reported gross nonfarm income from Schedule C, Schedule C-EZ and/or Schedule K-1 in the PRIMARY and/or SECONDARY GROSS NONFARM INCOME field(s). Note: Verify PRIMARY and/or SECONDARY REPORTED SE INCOME field(s) with amounts from Schedule SE.
    6 Click on "COMPUTE" (to view the changes before committing) AND press <F12> to commit and exit.

     

  5. Use the following steps, to compute/recompute self-employment tax, when the taxpayer used the optional method but no longer qualifies for the optional method.

    Note:

    Be sure to enter the information for each taxpayer (primary and/or secondary) in the appropriate field(s).

     

    Step Action
    1 If present, clear the amount(s) in the applicable PRIMARY and/or SECONDARY SE TAX NOW field(s).
    2 Enter "0" (zero) in the applicable PRIMARY and/or SECONDARY REPORTED SE INCOME field(s).
    Note: If the reported self-employment income is a negative amount, enter the negative amount in the applicable PRIMARY and/or SECONDARY REPORTED SE INCOME field(s).
    3 Enter the reported net self-employment income in the applicable PRIMARY and/or SECONDARY SE INC NOT ON SCH SE field(s).
    Note: If the reported self-employment income is a negative amount, enter "0" (zero).
    4 If present, remove the "Y" from the PRIMARY and/or SECONDARY OPTIONAL METHOD IND field(s), leaving the field(s) blank.
    5 If present, remove any amount(s) from the PRIMARY and/or SECONDARY NET FARM P/L field(s), leaving field(s) blank.
    6 If present, remove any amount(s) from the PRIMARY and/or SECONDARY GROSS FARM INCOME field(s), leaving field(s) blank.
    7 Click "COMPUTE" (to view the changes before committing) AND press <F12> to commit and exit.

     

  6. The negligence and reasonable cause columns display ONLY if the Accuracy Penalty Indicator shows that a penalty computation is required. If it is determined that there is NO CHANGE to the currently assessed SE tax, enter the amount from the PRIMARY and/or SECONDARY SE TAX NOW field(s). When SE tax is the only issue and the negligence penalty applies, enter the amount from the PRIMARY and/or SECONDARY SE TAX PER RETURN field.

  7. Leave the PRIMARY and/or SECONDARY SE TAX NOW field(s) blank using the following steps to allow the system to compute the reasonable cause portion of the SE tax.

    Steps Action
    1 Verify/enter the amount from the PRIMARY and/or SECONDARY REPORTED SE INCOME field(s), less reported SE income included in this field on which SET has not been paid and reasonable cause has not been established.
    2 Verify/enter the amount from the PRIMARY and/or SECONDARY SS/RR WAGES/TIPS field(s), less the portion of underreported SS/RR wages included in this field on which reasonable cause has not been established.
    3 Click on "COMPUTE" (to view changes before committing) AND press <F12>.

     

4.19.7.8.21.3  (10-01-2004)
IRA Contributions

  1. Select the IRA window only after all other required windows have been computed.

     

     

    To select the IRA window, the cursor must be located on an information return for IRA contributions. The Adjusted Gross Income window may display when Ira is selected from the ca Tax compmenu or when Status Code U is entered for any IRA information return.

  2. Use the following steps to compute/recompute the allowable IRA Contribution Deduction(s).

    Step Action
    1 In the PENSION PLAN field, enter "P" for primary taxpayer, "S" for spouse, or "B" for both.

    • The attached Form(s) W-2 Pension or deferred compensation box is checked.

    • The attached Form(s) W-2 includes an amount for contributions in Box 13, with a code F, D, or S.

    • No W-2 is attached to the return and wage income that is reported is unidentified on the return.

    • An attached Form W-2 or a Form W-2 information return is from a federal, state, or local government, including any political subdivision.

    • A Form W-2 information return has other than zero (0) in the IND field, contains the literal "DC" , and the corresponding W-2 is not attached to the return.

    • The taxpayer Filing Status (FS) 3 or 6 and no indication if taxpayers lived apart.

    • The taxpayer takes a deduction for a Keogh, SIMPLE Plan, or SEP on Form 1040 .

    • The taxpayer is a postal worker.

    Leave the field blank if unable to determine any of the above.
    2 Filing Status 3 or 6 only: In the LIVED WITH SPOUSE field, enter "Y" or " N" to indicate if the taxpayer lived with spouse. If no indication, enter "Y" . For any other filing status, leave blank.
    3 In the PRIMARY and/or SECONDARY COMPENSATION field, enter the total reported amount of the primary and/or secondary taxpayer’s earned income. Include taxable alimony, separate maintenance payments, and net earnings from SE income. If a loss exists on Schedule C or F, see IRM 4.19.3.
    4 In the IRA ADJUSTMENT PER RETURN field, enter the primary and/or secondary taxpayer’s IRA deduction amount from Form 1040..

     

    Note:

    The SEP/Keogh deduction amount from Form 1040 should display in the PRIMARY/ SECONDARY SEP/KEOGH field. If the filing status is 2, and it can be determined that both taxpayers contributed to a Keogh or SEP retirement plan, use the following steps.

     

    Step Action
    1 In the PRIMARY SEP/KEOGH field, enter the amount contributed by the primary taxpayer.
    2 In the SECONDARY SEP/KEOGH field, enter the amount contributed by the secondary taxpayer. Note: Enter the total SEP/Keogh deduction amount reported on Form 1040, in the PRIMARY SEP/KEOGH field, when unable to determine a breakdown of the amount.
    3 The REQUEST FOR ADDL DEDUCTION field is used, only during the Response phase. Enter "Y" , if the taxpayer submits a response requesting additional IRA deduction amounts that were not originally taken. Note: An information return must be created for the verified additional IRA deduction amount.
    4 Press <F12>.

     

4.19.7.8.21.4  (10-01-2004)
Withholding

  1. The Withholding window displays when an information return with a withholding income type is marked with Status Code "U" , wages are underreported, or the cursor is located on a withholding information return and the Withholding option is selected from the ca Tax comp menu. When wages are U/R and W/H is discrepant, select the Withholding window after all wage IRs are analyzed.

    Note:

    It is not necessary to change the status code of a group to recompute the withholding.

     

  2. Verify/enter the amount of excess SST/RRT claimed by the taxpayer in the EXCESS SST/RRT field.

  3. The cursor moves to the W/H VERIFIED INDICATOR field. Using the following steps:

    Step Action
       
    1 Make an entry, in the W/H VERIFIED INDICATOR field, when the system is allowing W/H due to rounding or when the verified withholding amount differs from the withholding per return amount. Entering " Y" in this field overrides any system computed changed to withholding and allows an entry in the VERIFIED WITHHOLDING field. If the withholding per return is correct, leave these fields blank.
    2 Verify/enter the correct amount of allowable withholding.
    3 Press <F12>.

     

4.19.7.8.21.5  (10-01-2004)
Excess Social Security Tax and Railroad Retirement Tax (SST/RRT)

  1. Use the EXCESS SST/RRT window to compute excess social security tax and/or excess railroad retirement tax. This window displays when Status Code "U" is entered for this income type or Excess sst/rrt is selected from the ca Tax comp menu.

     

  2. Use the following steps to compute/recompute the correct amount of Excess Social Security Tax and/or Railroad Retirement Tax.

    Step Action
    1 Verify/enter the amount from Excess/SST/RRT from Form 1040= in the EXCESS SST/RRT field.
    2 Enter "Y" in the VERIFIED INDICATOR field to override a system computed change to excess SST/RRT and allow an entry in the VERIFIED EXCESS SST/RRT field.

     

  3. Use the following steps to change a field entry only if it can be identified as Uncollected Tax (UT) from the dotted portion of the total tax line on Form 1040.

    Note:

    The TIER 1 AND 2 TIP TAX fields seldom require an entry.

     

    Step Action
    1 Enter only the UT amount from the Form 1040 total tax line that is also reported on Form(s) W-2,, and identified with a letter code of "A" or "M" in the PRIMARY TIER 1/SS TIP TAX field.
    2 Enter only the UT amount from the Form 1040 total tax line that is also reported on Form(s) W-2, and identified with a letter code of "A" or "M" in the SECONDARY TIER 1/SS TIP TAX field.
    3 Enter only the UT amount from Form 1040 total tax line that is also reported on Form(s) RRB-1099 in the PRIMARY TIER 2 TIP TAX field.
    4 Enter only the UT amount from Form 1040 total tax line that is also reported on Form(s) RRB-1099 in the SECONDARY TIER 2 TIP TAX field.
    5 Enter the correct amount of allowable excess SST/RRT as filed or adjusted in the VERIFIED EXCESS SST/RRT field.
    6 Press <F12>.

     

4.19.7.8.21.6  (10-01-2004)
State and Local Income Tax Refunds

  1. The SITR window displays when Status Code " U" is entered for any SITR information return. From the ca Tax comp menu, select siTr.

     

  2. When SITR is to be computed, the Adjusted Gross Income window may display.

  3. The prior year SITR information displays in the PRIOR YEAR section of the window. Only change, if the displayed value(s) is incorrect. Use the following steps to compute/recomputed SITR.

    Step Action
    1 Verify/enter the amount of state/local tax refund from Form 1040, line 10, in the REPORTED SITR field.
    2 Verify/enter the sum of state and local income taxes withheld from the taxpayer’s income, as reported on attached Form(s) W-2, in the STATE/LOCAL W/H field. Note: Leave blank if the Forms W-2 are not attached.
    3 Enter the amount from the current year Schedule A, line 5, in the STATE/LOCAL TAX DED field. Note: Leave this field blank when there is no current year deduction. Do not enter "0" (zero).
    4 Enter the total number of age and blind exemptions for taxpayer and spouse, as reported on Form 1040 in the AGE/BLIND COUNT field.
    5 If the taxpayer has been claimed as a dependent on someone else’s return enter "Y" in the T/P CLAIMED ON ANOTHER’S RETURN? field.
    6 If the Married Filing Separate and Spouse Itemized Deduction/Dual Status box on Form 1040 is checked, enter "Y" in the FS3/ITEMIZED OR ALIEN field.
    7 Press <F12>.

    Note: When status code "D" or "N" is input on a SITR information return, you must use the Ungroup pull-down menu option under the Group menu option to change the SITR information return status code to any other applicable status code.

4.19.7.8.21.7  (10-01-2004)
Social Security and Railroad Retirement Benefits (SSA/RRB)

  1. The SSA/RRB window is used to compute the taxable amount of social security benefits.

     

  2. From the ca Tax comp menu, select ssa/rrB . The window will automatically appear when IR code "U" is entered for any SSA/RRB information return.

  3. When SSA/RRB is computed the Adjusted Gross Income window may display.

  4. The SSA/RRB window will display if the displayed amounts are incorrect, use the following steps.

    Step Action
    1 Verify/enter the gross SSA/RRB benefit amount from Form 1040 in the GROSS SSA/RRB BENEFITS field.
    2 Verify/enter the taxable SSA/RRB amount from Form 1040 in the TAXABLE SSA/RRB BENEFITS field.
    3 Verify/enter the tax-exempt interest amount from Form 1040 , in the TAX-EXEMPT INTEREST field.

    For filing status 3 or 6, use the following steps.

    Step Action
    4 Enter "N" in TP LIVED WITH SPOUSE? field, if the taxpayer did NOT live with spouse during the tax year. If there is no indication that the taxpayer did not live with spouse, leave this field blank (not zero). Note: "D" annotated to the left of the SSA/RRB benefit line on is an indication the taxpayer did not live with his/her spouse during the tax year.
    5 Press <F12>.

     

    Note:

    "LSE" annotated to the left of the SSA/RRB benefit line on Form 1040 is an indication the taxpayer computed taxable SSA/RRB benefits using the Lump Sum Election method. For further information, see IRM 4.19.3, Social Security/Railroad Retirement Benefits Miscellaneous.

     

4.19.7.8.21.8  (10-01-2004)
Social Security Tax on Tips

  1. The Social Security tax (SST) on Tips window is used to compute the social security tip tax for both the taxpayer and spouse. It displays, when SST on unreported tip income is included on the return, if allocated tip income is present or when selected.

     

    SST on Tips Window

  2. From the ca Tax comp menu, select sst On tips.

    Note:

    The section for reasonable cause displays only if a computation is required for the Accuracy Related Penalty Due to Negligence.

     

  3. Use the following steps, to compute the SST on tips for a taxpayer and spouse.

    Step Action
    1 Verify/enter the original primary/secondary unreported total tip tax amount from Form 4137 in the PRIMARY/SECONDARY UNREPORTED TIP TAX field(s).
    2 Verify/enter the original primary/secondary unreported tips subject to Medicare tax Form 4137, line 5, amount in the PRIMARY/SECONDARY ALLOCATED TIPS field(s). Note: If the Form 4137, line 3 amount is less than the amount of tips that have been reported on Form 1040 (usually in the wage line), recompute the Form 4137 line 5 amount using the amount of tips that were actually reported on Form 1040 instead of Form 4137, line 3 amount. Use this recomputed Form 4137, line 5, amount in the above field.
    3 Verify/enter the primary/secondary reported wages and tips having social security/railroad retirement (Tier 1) tax withheld in the PRIMARY/ SECONDARY SS/RR WAGES/TIPS field(s).Note: If Form 4137 was NOT used, this amount can be taken from the wage line on Form 1040. Correct this amount if necessary. Add to this amount, any underreported SS/RR wages. Do not include unreported tips from Form 4137 or SE income identified in responses as being subject to FICA tax. (The system includes these amounts.)
    4 Verify/enter the original primary/secondary Form 4137, line 9 amount in the PRIMARY/SECONDARY ALLOCATED TIPS field(s). If the Form 4137 line 5 amount has been recomputed for the PRIMARY/SECONDARY ALLOCATED TIPS field(s), use this recomputed line 5 amount in recomputing the line 9 amount. Use the recomputed line 9 amount, in this field.