IRS Audits - Part 4 Examining Process

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IRS Audits

4.1.4  Other Source Workload

4.1.4.1  (05-19-1999)
Introduction

  1. This chapter contains information for "Other Source" Workload. Guidelines and procedures described below are to ensure proper identification and authority for workload identification, return ordering, inventory controls, classification and quality review, including maintenance of select and survey rates.

4.1.4.2  (05-19-1999)
Alien Returns

  1. Generally, nonresident alien returns, Form 1040NR, will be examined by Director, Compliance. Under certain circumstances, some may be referred to the appropriate area PSP Support Manager for follow-up action. Returns on which an election under IRC Section 6013(g) or (h) has been taken, and returns falling under IRC Section 879, should be examined in the area office having jurisdiction over the spouse who is a resident or citizen of the United States. Exceptions are as follows:

    1. An exception is made for Forms 1040NR identified for examination when an alien comes to an area office for departing alien clearance. If the examination is made from a retained copy, and RTVUE does not provide the needed information, area Examination will promptly request the original return from the Philadelphia Service Center (PSC). The request will indicate why the return is needed. Also, consider use of RTVUE. If the examination is made of a delinquent return or pickup of an unprocessed currently filed return, the return and examination report will be promptly forwarded to PSC for processing.

    2. Another exception is for Forms 1040 or 1040A selected as a part of a regular area Examination program when it is determined that the taxpayer should have filed Form 1040NR. In these cases, appropriate adjustments will be made based on nonresident alien rules. Adjustments will be processed on the original filed Forms 1040 or 1040A. In these situations, examiners will prepare Form 3198, Special Handling Notice, with notation "Eliminate Form 1040 or 1040A annual mailing requirement since taxpayer should file Form Planning and Special Programs Handbook 1040NR." If a joint return was filed, area Examination may examine any related pickup of Form 1040NR for the taxpayer's spouse. The related return and examination report will be forwarded to the PSC for processing.

     

  2. Forms 1040 and 1040A filed and examined in domestic area offices will not be transferred to Director, Compliance merely because the taxpayer has left the United States. However, if the examination will need to be conducted overseas, the books and records are maintained overseas, or if the issues are sufficiently complex to warrant an international examination, returns may be transferred. Questions should be directed to the Chief, Technical Section, District Office 98.

4.1.4.3  (05-19-1999)
Automatics

  1. Tax returns designated as "automatic" must be classified and either selected for examination or accepted as filed on classification. Certain individual, corporate, partnership and fiduciary returns are identified as "automatic" . See the LEM for the criteria used to categorize these returns.

4.1.4.4  (05-19-1999)
Bankruptcy Notices

  1. The procedures after receiving Bankruptcy Notice from Collection are as follows:

    1. If the taxpayer's return is assigned in the Service/Customer Service Center Examination function, part 3 of Form 2552, Data Required for Proof of Claim, will be forwarded for association with the return. The Service/Customer Service Center will immediately forward the case file and part 3 to the appropriate area Examination function.

    2. If the taxpayer's return is assigned in an area Examination function, part 3 will be immediately forwarded for association with the return.

    3. If the return is unassigned in central files at the Service/Customer Service Center, the return and part 3, together with information regarding any prior Examination record, will be forwarded to the PSP Support Manager for reclassification. If examination is warranted, the return will be immediately assigned to an examiner. If examination is not warranted, the return will be accepted as filed.

     

4.1.4.5  (05-19-1999)
Change in Accounting Method

  1. When National Headquarters issues a letter to a taxpayer authorizing a change in accounting method, a copy is sent to the appropriate Area Director for follow-up action. The PSP Support Manager will prepare Form 5346 for subsequent (unfiled) years. Follow-up action is not required in all future years as long as the PSP Support Manager is reasonably certain that the taxpayer is complying with the terms, conditions and adjustments upon which permission is predicated.

4.1.4.6  (05-19-1999)
Claims

  1. Claims related to returns charged to Field Territory Managers are not classified by the Service/Customer Service Center Examination Branch. These claims are forwarded to the area for association with the return. All other claims which meet Category A criteria outlined in the LEM or as defined by instructions provided by the PSP Support Manager or Chief, Classification Section, are classified by Examination prior to processing. If the claim is selected, the original return is secured and forwarded to the appropriate area PSP Support Manager using Source Code 30.

  2. Service/Customer Service Center Classification section will classify all claims with a vow of poverty issue to determine if the issue should be examined. Returns selected for examination with this issue will be transferred to the appropriate area PSP Support Manager. These cases will be "flagged" to alert the area that there is a frozen refund.

  3. The area PSP Support Manager should provide local instructions to the Chief, Classification Section at the Service/Customer Service Center for use in the classification of claims.

  4. Classification checksheets will be prepared by the Service/Customer Service Center for returns selected for area examination.

  5. If a claim is selected by the Service/Customer Service Center and later surveyed by the area, the area will process the claim and send Letter 1024 to the taxpayer, if Letter 86C or Letter 96C was sent informing the taxpayer of the selection and status of the return.

4.1.4.6.1  (05-19-1999)
Claims — Tentative Carryback Allowance

  1. Tentative Carryback Allowance Cases with related returns (carryback or carryover years) currently open in area Examination will be forwarded to the area. The Service/Customer Service Center will take necessary action to update or control selected returns on AIMS.

  2. The tentative allowance cases will be classified by the Service/Customer Service Center as follows:

    1. With the loss year return only, if the tentative allowance is based on a net operating loss or a capital loss carryback.

    2. With the year of the unused investment credit only, if the tentative allowance is based on an investment credit carryback.

     

  3. If the Service/Customer Service Center Examination classifier determines that additional returns are necessary to complete classification, these returns will be requested.

  4. For selected returns, all affected carryback returns should be associated prior to shipping to the areas.

  5. Joint Committee Tentative Carryback Allowances in excess of $1,000,000 to the same taxpayer must be selected and referred to area examination in accordance with the IRM after the allowance has been made.

  6. In bankruptcy cases, the refund application, the loss year return and any additional returns necessary will be classified by the Service/Customer Service Center. If necessary, the Chief, Classification Section may contact the concerned area for information to determine the classification disposition of such cases. Area Examination may have already taken action on the bankruptcy case. If not and the case is selected for examination:

    1. The loss application(s) will be forwarded immediately to the appropriate area in a folder marked "Bankruptcy—Tentative Carryback Case."

    2. Upon receipt in the area by the PSP Support Manager, these cases will either be associated with any other examination activity underway regarding that taxpayer or, if there is no such activity, the PSP Support Manager will determine appropriate examination action and assignment.

    3. All Examination action must be completed and the Adjustment/Correspondence Branch at the Service/Customer Service Center notified of the disposition within 90 days from the date the application was received by the Service.

     

4.1.4.7  (05-19-1999)
Collection Referrals

  1. This section provides instructions for screening and processing the following types of referrals:

    1. Form 3449 (Referral Report)

    2. Form 3031 (Report of Investigation of Transferee Liability.

     

4.1.4.7.1  (05-19-1999)
Form 3449

  1. The PSP Support Manager or designee should screen all Forms 3449 referred to Examination within 15 days of receipt.

  2. An INOLE should be obtained to determine the taxpayer's most current address, possible spousal information and related return information.

  3. An IMFOLI should be requested to determine the filed and non-filed years that are open on master file. If the IMFOLI reads POSTED in the RETURN column for all years, then the taxpayer has filed all years. If the IMFOLI reads NONE in any of the years, or if there are years missing, then the case must be developed for assessment.

  4. An AMDIS should be secured to determine if there is an open year in status 10 or 12 in a group. If there is, the Form 3449 should be sent to that group along with the IDRS research previously mentioned in items 2 and 3. The Form 3449 will be forwarded along with a Document Transmittal (Form 3210). The group will determine the examination potential and follow local examination procedures.

  5. If it is determined that the taxpayer has not filed, PSP must develop the case information for the non-filed year(s). The spousal information, if applicable, should also be requested.

  6. The following additional research should be completed and/or requested:

    1. Locator services (Trans-Union and Data Quick)

    2. CBRS (Currency Transactions)

    3. IRPTRO

    4. IRPTRE (Request from the Service Center)

     

  7. PSP will use Substitute for Return procedures as outlined in the AIMS manual for each non-filed year.

    Exception:

    PSP will forward the completed package including Form 5345, along with a Document Transmittal (Form 3210), to their local Service Center for processing.

     

  8. Upon approval of the Form 5345, PSP will input the information on ERCS. An ERCS tracking code and an AIMS project code will be assigned.

  9. In four to six weeks, PSP will request an IMFOLT and AMDIS to verify that a full AIMS data base exists.

  10. Once a full data base is correctly and fully established on AIMS the case can be assigned to a group based upon local procedures and guidelines for assignment of returns.

4.1.4.7.2  (05-19-1999)
Form 3031

  1. The PSP Support Manager or designee should screen all Forms 3031 referred to Examination within 30 days after receipt.

  2. An INOLE should be obtained to determine the taxpayer's most current address.

  3. An AMDIS should be secured to determine if there is an open year in status 10 or 12 in a group. If there is, Form 3031 should be sent to that group along with a Document Transmittal (Form 3210).

  4. If there is no open year in status 10 or 12, the PSP Support Manager or designee should requisition the return(s) on ERCS, associate the return(s) with Form 3031 and forward to an examiner for verification of assets transferred and case write-up. Document Transmittal (Form 3210) will be used to forward the return(s).

4.1.4.8  (05-19-1999)
Compliance Initiative Projects (CIP)

  1. Compliance Initiative Project procedures ensure conformance with Service policies and procedures regarding privacy, security and disclosure. CIPs are characterized by the use of internal or external data to identify, quantify, evaluate and correct areas of noncompliance. They usually involve a study or other analysis of a group of individuals such as those within an occupation, industry, geographic area or specific economic activity or event.

  2. CIPs may be multifunctional in their approach. Fed-State and Fed-Fed activities already covered by the implementing agreement or author authority, Return Preparer Program, Criminal Investigation and routine business operations are exempt for CIP requirements. Routine business operations include:

    1. ordering, classifying and storing returns

    2. filing and verifying information

    3. extending examinations to related taxpayers

    4. classification and case building using MACS or RTVUEs.

     

  3. Other source workload included in this chapter for which CIPs are not required are Collection referrals, Criminal Investigation referrals, TE/GE referrals, Information Reports and Return Preparers. Detailed information is located in the Compliance Initiative Projects Handbook.

4.1.4.9  (05-19-1999)
Criminal Investigation Referrals

  1. Upon receipt of a Criminal Investigation Referral of an Information Item for potential civil action from the Field Territory Manager, the PSP Support Manager will evaluate the information for examination potential. The referral, prepared by CI, should include:

    1. A copy of the Criminal Investigation Information Items Form.

    2. All pertinent information gathered.

    3. The original and/or copies of the original tax return(s) relating to the information item.

    4. Copies of related tax returns, if any.

     

  2. If an information item is selected, the PSP Support Manager will ensure that requests for any original returns are made before assignment and that AIMS control is established using project code 135.

  3. After all necessary classification is complete, these information items should be promptly assigned.

  4. For information items not selected, all returns should be closed using regular survey procedures.

4.1.4.10  (05-19-1999)
Tax Exempt/Government Entities Referrals

  1. Form 5666, TE/GE Referral Information Reports should be associated with the case file in Examination if a return for the taxpayer and class of tax is open. If the Form 5666 is for multiple years and only one return is open in the area, all returns should be forwarded to the area office.

  2. Form 5666 should be returned to the Returns Program Manager (RPM), TE/GE, if there are less than 180 days remaining on the statute of limitations of the applicable return at the time the form is received in Examination.

  3. If Form 5666 is for multiple years and any one of the returns has less than 180 days remaining on the statute of limitations, that return should not be corrected. If this should happen:

    1. Photocopy Form 5666 and attach Form 41, Routing and Transmittal Slip, to the photocopy with the explanation "The tax return for period (YYMM) will not be corrected by Examination because there are less than 180 days remaining on the statute of limitations."

    2. Forward Form 41 and the photocopy of Form 5666 to the RPM, EP/EO Division.

    3. Retain a copy of Form 41 in the case file.

     

  4. If there is no open case file in Examination, the PSP Support Manager should determine whether the information report or other issues indicate that the return warrants examination. If an examination is warranted, the return should be requisitioned, associated with the Form 5666, forwarded to an examiner or placed in priority files. The appropriate source code and project code, if applicable, should be used.

  5. TE/GE referrals should be screened within 30 days of receipt. After the referral is screened, a copy of Form 5666 should be returned to TE/GE advising of the selection or rejection of the referral. If selected, the returned copy should indicate whether the referral has been assigned or has been placed in a priority file.

  6. While screening the applicable return, the return should also be classified for other issues.

  7. If the return has been previously examined, reopening procedures do not apply for this issue only.

  8. Contacts with an employer to adjust a deduction claimed on the employer's return resulting from an examination of the employer, with respect to a Form 5500 series return (as reflected on Form 5666), is a continuation of the examination and reopening procedures do not apply.

4.1.4.11  (05-19-1999)
Employee Returns

  1. The Chief, Classification Section will forward an employee return to the PSP Support Manager in the appropriate area when the return order has reached the DIF score level of the employee return. The return will be transmitted to the area in a pink envelope and a memorandum will be forwarded to the Field Territory Manager informing of such transfer and providing survey requirements.

  2. When the return is being prepared for assignment, the PSP Support Manager will assign the return to a post-of-duty other than where the employee works.

4.1.4.12  (06-22-2000)
Examination Information Reports — Form 5346

  1. All approved Examination Information Reports, Form 5346, and all reports received from other areas, including those relating to returns for tax years not yet filed, will be referred to the PSP Support Manager.

  2. An approved Form 5346 which relates to a taxpayer filing in another area will be mailed to the PSP Support Manager in the other area.

  3. All Forms 5346 which relate to area taxpayers will be AIMS researched to determine if a return for the same taxpayer and class of tax is open in Examination. If open, the Form 5346 will be associated with the case file.

  4. The PSP Support Manager will promptly screen the Forms 5346 received and:

    1. Those reports not properly completed, not approved, lacking sufficient information and/or submitted for a filed year, subsequent to one currently being examined, will be returned to the originator's supervisor.

    2. Forms 5346 marked "Termination of Taxable Period" may not be closed. The return must be secured and assigned for examination.

    3. Those reports, for which the returns are necessary for classification will be researched on IDRS to determine if the examination can be completed with a CC RTVUE print. If not, the return will be requisitioned.

    4. Forms 5346, which do not warrant examination for any reason, will be disposed of as provided by Records Control Schedule, IRM 1.15.46.

     

  5. The PSP Support Manager will input Source Code 60 for Forms 5346 submitted for subsequent (unfiled) years. After input on AIMS, these Forms 5346 will be sent to the Chief, Classification Section at the Service/Customer Service Center.

4.1.4.13  (05-19-1999)
Federal State Programs

  1. The exchange of confidential tax information between the IRS and the states is intended to increase tax revenues, increase taxpayer compliance and reduce duplicate resource expenditures. This information may be covered by the Agreement on Coordination of Tax Administration executed by the Area Director on behalf of the Commissioner of the Internal Revenue Service and the head of the state tax agency.

  2. It may also include a request for specific information not covered by the basic agreement discussed above. This request could be submitted to a state or some other governmental agency whether it be state, local or Federal.

  3. Fed/State initiatives based on data covered by the Fed/State agreement signed by the Area Director do not require a CIP. The data is part of routine business operations. If the data is something "ad hoc" that is requested from the state or another governmental agency, a CIP is required. However, only Part One approval is necessary in order to secure the data.

4.1.4.14  (05-19-1999)
Non-Cash Charitable Contributions

  1. Forms 1040 which have Form 8283, Non-Cash Charitable Contributions, attached and which meet the criteria of the LEM, will be sent to Examination using Audit Code C.

  2. A comparison should be made of the Form 8282, Donee Information Return, amount received by the charity upon disposition, to the Form 8283 filed by the taxpayer with their return. RTVUE, BRTVUE or MACS facsimiles can be used to ascertain the acceptability of the deduction.

  3. If significant differences are noted in these amounts, the return should be assigned for examination.

  4. Any Form 8282 which does not warrant examination after screening will be disposed of.

  5. A referral to the Art Panel, as necessary, will be anotated on Form 6754, Examination Checksheet, for donor tax returns selected for Office Examination. The presence of Form 8282 could eliminate the need for a referral since the form will show an exact recent sales price. If Form 8282 is not available, a referral to the Art Panel will be made.

  6. All returns selected for examination which involve works of art will be sent to the area PSP Support Manager using Form 3210, Document Transmittal. The transmittal should state that the case(s) involve works of art and a referral to the Art Panel may be warranted.

4.1.4.15  (05-19-1999)
Inadequate Records Cases

  1. The PSP Support Manager should select for examination all returns with Form 5346, Examination Information Report, attached, indicating that the taxpayer did not maintain adequate records of business expenses, unless they lack significant examination potential.

  2. An Inadequate Records Notice (IRN) coordinator should be established in each area to monitor the follow-up investigations.

  3. Returns that are surveyed must have a Form 1900, Income Tax Survey After assignment, completed and attached to the return.

4.1.4.16  (05-19-1999)
Income from Illegal Activities

  1. The PSP Support Manager should forward to the Chief, Criminal Investigation all income tax returns indicating substantial income from illegal activities.

4.1.4.17  (05-19-1999)
Informants' Claims for Rewards

  1. The PSP Support Manager will receive selected claims through the Informants' Claim Examiner (ICE) at the Service/Compliance Center. The Service/Compliance Service Center is responsible for establishing on AIMS the returns related to the claim for reward.

  2. The PSP Support Manager may accept or survey these claims if the available information indicates that an examination is not warranted. If the claim is accepted or surveyed, the PSP Support Manager must inform the ICE expeditiously.

  3. The PSP Support Manager will promptly assign any claims deemed worthy of examination to the appropriate group. These cases require seven point protection and should be assigned in double sealed pink security envelopes.

  4. The identity of persons who furnish information regarding possible tax violations must be protected. All employees must handle such information in strict confidence. Special handling must be given to avoid disclosure to other than those employees having a "need to know."

4.1.4.18  (05-19-1999)
Information Returns

  1. The Information Returns Master File (IRMF) will match information returns and Currency Transaction Reports (CTR) with any current tax year return ordered from the DIF, DIF Programs Correspondence and Self-Employment Tax (SET) inventory files, or delivered as an Automatic/Special for the current year and two prior years.

  2. This data will be printed on an IRMF transcript and summarized on a summary sheet. The transcript and summary will be associated with the related return prior to classification.

  3. If the Information Returns Program (IRP) produces an underreporter transcript for a return located in an area, the transcript will be forwarded to the appropriate area and:

    1. If under examination, the transcript should be associated with the return.

    2. Returns without time applied, or unassigned, should be screened for the IRP issue within 15 workdays after the transcript is associated with the return.

     

4.1.4.19  (05-19-1999)
Relief From Joint and Several Liability

  1. Under IRC Section 6015, a spouse may be relieved of income tax liability in some cases when he/she files a joint return but is not aware that the return is inaccurate as to items generated by the other spouse. In these cases, "Relief from Joint & Several Liability" provisions are applied. The PSP Support Manager should assign the case to the appropriate examiner.

4.1.4.20  (05-19-1999)
International Returns

  1. The Chief, Classification Section is responsible for identifying all returns with international characteristics. These returns may be manually classified at the Service/Customer Service Center or, in some instances, shipped to areas to be manually classified by international examiners.

  2. Returns selected for international features at the Service/Customer Service Center will be routed to the PSP Support Manager in the area office. These returns will be stored in Central Files, Priority Suspense Files or assigned to groups following area procedures.

  3. Refer to the classification section of this handbook for specific instructions on classifying international returns.

4.1.4.21  (05-19-1999)
Midwest Automated Compliance System — MACS

  1. MACS is an automated compliance tool that provides the capability to profile a population, identify market segments, and identify issues during screening. MACS contains Return Transaction File data and certain Master File information for three years for all taxpayers who filed within an area or service/customer service center area (IMF, 1120, 1120S, 1065 and 1041 only). MACS has stringent operating restrictions to ensure the securing of the data and that taxpayer privacy is not compromised.

  2. MACS may be used for information on specific taxpayers even if only a partial name or address is known. This includes a return facsimile in either a one year or three year comparative format and a Cash-T analysis. This information may be used for case building or return selection decisions. A MACS facsimile may be used in lieu of the original tax return.

  3. MACS may be used to identify potential noncompliance within a market segment, and to select a sample of returns to test the level of noncompliance.

  4. No taxpayer compliance contact, including examination action, taxpayer service education, etc., should be made on specific taxpayers identified using MACS prior to the approval of a Compliance Initiative Project (CIP).

  5. Returns selected for compliance contact using MACS based on any criteria other than activity code, POD, PIA/PBA code and DIF score equal to or greater than the local computed DIF cutoff score, must have an approved CIP before contact is made.

  6. Using a classification checksheet on BMF returns selected by using MACS is suggested.

4.1.4.22  (05-19-1999)
New Employee Examinations

  1. The PSP Support Manager will receive from the Transactional Processing Branch of the Support Services Division, Form 2677, Request for Account History and Tax Audit.

  2. The PSP Support Manager will take the following action on Forms 2677:

    1. Request the tax returns for two open years.

    2. Request transcripts of account history for the three open years. Use the information on the transcripts to answer question 9, Account History Data, on Form 2677.

    3. Forward the Form 2677 to a contiguous POD, not the employee's POD, for examination of the new employee's return.

    4. Examinations will be started using the employee's copy of his/her tax return, if available.

     

4.1.4.23  (05-19-1999)
Nonfilers

  1. This program encompasses all failures to file with probable unsatisfied tax liabilities. Nonfilers include, but are not limited to: Refund Hold; Federal Employee and Retiree Delinquency Investigations (FERDI); Individual Nonfiler Strategy (INS); Compliance Initiative Projects (CIP) generated; Examination Information Reports, Form 5346, Informants' Claims; Frivolous Filers/Non-filers; etc.

4.1.4.23.1  (05-19-1999)
Case Building

  1. On receipt, the nonfiler case file should be built to include the following:

    1. IDRS/CFOL research for the nonfiler and any related/crossreference nonfiler

    2. CC IMFOLI

    3. CC IMFOLT for all unfiled years

    4. CC INOLES

    5. CC IRPTRO/E for all unfiled years

    6. Taxpayer Delinquency Investigation (TDI) Supplement, if available

    7. CC RTVUE, if available

    8. Currency and Banking Retrieval System (CBRS) research.

     

  2. Additional information which will be useful includes locator service (e.g. CDB Infotech) research, DMV information and other project generated internal/external information.

  3. All unfiled years within the six year enforcement period should be addressed, per Policy Statement P–5–133.

  4. Case building may also include the preparation and processing of the Substitute for Return (SFR). The decision whether to process the SFR should be made at an area level.

4.1.4.23.2  (05-19-1999)
Classification

  1. On completion of the building phase, the nonfiler case file should be classified for examination potential, while maintaining an emphasis on compliance. The classifier should consider how the nonfiler was initially identified; type and dollar amount of income reported per the IRP document or other third party source; and other information available such as cash transactions, real estate owned and location, high dollar mortgage interest, etc.

  2. The classifier must also review Master File information for the unfiled years. All nonfiler cases referred by Collection will reflect Transaction Code (TC) 595. Other TC's 59X should be researched using the ADP Document, Section 11.11, to determine if the delinquency was resolved previously. In general, these modules should not be pursued unless contrary information exists. If a previously resolved module will be pursued, TC 592 must be used. If TC 494 is reflected on the module, the case is being pursued by Automated Substitute for Return (ASFR) at the Service/Customer Service Center. ASFR should be contacted to coordinate control. If a TC 420/424 is reflected, CC AMDISA should be researched to determine correct control.

  3. As a general rule, collectibility should not be a consideration when classifying nonfilers; however, if the potential for non-collection is significant, a nonfiler case may be removed from the program and not pursued (e.g. nonfiler is incarcerated for 15 years). In instances where a nonfiler will not be pursued, all unfiled years/modules must be "satisfied" using a TDI satisfying transaction code and closing code.

4.1.4.23.3  (05-19-1999)
Control

  1. Nonfiler cases must be controlled on ERCS/AIMS prior to assignment. On controlling these cases, one of the following nonfiler source codes must be used. These are the only valid source codes for controlling nonfiler cases.

    1. Source Code 24 — "Known" nonfiler. Any taxpayer with an unfiled tax return and there is a record of the taxpayer on Master File.

    2. Source Code 12 — Used for related delinquencies generated from a DIF examination.

    3. Source Code 44 — Used for related delinquencies generated from a non-DIF examination.

     

  2. Every nonfiler case must reflect a project code which represents how the nonfiler was identified or generated. The most common project codes are identified below. If the nonfiler generated from a CIP, the nationally/locally defined project code must be used.

    1. Project Code 012 — INS Program, FY 98.

    2. Project Code 129 — Used for nonfiler cases worked by a CORR Tax Examiner. Correspondence cases should also reflect an ERCS tracking code. Aging reason code 99 must also be used.

    3. Project Code 149 — Referred/Accepted Fraud Referral.

    4. Project Code 150 — "Unknown" Nonfiler.

    5. Project Code 154 — Unagreed SFR Closing. Used for PC 150 and 156.

    6. Project Code 156 — "Known" Nonfiler.

    7. Project Code 437 — High Income, Select.

    8. Project Code 449 — High Income, Related.

    9. Project Code 655 — Refund Hold, SFR.

    10. Project Code 669 — INS Program, FY 97.

     

  3. All nonfiler cases must reflect Push Code 037, which allows the creation of an AIMS record when no TC 150 exists on Master File. This code holds the record on AIMS for 26 months.

  4. If no entity for the nonfiler exists on Master File, Form 2363, Master File Entity Change, should be prepared and input immediately. This will create the entity and allow for the AIMS record to be established.

4.1.4.23.4  (05-19-1999)
Assignment

  1. Nonfiler cases should be assigned to either field, office or correspondence examination. Cases which require an indirect method to determine income should be assigned to field or office examination. "Simple" nonfiler cases (i.e. cases reflecting wages, nonemployee compensation, interest, dividends, etc.) should be assigned to correspondence examination, if available, or office examination.

4.1.4.23.5  (05-19-1999)
Tracking

  1. This program encompasses many "types" of nonfilers. Certain nonfilers will require minimal tracking. Others will require substantial tracking. The use of correct source codes, project codes and tracking codes will simplify this task. Nonfilers generated from the INS and Refund Hold Programs require some degree of tracking. Tracking under the INS Program has been defined by national direction. Refund Hold cases must be tracked to ensure that any current year refunds are not being held without reason.

4.1.4.23.6  (05-19-1999)
Monitoring

  1. The Nonfiler Program should be monitored on a regular basis for the following:

    1. Overage — days in process

    2. Proper handling of non-pursued cases (must be resolved using satisfying transaction and closing codes)

    3. Proper use of source, project and tracking codes

    4. Proper handling of cases through the examination pipeline

    5. Proper assessment and closing of delinquent returns.

     

  2. Any errors or problems determined from monitoring should be addressed and brought to the attention of all Examination personnel.

4.1.4.24  (05-19-1999)
Offers in Compromise

  1. Offers in Compromise, based solely on doubt as to liability, not rejected by Service/Customer Service Center Classification or from the area Collection function, will be forwarded to Area Examination for further investigation. Area Examination will make a determination whether the offer merits further consideration. See the Examining Officer's Guide for further information on Offers in Compromise.

  2. In the case of an offer in compromise which relates only to issues of liability of the taxpayer:

    1. such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability, and

    2. the taxpayer shall not be required to provide a financial statement.

     

4.1.4.25  (05-19-1999)
Prompt Assessment Examination Requests

  1. Any returns referenced in a request for prompt assessment or prompt examination that are selected for examination by the Service/Customer Service Center Classification Section will be controlled on AIMS by the Center to the appropriate area office. The Center will use Letter 621C, or another appropriate letter, to notify the requester that the request has been transferred to the area for consideration.

  2. Upon receipt of requests for prompt assessments, Examination will proceed at the earliest possible date to close the returns which have not already been administratively closed. If an area is not in possession of the original returns for the taxable years needed in a prompt assessment request and such returns have not been administratively closed, the examination should proceed using the taxpayer's retained copies. The original returns should subsequently be requisitioned.

  3. If the statutory period for assessment as prescribed in IRC 6501(d) is about to expire and the taxable years covered in the request cannot be closed prior to the expiration date, the taxpayer will be given an opportunity to file a consent. In no case should the taxpayer be requested to withdraw the request for prompt assessment.

  4. When a request is received by an area involving a case that is pending before Appeals, a copy of the request will be sent to the Appeals office having physical possession of the returns.

  5. The PSP Support Manager will then assign the return(s) to the appropriate function, Office or Field

4.1.4.26  (05-19-1999)
Questionable Form W–4

  1. Any questionable Form W–4, Employee's Withholding Allowance Certificate, case referred by the Service Center Collection Branch (SCCB) to an area office, will be set up in PSP under a manually controlled system using Form 5354, Examination Request Nonmaster File, and an employee label. In addition to the employee's name, address and SSN, which is printed on the label, you should record the W–4 Control Document Locator number, the date the case is received in the area and the date the case is closed from the area and returned to the SCCB W–4 Coordinator.

  2. The SCCB W–4 Coordinator will send the W–4 case file to the PSP Support amanager in the area where the employee resides. SCCB will also send Letter 86(c) to the taxpayer to inform him/her of this action.

  3. The PSP Support Manager will then assign the W–4 case to the appropriate Examination function, Office Examination or Field Examination.

  4. If the employee does not respond to the appointment letter mailed by the Examination function, the file will be documented and returned to PSP. PSP will in turn close the case and return it to the SCCB W–4 Coordinator.

  5. The determination on the questionable Form W–4 by the area Examination function and the subsequent return of the file to the SCCB W–4 Coordinator should be made within 60 days from the date the W–4 is received in the area. PSP will be responsible for the timely completion of these cases.

  6. Form 3210, Document transmittal, will be used by PSP to forward completed case files to the SCCB W–4 Coordinator for further action.

4.1.4.27  (05-19-1999)
Reconsiderations — Source Code 73

  1. Cases selected for reconsideration prior to payment of the tax will be noted as "Reopened" and established on AIMS using Source Code 73 by the Service/Customer Service Center. If the issues cannot be resolved by correspondence, the case will be forwarded to the appropriate area.

4.1.4.27.1  (05-19-1999)
Request for Reconsideration — Form 3870

  1. In certain instances Examination personnel will receive requests from Collection and/or Taxpayer Service functions to review information submitted by taxpayers in disputed deficiency assessments. These will include instances when the taxpayer has received a balance due notice or is contacted by a Collection function employee and contends that:

    1. the taxpayer has never received any notification prior to Collection contact;

    2. the taxpayer has moved since filing the return in question and did not receive notice of the examination; and/or

    3. the taxpayer has never had the opportunity to submit the substantiation required, however, now has the necessary documents or documentation.

     

  2. Form 3870, Request for Adjustment, will be prepared by the referring function and will be identified as "Taxpayer Request for Reconsideration of Audit Assessment." Form 3870 will contain a complete explanation of the reasons the case should be reconsidered and the taxpayer will be required to sign the form. The taxpayer is also required to provide supporting documentation for reconsideration.

  3. Examination will evaluate the information and, if possible, make an immediate administrative determination concerning the liability in question. If Examination cannot make a determination within 30 days, the case will be closed with a TC 470, closing code 90. Examination will then reestablish controls under AIMS and secure the administrative file for further consideration. If the contact originated in Collection, Examination must notify that function that the case has been taken into AIMS inventory.

  4. The PSP Support Manager is designated to act as the central point for Examination. The screening and the assessment of the audit reconsideration should be performed by the PSP Support Manager. In addition, the PSP Support Manager will also perform periodic reviews of reconsideration cases to ensure that the criteria is being consistently applied.

  5. The following should be excluded from the above procedures:

    1. Frivolous Filers/Non-filers.

    2. Assessments made as a result of a closing agreement or in which the tax is compromised under IRC 7122,

    3. Assessments made after final TEFRA administrative procedures resulting from taxpayer executing an agreement on Form 870–AD, Offer of Waiver of Restriction on Assessments and Collection of Deficiency in Tax and of Acceptance of Overpayment, and

    4. Assessments related to a return closed on the basis of a final order of the U.S. Tax Court or other Court.

     

4.1.4.28  (05-19-1999)
Return Preparers Program

  1. Return preparer penalties are described in IRM 20.1.6, the Penalty Handbook. Program action on any preparer must be approved by the Area Director before the client returns can be examined. The PSP Support Manager or the Examination Return Preparer Coordinator (RPC) is usually responsible for identification, classification and control of return preparer program cases.

  2. The RPC reviews, generally within one day, all complaints and/or questions from any source concerning the quality of returns prepared by an individual.

  3. Leads primarily originate in Office Examination. The RPC reviews these referrals and if a program action case is possible, the following occurs:

    1. The RPC obtains a client list via IDRS.

    2. The list is reviewed by selecting random returns using IDRS command code RTVUE. If the actual return is necessary before continuing, it is requested using Source Code 45.

    3. The RPC selects returns which are ordered using Source Code 49 when the project is approved.

    4. Project returns are classified and selected returns are established on ERCS using the RPC's organization code.

    5. Returns are then assigned and updated to the appropriate group organization code as they are received.

     

4.1.4.29  (05-19-1999)
Section 338 Elections

  1. All Section 338 Elections, Certain Stock Purchases Treated as Asset Acquisitions, completed packages should be forwarded to the PSP Support Manager by the Section 338 Technical Reviewer.

  2. For all elections on Form 8023, the PSP Support Manager in the area where the purchasing corporation is located will be responsible for securing all relevant returns and coordinating examinations of the returns by using collateral requests or support requests on CEP cases. Relevant returns include:

    1. Purchasing Corporation

    2. Selling Corporation

    3. Target Corporation, and/or

    4. Deemed Sale Return

     

  3. The PSP Support Manager will ensure that these returns are classified in the area as a group (purchaser, seller and target), and where possible, by agents with Section 338 technical expertise.

4.1.4.30  (05-19-1999)
Service/Customer Service Center Identified Work

  1. The following types of cases are identified at the Service/Customer Service Center and are forwarded to the area PSP Support Manager. For further information, you should refer to the Service/Customer Service Center manual.

    1. Family Estate Trusts

    2. Forms 966/964 Liquidations

    3. Historical Structures

    4. HUD/FHA Walk-Aways

    5. Questionable Refund Detection Team (QRDT)

     

4.1.4.31  (05-19-1999)
Special Enforcement Program — SEP

  1. When information is received by Criminal Investigation indicating that Examination activity relating to a Special Enforcement taxpayer appears warranted, they will refer the information to the Examination function.

  2. The Examination function will independently evaluate the referred information. Examination standards for potential Strike Force cases should be consistent with Strike Force objectives. Civil case selection standards may not be applicable in any narrow sense to a potential Strike Force case. All available information needs to be considered that is relevant to the operations of a particular taxpayer. Information items determined as not having civil potential will be returned to Criminal Investigation.

  3. Any return selected for examination will be ordered or updated using the appropriate source and/or project codes relating to SEP. Note that source and/or project codes currently being used in Information Gathering/Compliance Initiative Projects will not be used when such projects relate to SEP.

4.1.4.32  (05-19-1999)
Statistics of Income

  1. The following procedures are subject to change with Area approval.

  2. Statistics of Income "SOI" returns will be classified in the Examination Branch at the Service/Customer Service Center. If selected, the returns will be photocopied as follows:

    1. If a return is not unusually large, the entire return will be copied. The original will be forwarded to Centralized Files or the area PSP Support Manager, and the copy used for statistical purposes.

    2. If a return is too voluminous to copy, only the first page of the return will be copied. The partial copy will be forwarded to the area PSP Support Manager and the original will be forwarded to SOI.

     

  3. If the original of a partially copied return is urgently needed for immediate examination, the area PSP Support Manager should contact the Chief, Classification and provide the identifying information necessary to secure the return; name, TIN, tax year and type of return.

    1. A return is urgently needed for immediate examination when the requested Examination action cannot be initiated or completed using the taxpayer's retained copy. The fact that the copy is not made available does not alone justify requesting a return from the Statistics of Income Division. All factors, such as the availability or nonavailability of the retained copy, along with the specific Examination need, e.g., prompt examination request, fraud, undue delay, etc., must be considered when determining the need to submit such a request for a SOI return.

     

  4. If there is a long delay in receiving a SOI return, National Headquarters Classification Section should be contacted through area channel.

  5. After returning from SOI, selected returns must be established on AIMS before shipment to the area office.

4.1.4.33  (05-19-1999)
Special Selection System Returns

  1. Certain individual returns are identified as Specials based on specific features on the return. These returns are sent to the area PSP Support Manager for assignment. The following audit codes (see Exhibit 4.1.3–1 for definitions) are handled as follows:

    1. Audit Code B — No special processing

    2. Audit Code C — Cases selected for examination by Service/Customer Service Center Classification should be fully classified. Cases should be flagged with Form 3198, Special Handling Notice, or other method to alert the area for potential assignment to an issue specialist.

    3. Audit Code D — No special processing

    4. Audit Code K — Comment as to the reason for selection should be made on the classification checksheet.

    5. Audit Code L — Appropriate comments should be made on the classification checksheet.

    6. Audit Code Q — No special processing

     

4.1.4.34  (05-19-1999)
Tax Shelters

  1. Tax shelters utilize improper or extreme interpretations of law or the facts to secure for investors substantial tax benefits which are clearly disproportionate to the economic reality of the transaction.

  2. Returns identified as tax shelters will be treated as Specials and delivered to the Examination Branch at the Service/Customer Service Center and screened by personnel experienced in the tax shelter area. If selected, the tax shelter return will be assigned to the area PSP Support Manager for examination. PCS controls should then be established.

  3. For TEFRA shelters, Service/Customer Service Center Classification will screen investor returns to determine if the deductions and/or credits from the pre-filing notification were claimed.

  4. If the deductions and/or credits from the pre-filing shelter are claimed and there are no other shelter issues on the return, the return will be selected for Service/Customer Service Center examination.

  5. If the deductions and/or credits from the pre-filing shelter are claimed and there are other shelters on the return in addition to the pre-filing shelter, the return will be selected and sent to the area for mandatory examination of the pre-filing shelter and consideration of the other shelters.

  6. If the deductions and/or credits from the pre-filing shelter are not claimed and there are no other shelters on the return, the return should be screened for other issues according to existing Classification procedures. If there are no other issues on the return, it will be accepted as filed.

  7. If the pre-filing shelter is not claimed and there are other shelters on the return, the return will be selected and forwarded to the appropriate area office for examination. Source Code 17 will be used for key shelter returns and Source Code 39 will be used for related shelter returns. Project Code 121 will be used for Pre-filing Notification cases.

  8. TEFRA procedures must be followed when distributions come from a TEFRA partnership and a pre-filing notification is issued.

  9. For non-TEFRA shelters, after inputting PCS controls, the investor returns will be sent to the area PSP Support Manager and put into area suspense.

4.1.4.35  (05-19-1999)
Taxpayer Compliance Measurement Program (TCMP)

  1. Taxpayer Compliance Measurement Program (TCMP). In some areas, the PSP Support Manager will be designated to be the Area TCMP Manager and will be responsible for monitoring the Area program, controlling the receipt and disposition of TCMP returns, checksheets and all other TCMP material.

  2. The PSP Support Manager has the ability to analyze the inventory of the current phase of TCMP returns by utilizing the TCMP Generalized System (TGS) and/or the open case database. Activity code and post-of-duty can be determined for planning purposes. TCMP returns are identified by source code 80. As examinations begin, source code 91 is used for related returns.

  3. TCMP returns are not ordered. These returns are delivered to the area in the initial months of the ongoing phase. TCMP returns should be assigned in accordance with TCMP program guidelines.

4.1.4.36  (05-19-1999)
TEFRA Partnerships

  1. The area PSP Support Manager should take the following actions on an Administrative Adjustment Request (AAR) and the related partnership/S corporation return:

  2. An AAR requesting "substituted return" treatment may be accepted as filed, assigned for examination or disallowed in full/part. For AARs which are allowed in full:

    1. Prepare Form 4318, Examination Workpapers, notating what actions have been taken.

    2. Complete Form 886–S, Partners' Share of Income, Deductions and Credits or Form 886–X, Small Business Corporation Shareholder's Share of Income. This may be done by the QMS, PSP or ESS Unit at the area's option.

    3. Forward to the Quality Measurement Staff (QMS). QMS should then forward the complete case file to the partnership/S corporation Service/Customer Service Center ESU Unit for processing.

     

  3. For AARs which are disallowed in full/part:

    1. Prepare "Formal Notification of AAR Disallowance." This may be done by the QMS, PSP or ESS Unit at the district's option.

    2. Forward to QMS.

     

  4. For AARs not requesting "substituted return" treatment or not allowed such treatment:

    1. The proposed adjustments may be allowed as in 2 above.

    2. Assign the AAR and partnership/S corporation return for examination, or

    3. Take no action on the request, forwarding it to QMS with instructions to issue a "Formal Notice of AAR Disallowance," as in 3 above.

     

  5. For AARs submitted by a partner/shareholder on his/her own behalf:

    1. The partnership/S corporation return will be forwarded to the area PSP Support Manager in the controlling area along with the partner/shareholder AAR and Form 8150, Action Request for Form 8082.

    2. The PSP support Manager should screen the AAR and partnership/S corporation return and allow the request in full/part as being partnership/S corporation items; allow the request in full/part as being non-partnership/S corporation items; or, assign the Form 1065/Form 1120S and Form 8082 (AAR) for examination.

    3. Upon completion of any of the actions taken in b above, Form 8150, together with any appropriate schedules, will be returned to the original partner/shareholder Service/Customer Service Center by the PSP Support Manager.

     

4.1.4.37  (05-19-1999)
Title 31 and Form 8300 Referrals

  1. The PSP Support Manager or designee should screen all Title 31 and Form 8300 referrals within 30 days after receipt.

  2. An INOLE should be obtained to determine the taxpayer's most current address, possible spousal information and related return information.

  3. An IMFOLI should be requested to determine the filed and non-filed years open on master file. If the IMFOLI reads POSTED in the RETURN column for all years, then the taxpayer has filed all years. If the IMFOLI reads NONE in any of the years, or there are years missing, then the case must be developed for assessment.

  4. An AMDIS should be secured to determine if there is an open year in status 10 or 12. If there is, the referral should be sent to that group along with the IDRS research previously mentioned in items 3 and 4. The referral will be forwarded along with a Document Transmittal (Form 3210). The group will determine the examination potential and follow local examination procedures.

  5. If there is no open year in status 10 or 12, and the taxpayer has filed a return, PSP will requisition the return(s) on ERCS and forward the return(s) to an examiner based upon local procedures and guidelines for assignment of returns.

  6. If it is determined that the taxpayer has not filed, PSP must develop the case information for the non-filed year(s). Spousal information, if applicable, should also be requested.

  7. Locator Services (Trans Union and Data Quick) should be requested along with other income information using the IDRS command code IRPTRO.

  8. PSP will use Substitite for Return procedures for each non-filed return.

    Exception:

    PSP will forward the completed package including Form 5345, along with a Document Transmittal (Form 3210) to their local Service/Customer Service Center for processing.

     

  9. Upon approval of the Form 5345, PSP will input the information on ERCS. An ERCS tracking code and an AIMS project code will be assigned.

  10. In four to six weeks, PSP will request an IMFOLT and an AMDIS to verify that a full AIMS data base exists.

  11. Once a full data base is correctly and completely established on AIMS, the case can be assigned to a group base upon local procedures and guidelines for return assignments.

4.1.4.38  (05-19-1999)
Training Returns

  1. Returns identified as training returns should be selected as a normal part of classification and assigned Project Code 204. If the returns are not used for training, the project code should be removed. Other methods to secure training returns would be the use of MACS in the area or ordering from the DIF CORR inventory located at the Service/Customer Service Center. All related, subsequent year, and/or prior year returns secured in connection with the training return will also have Project Code 204 assigned, regardless of when the related examination is started. Supplemental or special DIF orders can be made to secure training returns if a large volume is needed.

4.1.4.39  (05-19-1999)
Transfer of Returns

  1. Generally, the examination of any income, estate, or gift tax return is the responsibility of the area in which the taxpayer resides or conducts its business or maintains its principal office. The examination will generally be assigned to an examiner at the post-of-duty nearest to the taxpayer's residence for a non-business return or place of business for a business return.

  2. Transfer of returns for examination from area to area and between posts-of-duty in the same area will be governed by Regulation 26 CFR 301.7605 (published in the Internal Revenue Bulletin in 1990). By observing the regulatory guidelines on time and place of examination, the convenience of the taxpayer will be balanced with the requirements of sound and efficient tax administration.

  3. In addition to the general guidelines noted below, examiners must be familiar with all details of the regulation.

    1. No less than thirteen months will remain on the statute of limitations for assessment when the return is transferred from one area to another.

    2. Service/Customer Service Center transfers to area offices will not be initiated with less than seven months remaining on the statute of limitations.

    3. Office Examination: taxpayers will be able to attend an audit interview at a Service office closest to their residence in the assigned area providing that office has appropriate personnel.

    4. Field Examination: the audit will be conducted at the location where the original books, records and source documents are maintained, unless, in the case of small businesses, doing so would significantly disrupt the taxpayer's operation and require the business to close. This does not preclude on-site visits by the examiner.

     

  4. A taxpayer may request a transfer of an examination if they no longer reside or conduct business at the site shown on the original return. The taxpayer's request to transfer the place of examination must be written and must take into account the following factors:

    1. location of the taxpayer's residence,

    2. location of the taxpayer's business,

    3. where the taxpayer's books and records are maintained,

    4. character and extent of inconvenience at origin of taxpayer's request.

     

  5. The regulation provides further guidelines on time and place of examination with respect to incapacitated taxpayers, Service initiated transfers, location of representative's office, seasonal fluctuations in the business of the taxpayer or representative, and requests for transfer to offices with insufficient resources.

  6. When an income, estate, or gift tax return is transferred from one area to another for examination, the following procedures should be followed:

    1. Form 3185, Transfer of Returns—Transfer of Administrative File, will be used as the transmittal notice.

    2. All cases will be routed to the PSP staff for review prior to transfer. This requirement will ensure that only those cases meeting appropriate criteria are being transferred.

    3. The transferring area will close out the return using Disposal Code 30.

     

  7. The overall impact on compliance should be considered when determining if a return should be transferred for examination or should be surveyed.

  8. Examiners should strictly adhere to the "case-by-case" standard contained in the regulation for determining if a transfer is appropriate. No additional criteria should be developed by examiners or areas.

  9. If an examiner is assigned a case that was transferred from another area and it becomes clear that the books and records and other source documents needed to complete the examination are not available in that area, this case should be referred to the group manager for resolution. Group managers (or PSP Personnel) will contact PSP staff from the transferring area to determine which area will complete the examination. If agreement cannot be reached at the PSP level, the case will be referred to the Field Territory Manager level for resolution. Under no circumstances should the case be returned to the transferring area without prior telephone contact and agreement. Taxpayers and/or representatives should be consulted as necessary during this process and should be advised expeditiously where the examination will be completed.

4.1.4.40  (05-19-1999)
Frivolous Filer/Nonfiler Program

  1. The area director will designate a Frivolous Filer/Non-filer Program Coordinator responsible for monitoring the implementation of this program. In many instances, someone from the Planning and Special Programs staff is selected to be the coordinator.

  2. The coordinator should consult with Area/National Headquarters for specific instructions as to program responsibilities.

4.1.4.41  (05-19-1999)
Appeals Referrals

  1. A case may be referred to Examination from Appeals (where Appeals jurisdiction is not released) where the taxpayer challenges; a) underlying liability as to existence or amount or b) spousal defenses. (Refer to Section 3401 of RRA 98.)

  2. These cases should be given priority and assigned for examination within 30 days of receipt. These cases must be worked in the area and cannot be referred to any centralized Audit Reconsideration or Innocent Spouse units in the service centers.

 
 

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