IRS Audits - Part 4 Examining Process

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IRS Audits

4.1.7  Assignment of Selected Returns

4.1.7.1  (05-19-1999)
Overview

  1. This chapter discusses the assignment of selected returns.

  2. The Examination Plan is the blueprint for the allocation of staffing between the various activity codes and return categories. The PSP Support Manager is responsible for ensuring that returns are available for input by the groups in a manner that accomplishes the Plan. This must be balanced with program priorities and initiatives. They are, in descending order of priority:

    1. Current National Headquarters studies. Examples: TCMP, No TIN, etc. These studies usually involve a finite number of cases with specific completion goals.

    2. Current National Headquarters initiatives. Examples: Increase Excise coverage, Increase high asset corporate coverage. These initiatives usually affect the current fiscal year.

    3. Cases governed by the IRM requirements concerning items such as input deadlines, mandatory subsequent/prior year follow-up examinations, or special processing. Examples: Claims; Joint Committee; Bankruptcy; Tax Shelters; Reconsideration of Service Center contacts and locally initiated cases; Direct referrals; TEFRA investors received from the Service Center Examination Suspense Unit for Non-TEFRA issue development; Inadequate records notice subsequent years; Closing agreement, Form 906; etc.

    4. Locally identified projects. Examples: Compliance Initiative Project/Information Gathering Projects, Return Preparer Projects, etc.

    5. DIF and DIF related returns. After available priority and initiative type returns, which are cases meeting the priorities stated above, are input, the line item accomplishment expectations and class of tax accomplishment expectations are the very broad rules used to guide the remaining return input. The Return Starts analysis in Chapter 2 of this handbook should also be used as a guide.

     

4.1.7.2  (05-19-1999)
Market Segment Specialization

  1. The Market Segment Specialization Program (MSSP) is a mandatory program. PSPs should consider major market segment examinations as part of planning for the Examination Plan.

  2. Group managers have the responsibility of assigning returns to examiners by market segment. The PSP has responsibility to identify MSSP inventory and deliver it to the groups. Some of the tools available to the PSP are:

    1. Reports CSP 4340 and CSP 5240 — reports generated from the service center that provide a breakdown of inventory stored at the service/customer service center by PIA code.

    2. MACS — The Midwest Automated Compliance System can be used to profile populations and identify returns by market segment. Compliance Initiative/Information Gathering Project approval is required to order returns below the DIF cutoff or returns selected using criteria other than activity code, POD and PIA/PBA Code Refer to the MACS User Guide for more information.

     

  3. The PSP Support Manager should ensure that returns are classified by examiners with MSSP expertise. This applies to DIF and non-DIF returns.

  4. NORA/DORA research projects. Cases should be timely and properly developed and assigned to groups for examination.

4.1.7.3  (05-19-1999)
Assignment of Returns From Central Storage and Centralized Files & Scheduling

  1. Returns are assigned from Central Storage and Centralized Files and Scheduling as outlined in IRM 4.1.6 of this handbook.

  2. Field examination cases are generally assigned from Central Storage to the receiving group in status 10. Office examination cases are generally assigned to the receiving group from Centralized Files and Scheduling in status 12. Office examination orders, in particular, should be closely monitored to minimize potential adverse effects on cycle time.

4.1.7.4  (05-19-1999)
Control and Management of Tax Return and Return Information

  1. All tax return information, including MACS and RTVUE/BRTVU facsimiles, must be distributed to the offices outside PSP via a Form 3210. The sender must retain a copy of the Form 3210 for group control, and should use Form 3538, Document Transmittal, or similar instrument as allowed, to monitor the transmittal of tax returns or return information via Form 3210. If acknowledgement is not received within 10 days, immediate follow-up should be made by phone or mail.

  2. Those returns and facsimiles distributed for the purpose of making an audit determination must be returned to PSP within 30 calendar days. PSP will establish them on AIMS if selected for examination or dispose of them as soon as it is determined they are no longer needed. If the audit determination is made within PSP, the return or facsimile should be established on AIMS within 30 calendar days if selected or disposed of as soon as it is determined it is no longer needed. Local procedures may be substituted with the written approval of the Area. Facsimiles distributed for case building should be marked for "information only" .

  3. The same security should be provided for any tax return information produced or received in connection with other source work as is given actual tax return and all other confidential taxpayer information. Tax return information includes but is not limited to MACS and RTVUE/BRTVU prints and copies of taxpayer returns from external sources. Any documents containing taxpayer identifying information that are distributed outside PSP should be transmitted via Form 3210.

4.1.7.5  (05-19-1999)
Surveys from the Centralized Scheduling Database

  1. The Field Territory Manager has the responsibility to approve the survey of prior year returns. It is recommended that a memorandum to the Chief, Classification at the service/customer service center be initiated by the PSP Support Manager timely enough to ensure that office and field examination returns are surveyed by December 31. Refer to Chapter 6 of this handbook for further information.

4.1.7.6  (05-19-1999)
Glossary

  1. Exhibit 4.1.7–1 is provided as an aid to the handbook.

Exhibit 4.1.7-1  (05-19-1999)
Glossary of Terms

(1) Accomplishments Closed inventory in status 80 or higher.
(2) AIMs Assignee Code Twelve digit code used to determine the location or status of tax return on AIMs.  
(3) Amended Returns Inventory An inventory of Form 1040 paid claims (Category B).
(4) Base inventory The optimal level of work in process necessary to accomplish the Plan.
(5) BOD Business Operating Division.  
(6) Centralized Files Computerized central storage of unassigned inventory replaces the majority of the manual central files system previously operated in each area. The returns are located in the Centralized Files and Scheduling Unit (CFSU) at the service center. Included are unassigned field individual returns, corporate returns through Activity Code 217, and non-tax shelter partnership returns and Form 1120S returns. Central storage of Form 1041, U.S. Fiduciary Income Tax Return, is optional.
(7) Centralized Scheduling Centralized Scheduling is a system designed to store tax returns and schedule initial office examination appointments using computer generated letters.
(8) Compliance Initiative Project (CIP) Formerly known as Information Gathering Projects, Return Preparer Projects, etc. CIP’s are any research projected designed to identify, measure or analyze taxpayer noncompliance.
(9) CORR Return Low and medium non-business individual returns (Examination Classes 531, 532, and 533 DIF returns) which have been computer identified as possibly having issues which may be susceptible to correspondence-type examination by service centers.
(10) Current File Year The current file year is the tax year of returns which currently can be ordered for classification. For example, file year 1997 returns can be ordered for classification between 7/1/97 (Cycle 9727) and 6/30/98 (Cycle 9826). During this period, the current file year is File Year 1997. File year 1996 would be referred to as the prior file year and 1998 would be the subsequent file year.
(11) Delivered A return identified for delivery to be classified/screened.
(12) DIF A mathematical technique used to computer score income tax returns as to examination potential. Examination potential is indicated by a numeric score which is assigned to each return by Examination class; the greater the score, the greater the examination potential within each Examination class.
(13) DIF Regular Return A DIF return which receives a DIF score above the minimum cutoff score and is not a DIF Special or Automatic return.
(14) DIF Return An income tax return scored by DIF.
(15) DIF Score The score assigned to a return based on a mathematical technique.
(16) Employee Group Code Identifying code that replaced AIMs organization code.  
(17) Examination Class A method used to categorize returns by the amount of income or assets. For corporation returns, examination class is sometimes referred to as asset class.
(18) File Year A calendar year in which returns are filed; sometimes referred to as Processing Year, Posting Year, DIF File Year. All returns when received are maintained, processed, posted and filed on a calendar-year basis. For example, file year 1997 refers to all returns filed between 1/1/97 and 12/31/97.
(19) Inventory Returns available for classification or screening that have not been identified for delivery.
(20) Manual Classification The method of manually selecting returns with the highest potential for examination when the returns are not included in the DIF scoring system.
(21) Manual Screening The process of making judgment decisions to accept as filed by classification returns initially classified by computer. This includes setting the scope and establishing the type of examination for most selected returns.
(22) Master File A computer record containing all information with respect to taxpayers’ filing of returns and related documents, both individual and business. Individual return data is stored on the Individual Master File (IMF). Corporation, Employment, Estate, Excise, Partnership and Fiduciary return data is stored on the Business Master File (BMF).
(23) MCC Processing Cycle The cycle in which the Martinsburg Computing Center (MCC) posts returns processed by service center, selects returns, and creates tapes to print Examination Assemblies and reports. The cycle is expressed by a four digit code. The first two digits represent the file year, the second two digits represent the week of that file year (e.g. Cycle 9704 is the fourth week of the 1997 File Year).
(24) Midwest Automated Compliance System (MACS) An automated compliance tool available in districts and service centers. It contains three years tax return data and other Master File data for all IMF and BMF income tax return filers in the district or service center area.
(25) Minimum Cutoff Score A score established whereby returns with lower scores are excluded from DIF inventory.
(26) NBTPI Nonbusiness Total Positive Income includes all TPI items less:
(a) Schedule–C Net Profits
(b) Schedule–F Net Profits
(27) Primary Business Code The first three digits of the AIMs assignee code. Identifies the BOD and the Area office or Campus controlling a return.  
(28) PSP PSP refers to Chief, Planning and Special Programs. PSP sometimes is used to refer to the employees assigned to PSP Branch. The Chief, Planning and Special Programs position is sometimes referred to Chief, Planning or Chief, Planning and Technical Branch.
(29) Secondary Business Code Digits 6, 7, and 8 in the AAC used to identify a Territiory or processing unit where a return is located.  
(30) Special Return A return which contains one or more of the features, identified by Audit Codes (see Exhibits in Chapter 3), which must be delivered for screening or classification. All categories of Specials will be automatically delivered except Self Employment Tax Returns (Audit Code V) and Alternative Minimum Tax Returns (Audit Code W).
(31) Tax Preference Return A return identified as possibly having issues which may create minimum tax liability.
(32) Total Gross Receipts Total Gross Receipts (TGR)
(a) Schedule–C, Gross Receipts and/or,
(b) Schedule–F Gross Receipts
1. Cash Method
    a. Gross Receipts from Sales of Purchased Livestock and Other Items Purchased for Resale.
    b. Gross Receipts from Sales of Raised Livestock and Produce and Other Farm Income.
  2. Accrual Method
    a. Sales of Livestock
    b. Sales of Crops and Products
    c. Agricultural Program Payments
    d. Commodity Credit Loans
    e. Federal Gasoline Tax Credit
    f. State Gasoline Tax Refund
    g. Other Farm Income
(33) Total Positive Income (TPI) Total Positive Income (TPI). Only total positive values from the income fields listed are used. Losses are treated as a zero.
  (a) Wages
  (b) Interest
  (c) Dividends
  (d) Other Income
    1. State Tax Refund
    2. Alimony
    3. Schedule–D Profits
    4. Capital Gains Distributions
    5. Form 4797
    6. Fully Taxable Pension
    7. Rents and Royalties
    8. Income Other
  (e) Distributions
    1. Partnership
    2. Small Business Corporations
    3. Estate or Trust
  (f) Schedule–C Net Profits
  (g) Schedule–F Net Profits
(34) TPI Business Return Individual returns meeting at least one of the following conditions:
  (a) TGR $100,000 or more; or
  (b) TGR $25,000 under $100,000 and nonbusiness TPI is under $50,000; or
  (c) TGR is under $25,000 and TGR is greater than nonbusiness TPI.
(35) TPI Nonbusiness Return Individual returns meeting one of the following conditions:
  (a) No Schedule C or F; or
  (b) TGR under $25,000 and nonbusiness TPI exceeds TGR; or
  (c) TGR is $25,000 under $100,000 and nonbusiness TPI is at least $50,000.
(36) TPI Return An individual return filed after December 31, 1979, and DIF scored based on TPI (Total Positive Income).
(37) Turnover Months The number of months it will take for a return to be closed from work in process.
(38) Turnover Rate The number of times in a one year period that a return will be closed from work in process.
(39) Work-in-process Generally refers to status 12 inventory.
 
 

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