A wide range of tax literature is available to Service personnel. Monthly publications such as The Journal of Taxation, Taxation for Accountants, and Taxation for Lawyers, published by Warren, Gorham & Lamont, include articles pertaining to Federal tax matters.

Numerous books presenting detailed analyses of tax laws and issues are available and provide excellent sources of information. One of the better known is Federal Income Taxation of Corporations and Shareholders by Bittker and Eustice, published by Warren, Gorham & Lamont, which has been cited by the Supreme Court.

A number of tax services are available from commercial publishers that provide explanations and annotations on a variety of tax issues. Well known examples include CCH Incorporated’s Standard Federal Tax Reporter, Bureau of National Affairs’ Tax Management Portfolios, and Research Institute of America’s American Federal Tax Reports.

Although these services may not be available in office libraries, they may be available through other library systems, i.e., public libraries or universities.

Electronic tax research using computers, compact discs, and on-line tax services is also available. Information can be accessed quickly and all references to a given topic, obtained by searching, by specific words or word groups. Most of the documents discussed above are available from commercial vendors on compact disc or online.

Evidence is something which tends to prove a fact or point in question. Evidence is distinguished from proof, in that proof is the result or effect of evidence.

The Internal Revenue Code requires all taxpayers to keep adequate records. There are times, due to unusual circumstances, when records do not exist. In such cases, oral testimony may be the only evidence available. Therefore, oral statements made by taxpayers to examiners represent direct evidence which must be thoroughly considered. Although self-serving, uncontradicted statements which are not improbable or unreasonable should not be disregarded. The degree of reliability placed on a taxpayer’s oral statements must be based on the credibility of the taxpayer and surrounding circumstantial evidence (7.3.10 below) . The following general guidelines should also be considered:

A summary of a conversation or statement made by a taxpayer or witness should be prepared as documentation of the oral testimony and the taxpayer (or third party) should be requested to sign the document. It should always be signed by the examiner or examiners party to the interview. If the taxpayer or third party does not sign the documentation, then it is considered a report of the interview. This summary document should always contain:

Sometimes a more formal written statement is needed when documentation is not available and oral testimony will significantly affect the outcome of the case. In these cases examiners should assume that the case may eventually be resolved through litigation and should use formal written statements such as affidavits to record taxpayer or third party statements. An affidavit is an attested statement and has great validity when properly prepared and voluntarily given. Affidavits should be completed using Form 2311. Affidavits may be used:

If oral testimony is accepted or where oral testimony is not allowed, the workpapers should reflect a full development of the facts, oral statements, corroborating evidence and conclusions, including an explanation of the factors supporting the conclusion. "Per oral testimony" or "as reasonable" are insufficient unless the amounts are both de minimis and reasonable.

One of the basic rules of evidence is that witnesses (either taxpayers or third parties) can testify only about facts of which they have first hand knowledge. In other words, witnesses must be able to say the facts to which they testify are true.

Some issues are so difficult that the ordinary person needs assistance from someone more familiar with the subject to understand and resolve the matter at hand. An expert opinion is made by someone with the education and experience to qualify as an expert. Thus, expert testimony is needed.

Hearsay is what a witness says another person was heard to say. It is a secondary source of information and generally the reliability and trustworthiness of the evidence rests upon the veracity and reliability of a person giving testimony.

A common example of hearsay evidence is testimony of taxpayers’ representatives. It should therefore be recorded in the workpapers by examiners. Hearsay often leads to primary sources of information.

A statement that is harmful to the person making the statement is considered an "admission against interest" . When an admission is made voluntarily and with deliberation, it represents substantial evidence that the fact admitted is probably true.

An opinion is a belief not based on absolute certainty, or a judgment or evaluation of what seems to be true. Opinions are statements of personal feelings.

An opinion is not conclusive evidence of a fact. But opinions may be the only evidence available. Before accepting an opinion as evidence, make every effort to obtain other documentary evidence.

Opinions emphasize connotative meaning, that is, how someone feels about something; how they value it.

Opinions cannot be proven or verified. The only criterion for testing an opinion is whether it is acceptable or not, believed or not believed.

There are three primary types of opinions:

Observations are statements, judgements, or inferences of fact based on something observed. It is the act of recognizing and noting a fact or occurrence.

Documents are another form of evidence. Documentary evidence is generally regarded as having great probative (providing proof or evidence) value. Writings made contemporaneously with the happening of an event generally reflect the actual facts and show what was in the minds of the parties to the event.

While documentary evidence has great value, it should not be relied on to the exclusion of other facts. Facts can also be established by oral testimony and there will be occasions when courts will give greater weight to oral testimony than to conflicting documentary evidence.

Circumstantial evidence is evidence from which more than one logical conclusion can be reached. To be useful, both the credibility of the evidence and the reasonableness of the conclusion should be evaluated.

The best evidence rule requires that, when possible, original evidence be used. Therefore, examiners should always ask to the see original documents when there is reason to believe such documents are available.

Secondary evidence is used when original evidence is unavailable. Examples of acceptable secondary evidence are copies of original documents made by an examiner. In the absence of original documents, copies made by the examiner become the best evidence available.

The fact in dispute can, in some cases, be proved by showing other facts from which the fact can be inferred. In other words, as a matter of logic, an inference can be made from facts to decide a disputed fact.

An inference is a logical conclusion based on facts. Things beyond the range of what can be observed are inferences.

A determination of taxpayer credibility is most often required in connection with evaluating oral evidence presented by taxpayers (see 7.3.2, Oral Testimony).

It is the responsibility of examiners to establish the taxpayer’s or third party’s credibility as part of the evaluation of oral evidence. Corroborative or contradictory details will have an important bearing on determining the reasonableness and probability of the statements.

If the statements of taxpayers, in the judgment of examiners, suggest some degree of unreliability, the decision to accept some, all or none of the oral statements as credible evidence should take this into account. However, unless taxpayers’ statements are found to be wholly unreliable, they must be given some weight in the conclusion reached.

When deductions (such as exemptions for dependents) are based on a substantial number of small expenditures all of which cannot be substantiated by documentary evidence, examiner judgement will be used to reach a reasonable determination. This is provided there is basis for allowance under the law and regulations.

These instructions are not intended to relieve taxpayers of the burden of proof, nor to sanction their failure to comply with the recordkeeping requirements of the law and regulations. Rather, they are intended to give examiners flexibility in the evaluation of incomplete evidence that is often encountered in everyday administration of the tax laws.

Examiners will exercise sound judgment to make reasonable determinations. The examiner must be sure that there is a basis for each allowance. This involves consideration of the following elements, which will vary according to the nature of the items involved and the circumstances of the case:

Close approximations of items, not fully supported by documentary proof, can frequently be established through reliable secondary sources and collateral evidence. For example, in questionable exemption cases, the fact that taxpayers cannot furnish documentary evidence in support of some of the amounts contributed need not be fatal to allowance of the exemption. Taxpayers may be able to demonstrate the total cost of support with reasonable certainty and satisfy examiners, for example, by third-party affidavits, that only nominal amounts were contributed by others.

Due consideration should be given to:

The practice of disallowing amounts claimed because there is no documentary evidence available, which will establish the precise amounts beyond any reasonable doubt (even though it is clear that the taxpayer did incur some expense) ignores commonly recognized business practice, as well as the fact that proof may be established by credible oral testimony. However, an arbitrarily computed portion of deductions in this situation will not be allowed merely for the purpose of expediting the closing of the case.

The extent of the allowance in (7) above should be governed by the principles stated in (4), (5) and (6) above. Allowances should be consistent with an appraisal of the facts and conservative to ensure that taxpayers do not profit from failure to keep required records of all elements of travel expenses.

The Law Enforcement Manual contains tolerances to be observed for deficiencies and various types of penalties. Consult the applicable section as needed.

The definition of "significant" or "material" depends on an examiner’s perception of a return as a whole and the items that comprise the return. There are several factors, however, that examiners must consider when determining whether an item is significant. These factors include:

Generally, automatic adjustments (obvious errors or omissions on the return) in excess of tolerances are to be considered significant items.

The impact on compliance within a segment of the population, sector of the economy, or similarly situated taxpayers will be considered when making a decision whether or not to raise an issue.

Once an examination has begun and a decision is made to limit the scope of an examination on account of collectibility, examiners will complete the examination at the earliest possible opportunity.

In making the determination, the following should be considered:

The steps taken to determine whether to limit the scope of the examination are to be documented. One item on Form 4318 should summarize the conclusions reached.

The scope of the examination may be limited on an employment tax examination. However, examiners should avoid taking any action that would give the taxpayer a safe haven. As an alternative, examiners should limit the number of returns examined. This approach minimizes the potential tax liability, while avoiding the likelihood of giving the taxpayer a safe haven.

When permission has been given to limit the scope of the examination due to collectibility, the following adjustments should be included in the audit report:

Judgment should be exercised when identifying which issues are to be considered "developed." The following areas should be considered in making the decision:

Once a determination to limit the scope has been made and approved, the determined tax liability will always be assessed.

In examinations conducted by examiners using field techniques, timing issues should be dealt with at the planning level. Generally, planning an examination to include short-term timing issues is not an effective use of resources. However, unplanned timing issues which are uncovered or arise as a correlative adjustment during an examination of non-timing issues should be made if cost effective to do so.

The pre-contact and/or examination plan should preclude the inclusion of timing issues, except those with long term, flagrant short term, indefinite, or permanent deferral features.

Coordinated Issues (ISP Positions) are major issues of particular importance to an industry that have been selected for industry-wide coordination.

Managers and examiners auditing cases within an industry will follow the decisions on coordinated issues formulated by the Industry Specialization Program.

Resolution of a coordinated issue on a basis, different than that formulated by the Industry Specialist requires the approval of the Industry Specialist and the National Industry Coordinator. In identified industries cases, decisions to avoid pursuit of a coordinated issue area also require the concurrence of the specialist. This also applies to cases which must be closed due to an imminent statute expiration, prior to issuance of the Industry Specialist’s final report on the issue.

For more information on the Industry Specialization Program (ISP) , see your Area Industry Specialization Technical Coordinator (AISTC).

The term "whipsaw" refers to situations where the government is subjected to conflicting claims by taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and correct reporting of the transaction will benefit one and hurt the other for tax purposes.

A potential whipsaw situation could be present in almost any transaction; however, experience has shown the following issues to generate the majority of whipsaw cases:

When whipsaw issues are identified, examiners will secure the name, address, and the tax identification number (TIN) of the related party. A transcript will be requested to determine the related party’s examination status. If a RTVUE display contains sufficient data to complete the examination of the related party, a collateral request is not necessary. Otherwise, Form 6229 will be prepared to request a collateral examination. The primary objective of requiring support examinations of these returns is to assure consistent treatment of related taxpayers or taxpayers involved in the same transaction.

With the exception of TEFRA Partnership/S corporation examinations, there is no guidance outlining the manner or time for discussing issues with taxpayers. Generally, substantive issues should be proposed and discussed with taxpayers or their representatives face to face. In some circumstances a telephone call may suffice, but this would be the exception.

Closing conferences vary widely in the degree of formality, but generally follow the same format:

A report should not be given to the taxpayer prior to discussing the findings and proposed issues with taxpayers or their representatives. Exceptions to this rule would be for a no-show appointment or an uncooperative taxpayer. To facilitate discussion, examiners may provide taxpayers with a listing and brief description of items to be discussed at the closing conference so that taxpayers can be prepared to discuss the issues and/or present additional information.

Be prepared to converse knowledgeably and explain proposed adjustments in language the other person can understand. Be ready to provide taxpayers with copies of relevant court cases and computations to help explain the adjustments. Avoid extraneous issues that have no bearing on the issue and distract from resolving differences.

Listen to the taxpayer. Examiners should get a clear understanding from all persons present that there are no pertinent facts other than those of which the examiner is aware. This can be done in a positive manner by stating, "This is my understanding . . .," and then detailing the