Federal Out-of-Scope (OOS) and Special Situations

Modified on Wed, Oct 16 at 2:15 PM

Scenario	Description and References	Documented
Out of Scope
Married Filing Separate	Publication 4491 (Rev. 10-2021) (irs.gov) Are there special rules for taxpayers who live in community property states? The income of taxpayers who lived in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin during the tax year and who choose to file separate returns may be considered separate income or community income for tax purposes. Each state has its own community property laws, which may affect the amount of tax owed by taxpayers. See Publication 555, Community Property, for more information. If your tax assistance program views community property tax laws for taxpayers who are Married Filing Separately or who are filing as Head of Household because they can be considered unmarried for income tax filing purposes as beyond the scope of the program, refer such taxpayers to a professional tax preparer. Follow up: Treatment of individuals otherwise eligible for HOH. Per PHX, see Pub 504, P.23.	TY 2022
Solar Installation Tax Credits	Pub 4012, EXT-6 (TY 2022) Part I, Residential Clean Energy Credit, is available for taxpayers who purchased qualified residential alternative energy equipment, such as solar hot water heaters, stoves that burn biomass fuel, geothermal heat pumps and wind turbines. This part of the form is Out of Scope. Taxpayers that have these expenses should be referred to a professional tax preparer.	TY 2022
Income/Loss from Rental Property	Pub 4012, D-54 (TY 2022) Volunteers must certify at Military level to prepare Schedule E for rental income. Rental income and expenses are in-scope only for military families renting their personal residences.	TY 2022
Foreign Pensions or Social Security	Out of Scope The following scenarios involving foreign pensions and foreign social security are considered OOS of our program: 1. Foreign social security from Canada or Germany that is treated as U.S. Social Security (see comments in Analysis section). 2. Foreign pensions that exceed the following dollar limits: Unmarried taxpayers - If the total value * of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Married taxpayers filing a joint return - If the total value * of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. * If you do not know or have reason to know based on readily accessible information the fair market value of your interest in a foreign pension plan, the value to be included in determining the total value of your specified foreign financial assets during the tax year is the fair market value, determined as of the last day of the tax year, of the currency and other property distributed during the tax year to you. 3. Taxpayers who wish to explore or preserve treaty benefits. See discussion of those benefits in the Analysis section that follows. Analysis There are two scope of service restrictions indicated in Pub 4012, as well as possible treaty-related benefits that may come into play if a taxpayer has foreign pension or social security income. Pub 4012, TY 2022 (two scope of service restrictions) Scope of Service (1) IRAs, pensions and annuities See F 1099-R for limitations • Foreign retirement arrangements that may need special reporting on FINCEN 114 or F 8938 >> FINCEN 114 Report of Foreign Bank and Financial Accounts (FBAR) \| Internal Revenue Service (irs.gov) Per the Bank Secrecy Act, every year you must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114. Who Must File A U.S. person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report: a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported. But, you don’t need to report foreign financial accounts that are: Correspondent/Nostro accounts, Owned by a governmental entity, Owned by an international financial institution, Maintained on a U.S. military banking facility, Held in an individual retirement account (IRA) of which you’re an owner or beneficiary, Held in a retirement plan of which you’re a participant or beneficiary, or Part of a trust of which you’re a beneficiary, if a U.S. person (trust, trustee of the trust or agent of the trust) files an FBAR reporting these accounts. >> Form 8938 Instructions , excerpted below: Taxpayers living in the United States. If you do not live outside the United States, you satisfy the reporting threshold discussed next that applies to you, and no exception applies, file Form 8938 with your income tax return. Unmarried taxpayers. If you are not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Married taxpayers filing a joint income tax return. If you are married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. Value of an Interest in a Foreign Estate, Foreign Pension Plan, and Foreign Deferred Compensation Plan If you do not know or have reason to know based on readily accessible information the fair market value of your interest in a foreign estate, foreign pension plan, or foreign deferred compensation plan during the tax year, the value to be included in determining the total value of your specified foreign financial assets during the tax year is the fair market value, determined as of the last day of the tax year, of the currency and other property distributed during the tax year to you. If you received no distributions during the tax year and do not know or have reason to know based on readily accessible information the fair market value of your interest, use a value of zero for the interest. Scope of Service (2) Social Security benefits Not in scope for: • Foreign social security from Canada or Germany that is treated as U.S. Social Security Social Security Benefits - Canada or Germany Social Security Income (taxact.com) Under income tax treaties with Canada and Germany, social security benefits paid by those countries to U.S. residents are treated for U.S. income tax purposes as if they were paid under the social security legislation of the United States Treaty-related Benefits The Taxation of Foreign Pension and Annuity Distributions \| Internal Revenue Service (irs.gov) If you live in the United States and receive a pension/annuity paid by a foreign payor, you must claim the appropriate treaty withholding exemption on the form, and in the manner specified by the foreign government. If the foreign government, and/or the foreign withholding agent, refuses to honor the treaty claim, make the treaty claim on your income tax return, or other prescribed form, filed with the foreign country. Additionally, you may be able to claim a Foreign Tax Credit on your U.S. federal individual income tax return for any foreign income tax withheld from your foreign pension or annuity. Be aware that a Foreign Tax Credit generally would not be permitted for tax withheld that is in excess of the liability under foreign law, taking into consideration applicable income tax treaties.	TY 2023
Transactions Involving the Sale or Capital Gain/Loss of Virtual Currency	Pub 4012, (TY 2022) D-26 Transactions involving digital assets (virtual currency), such as a disposition, sale, exchange or transfer, are Out of Scope. However, the tax return is in scope if the taxpayer is able to select No to the digital asset question on Form 1040. See Scope of Service in this publication and irs.gov/ virtualcurrencyfaqs Page 6 (Scope of Service) In scope if taxpayers can check the No box (on the 1040). Taxpayers check No if they: • held no virtual currency for the tax year or if the taxpayer’s only transactions involving virtual currency during the tax year were purchases of virtual currency with real currency • held virtual currency in a wallet or account • transferred virtual currency from one wallet or account they own or control to another that they own or control • received virtual currency as an inheritance or gift	TY 2022
Mortgage Interest Credit (MIC)	Pub 4012, 17 (TY 2022)	TY 2022
Moving Expenses	Pub 4012, E-3 (TY 2022) Moving expenses apply to active duty military only. Must be certified for Military.	TY 2022
Bankruptcy	Pub 4012, EXT-2 (TY 2022) If the taxpayer is in bankruptcy, the tax return is Out of Scope for the VITA/TCE Programs.	TY 2022
Certain Business Returns (Schedule C)	Pub 4012, 10 (TY 2022) Not in scope for: (Note that the highlighted items are listed in our Program Limitations & Requirements handout). Also see note following list of OOS elements! • Hobby income or not for profit activity • Professional gamblers • Bartering • Any transactions involving digital assets • Method of accounting other than cash • Taxpayers who do not materially participate in the business • Payments made that require F 1099 to be filed • Returns and allowances • Cost of goods sold (inventory) • Total expenses over $35,000 • Vehicle expenses reported as actual expenses • Contract labor • Depletion • Depreciation or when F 4562 is required • Expenses for employees • Car rental or lease more than 30 days (use standard mileage rate method only) • Casualty losses, amortization • Business use of home • Net losses Per Pub 4012, Schedule C - General Expenses: All allowable and documented expenses must be reported on Sch C. If any deductible expenses are Out of Scope, the entire return is Out of Scope and taxpayer should be referred to professional preparer. There is no option to disregard allowable expenses.	TY 2022
Special Situations
Amended returns requested at a different UWTSA site.	If the site where the original return was prepared is still active, please ask the taxpayer to seek assistance there, since they will have access to it. If that site is not active anymore, or that option is not agreeable to the taxpayer, the SC should contact the UWTSA VITA team for a one-off solution.
Other state return required	If an AZ return is not indicated [for example, a prior year (PY) return must be completed, and the taxpayer was not an AZ resident for that year]: Execute GYR Kiosk process to enable a transfer to a Code for America partner in that state. Part-year AZ residency: Complete the return if the PY return is available (for consistency check) &/or site has knowledge of the relevant state’s tax law. Otherwise, execute GYR Kiosk process to allow for Hub team to perform research or obtain additional information as needed and complete the return.	TY 2023