Audit reports should contain all the information necessary to ensure a clear understanding of the adjustments and document how the tax liability was computed. Examination reports (unlike workpapers) are legally binding documents and, when executed, serve as the basis for assessment and collection action. Based on this importance, examiners should take all necessary steps to ensure report accuracy.

Report Generation Software (RGS) is required for generation of all income tax examination reports (with the exception of LMSB agents utilizing BNA Software) and for entry of all data required for the Examination Operational Automation Database (EOAD) See IRM 4.10.16. EOAD was designed to provide data that would allow the tracking of examination adjustments by issue and related cause. This data is used to enhance the ability to identify specific areas of noncompliance based on examination reports. Procedures for use of RGS in report writing can be found in RGS User Guides and training materials. See IRM 4.10.8.17.3.

IRC § 6212 requires the Service to include an explanation of the entire audit process with any first report/notice of proposed deficiency. Publication 3498, The Examination Process, will be used for this purpose.

The following procedures will be followed:

Agreement forms are considered "executed" when the taxpayer(s) has signed the form. Executed agreement forms should also indicate the date received by the IRS (agreement forms should be date stamped upon receipt).

Taxpayers, upon receipt of an audit report, may wish to pay the deficiency immediately. Form 3244, Payment Posting Voucher, should be processed with the funds if payment is received. Attach a copy of the completed Form 3244 to the face of the tax return.

Cases may be processed without an executed agreement form if a full paid remittance, not specifically designated as a cash bond, is received in response to a proposed liability. See Rev. Proc. 84-58, 1984-2 C.B. 501.

Cases should be closed from the group within the following timeframes ( IRM 4.4.18 requirements for expedite processing, e.g. agreed, unpaid deficiencies in excess of $50,000, will take precedence over the standard timeframes indicated below):

IRC § 6404(g) provides for the suspension of interest when the Service fails to provide timely and adequate notice of a tax liability. Examination report Form 4549 is sufficient notice if it contains an explanation of each item of adjustment. IRM 4.10.8.12.13 addresses the requirements and delivery of the notice to the taxpayer.

No-change cases will be closed by issuing a no-change report to the taxpayer upon the completion of the no-change examination (see IRM 4.10.8.2.3 for detailed procedures).

When an examination results in both change and no-change years, the appropriate basic report should be prepared for all years. The column for the no-change years should have "None" or zero on lines 2, 14 and 19 of RGS Form CG-4549 or CG-4549A, Income Tax Examination Changes, or line 2 of Form CG-4605 or CG-4605A, Examination Changes.

This section includes procedures for an examination which results in adjustments to taxable income but does not change the taxpayer’s liability.

In cases where the years examined result in adjustments to taxable income but no change to the tax liability, it is important to notify the taxpayer of, or secure agreement to, the audit adjustments, so that such adjustments will be properly reflected in subsequent year returns. A report on Form 4549 or 4605 (with any necessary supporting schedules) should be prepared and given to the taxpayer at the conclusion of the examination.

It is not necessary to secure the taxpayer’s agreement since there is no tax liability.

Upon completion of a no-change examination of any return in office or field examination, the examiner will provide Letter 3401, No-Change Report Transmittal Letter, and one copy each of the no-change report to the taxpayer and the taxpayer’s representative (if Form 2848, Power of Attorney and Declaration of Representative, authorizes the representative to receive notices and communications). Letter 3401 advises the taxpayer that a no-change is proposed but is subject to review. It does not replace Letter 590 which is issued after the case is officially closed. Letter 590 (undated) should be prepared and signed by the Examiner and included in the case file when closed from the group.

An RGS no-change report will be generated or a no-change report will be prepared on Form 4549 with the following modifications:

On Form 3198, Special Handling Notice, check the blocks for " No Change Letters" and "Letter 590" in the "Typing Instructions" section. Letter 590 is issued by Centralized Case Processing and notifies the taxpayer that the no-change report has cleared review and will be closed as a no-change.

Formal re-opening procedures do not apply if subsequent changes are needed before issuance of the formal no-change letter.

The "no-change" report may be acceptable documentation for repetitive audit verification in lieu of Letter 590 if the transaction code on the transcript collaborates the taxpayer’s no-change report.

Form 4549, Income Tax Examination Changes, is the basic report form for regular agreed individual and corporate cases. The RGS generated version of this report is Form CG-4549.

Instructions for preparing Form 4549 are outlined below. Sections of the form not discussed are self-explanatory.

Name and Address — enter the correct name and address of the taxpayer.

Taxpayer Identification Number — use Social Security Number (SSN) if individual also has an Employer Identification Number (EIN). On joint returns, check master file to determine which SSN was used as the primary number for the year(s) examined.

Person with Whom Examination Changes Were Discussed — enter individual with whom changes were discussed. If a power of attorney or corporate officer, also enter title.

Tax Period — enter the taxable year for which the column applies. For calendar, fiscal, and 52–53 week year, show the year ending date (mm/dd/yyyy). For a short period, show the beginning and ending date.

Adjustments to Income — list adjustments. Place a bracket around the dollar amount if an adjustment is in the taxpayer’s favor. If there are more than fifteen adjustments write, "See page __" on line 1(a) and use Form 4549–B, Income Tax Examination Changes — Adjustment to Income, for listing the adjustments.

Taxable Income Per Return or as Previously Adjusted — enter the final figure computed by the taxpayer on the last processed return or as computed on a prior processed examiner’s report if applicable.

Corrected Tax Liability — identify how the tax was computed (tax table, tax rate schedule, etc.), the taxpayer’s filing status (complete for individual returns only) and the amount of tax. If additional tax such as Parent’s Election to Report Child’s Interest and Dividends, Tax on Accumulation Distribution of Trusts, Tax on Lump-Sum Distributions, maximum tax, etc., applies, indicate on this line and attach schedule showing the computation of corrected tax figure. Likewise, if the alternative minimum tax (AMT) applies, attach a schedule showing the computation of the AMT.

Less Credits — this line should include only non-refundable credits. Do not include credits such as earned income credits or withholding tax and excess FICA credits.

Other Taxes — include recapture taxes, self-employment tax, etc. Attach the appropriate forms detailing the computations. Do not include alternative minimum tax on this line.

Total Tax Shown on Return or as Previously Adjusted — include tax per return plus any additional tax assessed/abated as reflected on a transcript.

Adjustments — Any changes to special fuels or prepayment credits should be reflected on this line. The calculation of any changes should be attached to the agreed report.

Penalties — IRC § 6751 requires that penalties be identified by the name of the penalty, the IRC section under which the penalty is imposed, and include a computation of each penalty on every notice (report) imposing the penalty. Standard Explanations contained in RGS are required to be used by all examiners imposing a penalty after December 31, 2000. See Exhibit 4.10.8-16 and See Exhibit 4.10.8-17 for a list of Standard Explanations. If the penalty cannot be currently computed, place an asterisk in the line amount field and describe the process of the calculation in "Other Information."

Form 4549 or the computer generated Form CG-4549 will be used by Office Auditors, Tax Compliance Officers and Tax Resolution Representatives to secure agreements from taxpayers in deficiency or overassessment cases. The 45-day waiver will no longer be added to agreed reports. See the instructions for preparing Form 4549/CG-4549 outlined in IRM 4.10.8.3.1 above.

Statements should be included in the "Other Information " section of the report as needed. Below are examples of statements which should be used to clarify the examination results:

Form 4605, Examination Changes Partnerships, Fiduciaries, S Corporations and Interest Charge Domestic International Sales Corporations, is the basic report form for use in these cases. The computer generated version of this report is Form CG-4605 and is prepared using the RGS program.

Form 886–S, Partners’ Shares of Income, Deductions and Credits, and Form 886–X, Shareholders’ Shares of Income, Deductions and Credits, are forms used to identify partner and shareholder level adjustments for each year in which a change is recommended.

Form 886-Z, Partner’s or S Corporation Shareholder’s Shares of Income, should be printed for the case file only. It reflects the percentages of ownership that are not on the Form 886-S or Form 886-X. See IRM 4.31.2, TEFRA Examinations - Field Procedures and IRM 4.31.5, Non-TEFRA Examinations - Field Office Procedures, for procedures in working a TEFRA or non-TEFRA key case and related investors. See IRM 4.31, Flow-Through Entity Handbook for procedures.

Form 886-S, Form 886-X and Form 886-Z should clearly reflect corrected items of income, separately stated items and other items to be adjusted at the investor level. See Exhibit 4.10.8-1 for a sample non-TEFRA report. See Exhibit 4.10.8-2 for a sample TEFRA report.

Basic procedures for a "regular agreed" closing:

Form 4605 is the basic report form for "regular agreed " Domestic International Sales Corporation (Form 1120–DISC) cases.

Form 886–Y, Examination Changes — Shareholder’s Share of Deemed and Actual Domestic International Sales Corporation’s Distributions, is prepared in conjunction with Form 4605 for each year in which a change is recommended to show the corrected Schedule of Distributions.

This section addresses the type of reports used for this entity. Specific instructions for preparing the forms are addressed in other sections.

Deficiency, Overassessment or Claim — results should be presented on a Form 4549.

Distributions to Beneficiaries — changes should be reflected on Form 4605. Form 886–W, Beneficiary’s Shares of Income, Deductions, Credits, should be prepared for each year in which a change is recommended. The Form 886–W is used to show the corrected distribution of each beneficiary’s share of fiduciary income and credits.

When both of the situations described in paragraphs (2) and (3) occur, the instructions in both such paragraphs should be followed.

Partially agreed corporate and individual cases.

Claims allowed in full or part in a partially agreed case if there are agreed adjustments in addition to the claim.

When an overassessment on one return and a deficiency proposed on a related return is the result of the shifting of income or expenses (whipsaw issues).

"Excepted agreed" fiduciary cases.

Form 1120S, U.S. Income Tax Return, for an S corporation case where small business corporation provisions of the Internal Revenue Code (Subchapter S) are not applicable.

Cases involving Personal Holding Co. deficiency dividends.

Joint Committee Cases

Transferor—transferee cases

Unagreed cases requiring a Preliminary (30-Day) Letter

Forms in the 870 series are used to indicate that the taxpayer is waiving the statutory restriction upon assessment and collection of the deficiency of tax.

FORM 870 — Generally used instead of Form 4549.

FORM 875 — Form 875 may be signed by any principal or general fiduciary or corporate officer authorized to sign binding agreements.

FORM 870–PT/S/LT — TEFRA agreement forms used instead of Form 4605, Examination Changes Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations.

Instructions for agreement forms in the 870 series:

The reports and forms required to close a partially agreed individual or corporate case are as follows:

Form 4665 Report Transmittal. See IRM 4.10.8.10.5 below, for instructions.

Form 4549–A should be prepared using only the agreed adjustments. The additional tax computed will be reflected on Form 870. Indicate "Agreed Issues" on the top of the Form 4549–A report. The Form 4549–A reflecting the agreed issues should be included in the case file as a workpaper to document the calculation of the tax shown on Form 870.

Form 870 is used to secure agreements where no S-corporations or TEFRA issues are involved.

A second Form 4549–A should be prepared to show both agreed and unagreed adjustments.

Lead sheets for all remaining unagreed issues should be attached and procedures for unagreed cases should be followed. See IRM 4.10.8.10.2.

Form 3198, Special Handling Notice, should be on the outside of the case file specifying "Partial Agreement." Form 870 must be processed prior to the issuance of the 30-day letter for the unagreed issues.

The procedures for processing a partially agreed Non-TEFRA partnership case are the same as the procedures for individual and corporation cases outlined in IRM 4.10.8.5.1, with the following exceptions for different forms.

Form 4605–A is the basic report for partially agreed partnership cases. See IRM 4.10.8.3.4.1 instructions for Form 4605 which also apply to Form 4605–A.

Form 886–S, Partner’s Shares of Income, Deductions, and Credits, is prepared for each change year.

Form 875 is used for securing agreements in partially agreed Non-TEFRA cases.

See IRM 4.31.5, Non-TEFRA Examinations-Field Office Procedures.

The procedures for processing a partially agreed Non-TEFRA S Corporation case are the same as the procedures for individual and corporation cases outlined in IRM 4.10.8.5.1, with the following exceptions for different forms.

Form 4605–A is the basic report for partially agreed S corporation and fiduciary cases. See IRM 4.10.8.3.4.1 above for instructions for Form 4605 which also apply to Form 4605–A.

Form 886–X, Shareholders’ Shares of Income, Deductions, and Credits, or Form 886–W, Beneficiary’s Shares of Income, Deductions, Credits, is prepared for each change year.

Form 4549–A is used in partially agreed S corporation or fiduciary cases when a deficiency or overassessment is recommended against the corporation or trust, or if a claim is involved. The tax computation should be shown in the "Other Information" section of Form 4549–A or on an attached lead sheet.

Forms 870 and 875 are used to secure agreements in partially agreed S corporation and Fiduciary cases that are not involved in TEFRA proceedings.