IRS Audits - Part 4 Examining Process

[ Home ] [ Services ] [ FAQ ] [ Site Map ] [ Contact Us ]

IRS Audits

Chapter 14. Statutory Notices of Deficiency

Section 1. Statutory Notices of Deficiency Issued by Area Offices (Cont. 2)

4.14.1  Statutory Notices of Deficiency Issued by Area Offices (Cont. 2)

4.14.1.19 
Protests, Correspondence and Waivers Received After Issuance of Notice of Deficiency

4.14.1.19.2 
Additional Information and Reconsideration Requests

4.14.1.19.2.1  (10-30-2004)
Notice of Deficiency Reconsideration Cases

  1. A notice of deficiency reconsideration case is one in which the taxpayer received a notice of deficiency and requests reconsideration of the deficiency.

    • Cases in which a notice of deficiency has been mailed and returned undeliverable are reconsiderations.

    • Delinquent returns submitted by the taxpayer are reconsiderations. See section 4.14.1.19.2.2, Delinquent Return Secured, below.

     

  2. The tax liability shown in the notice of deficiency cannot be increased. Exceptions are found in IRC sections 6212 and 6213.

  3. New issues cannot be raised unless introduced by the taxpayer. Affirmative issues can be raised by the Service if the taxpayer files a petition with the Tax Court.

  4. The notice of deficiency issued will not be voided and the assembly should not be disturbed.

4.14.1.19.2.2  (10-30-2004)
Delinquent Return Secured

  1. If the taxpayer provides a completed tax return once the notice of deficiency is issued, treat the return as " substantial documentation" and follow normal examination reconsideration procedures. This applies whether or not an assessment has been made (TC 290 or 300), unless a petition has been filed with the Tax Court.

  2. If a petition has been filed with the Tax Court, the delinquent return will be transmitted to the appropriate Appeals Office that serves the area making the determination of the tax liability.

  3. The statute of limitations must be updated to correctly reflect the receipt of the delinquent return.

4.14.1.19.2.3  (10-30-2004)
Information Results in Decrease to Deficiency

  1. The following actions will be taken.

    1. Prepare a revised examination report. On the revised report, adjust the amounts shown on the original return. Clearly label the top of the revised report "Supplement to the Notice of Deficiency. " This revised report does not nullify or supersede the original notice of deficiency, nor does it extend the period for filing a petition with the Tax Court.

    2. Send Letter 555 (DO) to the taxpayer.

    3. Assess tax shown on delinquent return and applicable delinquency and estimated tax penalties.

    4. Return case file to suspense files.

     

4.14.1.19.2.4  (10-30-2004)
Information Results in No Change to Deficiency

  1. The following actions will be taken:

    1. Send Letter 555 (DO) to the taxpayer.

    2. Return case file to 90-Day suspense files.

     

4.14.1.19.2.5  (10-30-2004)
Information Results in No Deficiency

  1. Send Letter 645 (DO) to the taxpayer and close case as "no change" .

4.14.1.19.3  (10-30-2004)
Waivers of Restriction on Assessment

  1. When a signed agreement or waiver form is received, the 90-day suspense period is terminated. The following forms are considered agreements:

    • Form 870, waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment — used for individuals, corporations and fiduciaries

    • Form 890, Waiver of Restrictions on Assessments and Collection of Deficiency and Acceptance of Overassessment

    •  

    • Form 4089, Notice of Deficiency - Waiver

    • Form 4549, Income Tax Examination Changes

    • Form 5564–A, Notice of Deficiency - Waiver

     

  2. If the taxpayer(s) waives the restrictions upon assessment and collection of the deficiency in whole during the 90-day period, the case will be transmitted immediately to Case Processing for assessment of the deficiency.

    1. Recompute the statute date based on the agreement receipt date. See Exhibit 4.14.1–5 for the steps on recomputing the statute date. Enter the new statute date on the control card and Form 895.

    2. Annotate the control file to show that a full agreement was received and close out all controls.

    3. Clearly identify or flag all statute cases. The AIMS database should be updated to reflect the new statute date. Notify the statute control employee of the new statute date.

     

  3. If the taxpayer waives the restrictions upon assessment and collection of the deficiency in part, the waiver and the return will be transmitted to Case Processing for assessment of the agreed portion of the deficiency.

    1. Flag these cases as partial agreement cases for identification and processing purposes.

    2. Clearly identify or flag all statute cases.

    3. Forward copies of the examination report, the agreement and Form 5344 to Case Processing with a buck slip requesting that a verification of the partial assessment be returned to the 90-day suspense file area.

    4. The case will remain in the suspense file awaiting either further correspondence, petition, or default.

    5. The designated technical person will ensure that the waiver and tax return is restored to the suspensed case file.

    6. If the case has been transmitted to Appeals, the waiver will be transmitted to that office upon receipt.

     

4.14.1.19.3.1  (10-30-2004)
Signed Waiver or Agreement

  1. When a signed waiver or agreement form is received, the 90-day or 150-day suspense period is terminated from the date of the agreement.

  2. An assessment must be made within 60 days, plus the days remaining on the statute at the time the statutory notice of deficiency was issued. Refer to Exhibit 4.14.1–5 for computation of the assessment statute. The following forms are considered agreements.

    • Form 4089, Notice of Deficiency–Waiver

    • Form 5564–A, Notice of Deficiency–Waiver.

    • Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment — used for individuals, corporations and fiduciaries.

    • Form 890, Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment — used for estate and gift tax.

    • Form 4549, Income Tax Examination Changes.

     

4.14.1.19.3.2  (10-30-2004)
Receipt of Waiver or Agreement

  1. Upon receipt of a signed waiver or agreement, the following actions must be taken:

    1. Date stamp the waiver or agreement form and associate it with the case file. If an agreement is received prior to the closing of the case (status 90), use an agreed disposal code.

    2. Examine the waiver or agreement form to determine if it is properly signed by the taxpayer(s).

    3. Compute the new statute date for assessment. Refer to Exhibit 4.14.1–5 for computation of the assessment statute.

    4. Close the case agreed to Case Processing for assessment of the deficiency.

     

    Note:

    If a waiver of restriction on assessment is received on a docketed case that has already been forwarded to the Office of Appeals, the waiver should be date stamped and transmitted immediately to the Appeals office to which the case was transferred. The waiver should be transmitted with a Form 3210 which is annotated to reflect the recomputed ASED and the fact that the waiver relates to a case in 90-day status.

     

4.14.1.19.3.3  (10-30-2004)
Waiver or Agreement Received on Joint Return When Only One Spouse Has Signed Waiver of Restrictions

  1. If the notice of deficiency waiver or agreement form received is signed by one spouse, the 90 or 150-day period is terminated for the signing spouse only.

    1. Compute the new statute date for assessment. Refer to Exhibit 4.14.1–5 for computation of the assessment date.

    2. Assess deficiency for signing spouse using MFT 31 process. No assessment may be made for non-signing spouse before expiration of 90 or 150-day suspension period.

    3. Suspense cases pending agreement, default, or petition from non-signing spouse.

    4. Upon default, compute the new statute date for the assessment. Close the case for assessment of non-signing spouse using MFT 31.

     

  2. If the notice of deficiency waiver or agreement form received is signed by one spouse and the deficiency is paid in full, the 90 or 150-day period is terminated for the signing spouse only.

    1. Assess deficiency for signing spouse on MFT 31 process.

    2. No assessment may be made for non-signing spouse before expiration of 90 or 150-day suspension period.

    3. Suspense case awaiting agreement, default, or petition from non-signing spouse.

    4. Upon default, compute new statute date for the assessment. Close case for assessment of non-signing spouse using MFT 31.

     

4.14.1.19.3.4  (10-30-2004)
Full Payment of Deficiency And No Waiver or Agreement Received

  1. Assess deficiency (jointly, if joint return) upon default and close the case. This procedure cannot be used if the taxpayer designates the payment as a cash bond. See Rev. Proc. 84–58, 1984–2 CB 501.

4.14.1.20  (10-30-2004)
Appeals Waiver of Jurisdiction in Notice of Deficiency Cases

  1. Delegation Order 66 vests settlement jurisdiction in Appeals offices during the 90/150-day period in all protested (to Office of Appeals) cases in which the Area Director issued the notices of deficiency.

  2. The delegation order permits the Chief Appeals to release jurisdiction by waiver to the office of the Area Director, which issued the notice, except in cases in which criminal prosecution has been recommended and not finally disposed of or the notice of deficiency includes the fraud penalty.

  3. Appeals may waive jurisdiction in examination cases regardless of the amount involved.

  4. When Appeals releases jurisdiction to the Area Director, the Area Director assumes complete jurisdiction of the case during the 90-day or 150-day period. This includes the authority to transfer the case to another area.

  5. Waiver of jurisdiction by Appeals does not increase the authority of an Examination function examiner. The authority of an examiner is the same in a 90-day case as in any other case.

4.14.1.20.1  (10-30-2004)
Communications with Taxpayers

  1. The taxpayer must be clearly informed that reconsideration of the case will in no way serve to suspend or extend the period for filing a petition with the Tax Court.

  2. If sufficient time remains during the 90/150 day period, the taxpayer will not be denied a hearing before Appeals, if an Appeals conference is specifically requested by the taxpayer. The request for an Appeals conference will be coordinated with Appeals on a case-by-case basis to determine if Appeals will conference the case or will release jurisdiction to the Area Office.

  3. If additional information is received that would decrease the deficiency amount on the notice of deficiency, a supplemental report to the notice of deficiency will be prepared. Refer to section 4.14.1.19.2.3, Information Results in Decrease to Deficiency.

4.14.1.20.2  (10-30-2004)
Agreement Secured

  1. If the taxpayer's liability is adjusted and an agreement is reached and signed, the taxpayer will be advised that there is no need to file a petition with the Tax Court.

  2. When a waiver or agreement is received, the case can be closed as outlined in section 4.14.1.19.3 above.

4.14.1.21  (10-30-2004)
United States Tax Court Petition Filed

  1. An electronic list of cases that have been docketed in Tax Court must be obtained daily by accessing the Appeals Centralized Database System, ACDS/DIMS, which is available on the IRS intranet for:

    • regular examination cases petitioned to Tax Court, and

    • TEFRA partnership/S-corporation cases petitioned to Tax Court, or suits filed in District Court and Claims Court.

     

  2. The docketed case list reflects the following information regarding the Tax Court petition:

    • Docket Number

    • Name and Address of Petitioner(s)

    • TIN (if known)

    • Name of office issuing Notice of Deficiency

    • Date of Notice of Deficiency

     

  3. Upon retrieval, immediately date stamp the docket list.

  4. Determine the taxpayer(s) who have filed timely petitions. Perform research on all of the taxpayers containing their unique office code as well as the "unknowns" . Unknowns are taxpayers without a pre-determined Area office code.

  5. Within ten (10) calendar days of the receipt of the docket list, the cases must be located, processed for closing and transmitted through Case Processing to the Office of Appeals.

    1. The notices clerk will locate the case file, close out all controls and forward the case file to the appropriate closing program. The docket list will be annotated to indicate the specific action taken on the case and the date.

    2. If a case has been transferred to another area, notify the area where the case was transferred. Give them the date the petition was filed, name of petitioner, and years involved. A copy of the page of the docket list identifying the taxpayer and the tax years should be forwarded to the area where the case was transferred.

    3. If it is determined that the case is physically located in another area or service center, the office having physical possession of the case will be notified telephonically that the taxpayer has petitioned the Tax Court. The docket list number and petition date will be provided.

     

  6. After closing the case, it must be forwarded immediately to Appeals (hand carried whenever possible) to obtain immediate acknowledgement of transmittal, via a Form 3210.

  7. At the end of each month, the tickler file for Form 3210 will be checked and follow-up action taken on any Form 3210 for which Part 4 has been outstanding for 30 days or longer. This is done to determine whether the cases were received by Appeals or why Part 4 was not returned.

  8. When the Appeals acknowledgment copy is received from Appeals, destroy the suspensed copy and replace it with the Appeals acknowledgment copy. The Appeals Acknowledgment copy will be kept for one year from the date of receipt.

4.14.1.21.1  (10-30-2004)
Electronically Filed Returns

  1. If the return was electronically filed, Examination has the responsibility to request the signature document, Form 8453, and original Forms W-2 (if the electronically filed return required such forms to be submitted) before the case is forwarded to Appeals. See Exhibit 4.4.1-1 (Form 8453) for information about requesting these documents. Make arrangements with the local Appeals Office as to the designated person (and address) to whom Form 8453 should be forwarded. Exam will print a copy of the ELFRQ or ESTAB request and attach it to the case file before forwarding the case to Appeals.

  2. For electronically filed returns using PIN signatures, use command code TRDBV to research specific information on electronically filed returns and TRPRT to request prints of electronically filed returns.

4.14.1.21.2  (10-30-2004)
Unlocatable Case Files

  1. If the case cannot be physically located within three days of receipt of the docket list, prepare Form 5348, Examination Update, to input Freeze Code "Q" on AIMS. Any area attempting to update the status of the "Q" freeze identified case will forward the case to Technical Services' suspense file area upon notification of the freeze code. When the case is located, reverse the " Q" freeze code via a Form 5348.

4.14.1.21.3  (10-30-2004)
Status 90 Cases

  1. Occasionally, a case appearing on the docket list may have been defaulted, tax assessed and closed to the files area in the campus before the docket list was received. AIMS research will indicate status code 90. If this occurs, Technical Services is responsible for preparing Form 3177, Notice of Action for Entry on Master File, to input CC STAUP (15 cycles) to prevent the issuance of balance due notices to the taxpayer.

  2. When a docketed case that is in AIMS status code 90 is identified, a current print of a full AMDISA or TXMOD must be secured. This print will be attached to a copy of the appropriate page of the docket list and will be forwarded to Appeals via Form 3210, Document Transmittal. Appeals will also be notified that the STAUP has been input to stop the notices. APPEALS WILL BE RESPONSIBLE FOR MONITORING THE STAUP TO INCREASE/DECREASE THE NOTICE SUPPRESSION TIMEFRAME AND RETRIEVAL OF THE CASE FILE FROM THE SERVICE CENTER.

  3. Exam must build a file which will include:

    1. Full AMDISA and TXMOD prints of all docketed tax periods;

    2. A copy of the page in the docket list identifying the taxpayer, tax periods, docket number and Appeals Office;

    3. Photocopy of the closed control card showing the date the 90-day letter was issued; and

    4. Form 5348, Examination Update, requesting CC AMSTUR, status code 24.

     

  4. If no data is available, the file will include:

    1. TXMOD and/or MFTRA print of the docketed tax periods which verify the TIN and reflects an Examination closure,

    2. Record of CC AM424 request to create an AIMS database,

    3. A copy of the page on the docket list identifying the taxpayer, tax periods, docket number, and Appeals Office.

     

  5. The file will be sent to the closing function for suspense until 40 days from the Status 90 date.

  6. At the end of the 40-day period, the closing function will:

    1. Reestablish the case using Form 5348, CC AMSTUR

    2. Prepare Form 5344, Examination Closing Record, to close the return to Appeals. Since the Exam results contain the assessment which is now unagreed, an amount of $1 must be entered in Item 18 to prevent a duplication of Exam results.

    3. Route the AIMS print, verifying Appeals status, to Appeals for association with the file.

    4. APPEALS WILL REQUEST ABATEMENT OF THE ASSESSMENT.

     

4.14.1.21.4  (10-30-2004)
Non-Petitioning Spouse

  1. A non-petitioning spouse case occurs when one spouse files a petition with the Tax Court or otherwise avails himself/herself of the appeal rights on a proposed joint return deficiency and the other spouse agrees to the deficiency or does not take appeal action.

  2. Where it appears that only one spouse has petitioned the Tax Court, review the statute date for the cases suspended in the 90-day files.

4.14.1.21.4.1  (10-30-2004)
Imminent Statute

  1. If the statute will expire within 120 days (imminent) and it appears that only one spouse has petitioned the Tax Court, contact Appeals and ask them to review the petition. If Appeals determines there is a non-petitioning spouse, then the following procedures apply:

    IF the 90-day period for the non-petitioning spouse has: THEN
    expired Process a MFT 31 assessment on the non-petitioning spouse. See IRMs 4.4.2 and 4.4.12.4.45.6 .
    not expired Prepare a "dummy" case file and retain it in the 90 day suspense file. MAINTAIN STATUTE CONTROL. If an agreement for the non-petitioning spouse is received, make a MFT 31 assessment for that spouse.

     

  2. Forward to Appeals the petitioned case and include the following information on a routing slip attached to the case file:

    1. "Non-Petitioning Spouse Case"

    2. Petitioning spouse's name

    3. Status Date for non-petitioning spouse's name

    4. Status Date

    5. Indicate whether assessment has been made against the non-petitioning spouse

     

  3. After the non-petitioning spouse case has been assessed, forward to Appeals any "dummy" case file that was prepared and include the following information on a routing slip attached to the file:

    1. "Non-Petitioning Spouse Case"

    2. Non-petitioning spouse's name

    3. Indicate that the assessment has been made against the non-petitioning spouse.

     

4.14.1.21.4.2  (10-30-2004)
Statute not Imminent

  1. For those cases, suspended in the 90-day suspense files, where more than 120 days remain on the statute and it appears that only one spouse has petitioned the Tax Court, flag the case " Possible Non-Petitioning Spouse Case" and forward the case to Appeals. Do not make a MFT 31 assessment unless it is requested by Appeals.

4.14.1.21.4.3  (10-30-2004)
Petitioned Case Settled

  1. When the petitioned case is subsequently settled, whether by the Tax Court or by separate agreement, Appeals will submit Form 3198 and Form 5403 as follows:

    IF: THEN:
    The deficiency is upheld by Tax Court Appeals will request a MFT 31 assessment for petitioning spouse. This assessment becomes the overriding assessment, however, the tax is collected only once.
    The tax has been overassessed Appeals will request a partial or total abatement of the previous MFT 31 assessment made against the non-petitioning spouse. (A Form 1331 must be prepared.)

     

  2. A Form 5403 will also be submitted to request a no-change with Appeals results for the MF joint account. Process this Form 5403 through the terminal.

4.14.1.21.4.4  (10-30-2004)
NMF Spousal Assessments

  1. There are several situations (for example, bankruptcy or Tax Court cases) in which only spouse petitions and we assess the "same tax" against both the husband and the wife as separate assessments. Use MFT 31 procedures for this purpose.

  2. When a joint return is ready to be closed, prepare a joint Form 5344. If the same tax will be assessed against both taxpayers, such as petitioning/non-petitioning cases, DO NOT enter the NMF Assessment amount in Item 35, otherwise enter the NMF tax assessment amount in Item 35, see IRM 4.4.12.4.45.5, MFT 31.

4.14.1.21.4.5  (10-30-2004)
Closing Related Returns

  1. See IRM 4.4.12 for procedures on closing related returns.

4.14.1.22  (10-30-2004)
Defaulted Notices

  1. It is the responsibility of Technical Services to take the necessary actions to ensure the assessment of the deficiency on any defaulted notice of deficiency is made within the statutory period for assessment.

  2. If the taxpayer does not petition the Tax Court or agree to the deficiency within 105 (165 if addressed to a person outside the United States) days, the case is considered to be defaulted. The deficiency is to be assessed immediately after the requisite number of days (105 or 165) have passed from the date of the issuance of the notice.

  3. Assessment of the deficiency on any defaulted case must be made within the statutory period. Per Treas. Reg. section 301.6503(a)-1, the period of limitation on assessment and collection of any deficiency is suspended for 90 days after the mailing of a notice of such deficiency if the notice of deficiency is addressed to a person within the States of the Union and the District of Columbia, or 150 days if such notice of deficiency is addressed to a person outside the States of the Union and the District of Columbia (do not count Saturday, Sunday, or a legal holiday in the District of Columbia as the 90th or 150th day) plus an additional 60 days thereafter in either case.

  4. Recompute the new statute date for defaulted cases. Refer to Exhibit 4.14.1–5 for computation of the new statute date. Notify the statute control employee of the new statute date.

  5. Enter the new statute date on the control card and on the case file.

  6. Close out all controls and forward the defaulted case for closure.

4.14.1.22.1  (10-30-2004)
Defaulted Notices: Duplicate Notices Sent to Addresses Both Inside and Outside the United States

  1. When duplicate original notices of deficiency are sent to addresses both inside and outside of the United States and the Commissioner does not know the location of the taxpayer's residence on the date the notices are mailed, and the taxpayer does not file a petition within 90 days, a "protective" assessment of the deficiency will be made after 105 days (90 +15). In such cases, all billing and collection activity should be suspended until the domestic-foreign address issue is resolved; i.e., the taxpayer agrees, files a petition within the 150 day period, or the notice defaults after 150 days (see Polo v. Commissioner, T.C. Memo. 1991–16).

  2. Area Counsel should be consulted in all cases where there is doubt about whether the 90 or 150 day period for filing a Tax Court petition may apply.

4.14.1.23  (10-30-2004)
Notice of Deficiency Involving a Non-Extending Spouse

  1. A notice of deficiency will be issued to a non-extending spouse in situations when one of the spouses will not consent to extend the assessment statute of limitations:

    • A spouse cannot be located to secure a statute extension, or

    • A spouse refuses to sign a statute extension.

     

  2. The examiner will prepare a duplicate file for the non-extending spouse.

    1. The duplicate file should contain all information required to