IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 19. Liability Determination

Section 1. Campus Examination Operations

4.19.1  Campus Examination Operations

4.19.1.1  (10-01-2003)
Examination General Overview

  1. Wage and Investment (W&I) Exam Operations and Small Business/Self Employed (SB/SE) Campus Examination (both collectively referred to as either"Examination" , "Campus (Service Center) Examination " , or ("Correspondence Examination" ) supports the mission of the Service by maintaining an enforcement presence and encouraging the correct reporting by taxpayers of income, estate, gift, employment, and certain excise taxes in order to instill the highest degree of public confidence in the tax system’s integrity, fairness, and efficiency.

  2. Examination will measure the degree of voluntary compliance as reflected on filed returns; reduce noncompliance by identifying and cost-effectively allocating resources to those returns most in need of examination and taxpayer contact; and conduct, on a timely basis, quality examinations of tax returns and quality contacts to determine the correct tax liability.

  3. All Examination personnel need to be aware of the Taxpayer Advocate Service (TAS). See Internal Revenue Manual (IRM) Part 13 (Taxpayer Advocate) for more information.

  4. This section contains information on Examination general procedures for administrative matters and provides a reference for common issues and related items that might be found on tax returns.

4.19.1.1.1  (01-01-2006)
Glossary

  1. Some of the IRS acronyms used in Exam are listed below. Others can be found in the Document 6209.

  2. IRS Acronyms are listed electronically: See http://cincyweb.web.web.irs.gov/employee-resources/acronyms.htm

    23C Assessment Date; Master File Notice Date
    AAC AIMS Assignee Code
    AAR Administrative Adjustment Request
    ADJ Adjustment
    AFDC Aid for Dependent Children
    AEIC Advance Earned Income Credit
    AEITC Advanced Earned Income Tax Credit
    AGI Adjusted Gross Income
    AIMS Audit Information Management System
    AO Area Office
    ARDI Accounts Receivable Dollar Inventory
    ASED Assessment Statute Expiration Date
    ASFR Automated Substitute For Return
    BMF Business Master File
    BMFOL Business Master File On-Line
    BOBBY Related cases controlled under Bobby #
    BOD Business Operating Divisions
    C-Team Compliance Team
    CAF Centralized Authorization File
    CARE Customer Assistance, Relationships & Education
    CAT A Category A Claims
    CC Closing Code
    CC Command Code
    CCC Computer Condition Code
    CCP Centralized Case Processing
    CDP Collection Due Process
    CEAS Correspondence Examination Automation System
    CECS Centralized Exam Classification System
    CF Computer Form
    CFC Campus Fraud Coordinator
    CFf Collection Function - field
    CFOL Corporate Files On-Line
    CFS Customer Feedback System
    CPB Corporate Print Business
    CSCO Compliance Service Collection Operations
    CSR Customer Service Representative
    CF and S Centralized Files and Scheduling
    CFSU Centralized Files and Scheduling Unit
    CICS Closing Information Cover Sheet
    CIP Compliance Initiative Project
    CIRS Criminal Investigation Referral System
    CORR Correspondence Examination
    CRN Credit Reference Number
    CRI Compliance Research Intranet
    CTR Cash Transaction Report
    DC Disposal Code
    DCC Detroit Computing Center
    DCI Data Capturing Instruments
    DDb Dependent Database
    DDE Direct Data Entry
    DIF Discriminate Function
    DIS Distributed Input System
    DLN Document Locator Number
    DMF Debtor Master File
    DMFC Debtor Master File Case
    DST Decision Support Tool
    DUPF Duplicate Filing (DupFile)
    EFC Exam Fraud Coordinator
    EFDS Electronic Fraud Detection System
    EFIN Electronic Filer Identification Number
    EFS Electronic Filing System
    EFT Electronic Funds Transfer
    EFTPS Electronic Federal Tax Payment System
    EGC Employee Group Code
    EIN Employer Identification Number
    EIC Earned Income Credit
    EITC Earned Income Tax Credit
    EITCRA Earned Income Tax Credit Referral Automation
    ELF Electronic Filing System
    EONS Electronic On-Line Network System
    ERCS Examination Returns Control System
    ES Estimated Tax
    ESP Estimated Tax Penalty
    ESU Examination Support Unit
    ETAP Employment Tax Adjustment Program
    FCR Federal Case Registry
    FAM Filing Analysis Module
    FEMA Federal Emergency Management Agency
    FHA Federal Housing Authority
    FICA Federal Insurance Contribution Act
    FIRP Foreign Information Return Program
    FLC File Locator Code
    FMS Financial Management Service
    FOFI Forgiveness of Federal Indebtedness
    FOIA Freedom Of Information Act
    FP Full Paid
    FPAA Final Partnership Administrative Adjustment
    FRC Federal Records Center
    FRP Frivolous Return Program
    FRS Fraud Referral Specialist
    FSAA Final Sub-chapter S Administrative Adjustment
    FTA Fraud Technical Advisor
    FTP Failure to Pay
    FUTA Federal Unemployment Tax Act
    FWT Federal Withholding Tax
    FY Fiscal Year
    GII Generalized IDRS Interface
    HC Hold Code
    HHET Household Employment Tax
    HHS Health and Human Services
    HIP Health Insurance Premium
    HOH Head of Household
    HPTF Hard-core Payment Tracer Function
    HQ Headquarters
    HSH Household Help
    HUD Department of Housing and Urban Development
    ICL Initial Contact Letter
    ICP Integrated Case Processing
    ICR Initial Contact Resolution
    IDRS Integrated Data Retrieval System
    IDS Inventory Delivery System
    IGP Information Gathering Project
    IMF Individual Master File
    IMFOL Individual Master File On-Line
    IRC Internal Revenue Code
    IRM Internal Revenue Manual
    IRMF Information Return Master File
    IRN Item Reference Number
    IRP Information Returns Processing
    ISRP Integrated Submission Remittance Processing
    IT Income Tax
    LEM Law Enforcement Manual
    LIHC Low Income Housing Credit
    LMSB Large and Mid-Size Business
    LOS Level of Service
    LUQ Large Unusual Questionable items
    MACS Midwest Automated Compliance System
    MCC Martinsburg Computing Center
    MCC Mortgage Credit Certificate
    MDC MACS Development Center
    ME Math Error
    MF Master File
    MFJ Married Filing Jointly
    MFS Married Filing Separate
    MFT Master File Tax (Code)
    MFTRA Master File Transcript
    MISTLE Management Information System Top Level Executive
    MSSP Market Segment Specialization Program
    NAP National Account Profile
    NC Name Control
    NCC National Computing Center
    NCRS National Compliance Research Study
    NCL Net Capitol Loss
    NEC Non Employee Compensation
    NEI Non-Earned Income
    NIF Not In Files
    NMF Non Master File
    NOL Net Operating Loss
    NOLD Net Operating Loss Deduction
    NRP National Research Project
    NPS National Print System
    NQRS National Quality Review System
    NRA Non-Resident Alien
    NSD No Source Document
    NU Nullified Unpostable
    NUMIDENT SSA File Number
    OIC Offer In Compromise
    OLE On-Line Entity
    ORINC Ordinary Income
    OTAC Office of Tax Administration Coordination
    OTFP Other Than Full Paid
    PAO Penalty Appeals Officer
    PBA Principal Business Activity Code
    PBC Primary Business Code
    PC Priority Code
    PDT Potentially Dangerous Taxpayer
    PIN Personal Identification Number
    PN Pending Transaction
    POA Power of Attorney
    POD Post Of Duty
    PROMIS Problem Resolution Management Information System
    PSSN Primary Social Security Number
    PSP Planning and Special Programs
    PY Processing Year
    QRDb Quality Review Database
    QRDT Questionable Refund Detection Team
    QRP Questionable Refund Program
    RC Reason Code
    R & C Receipt & Control
    RCP Research Compliance Project
    REMIC Real Estate Mortgage Investment Conduit
    RGS Report Generation Software
    RI Recertification Indicator
    RIS Request for Information Services
    RPC Return Processing Code
    RPC Return Processing Coordinator
    RPD Return Processing Date
    RPM Return Program Manager
    RPP Return Preparer Program
    RPS Remittance Processing System
    RRA Revenue Reconciliation Act
    RTF Returns Transaction File
    RTVUE Return Review (IMF Only)
    SAT System Acceptability Test
    SBC Secondary Business Code
    SB/SE Small Business/Self Employment Operating Division
    SC Service Center now known as Campus
    SC Source Code
    SC Status Code
    SCAMPS Service Center (Campus) Automated Mail Processing System
    SCCB Service Center (Campus) Collection Branch - see CSCO
    SCEB Service Center (Campus) Examination Branch
    SCRIPS Service Center (Campus) Recognition/Image Processing System
    SD Source Document
    SE Self-Employment
    SEI Self-Employment Income
    SERP Service Wide Electronic Research Program
    SET Self Employment Tax
    SFR/SUB Substitute for Return
    SOI Statistics of Income
    SPOC Single Point of Contact
    SPRG Specialized Product Reviewed Groups
    SSA Social Security Administration
    SSN Social Security Number
    SSSN Secondary Social Security Number
    SST Social Security Tax
    TAC Tax Assistance Centers
    TAS Taxpayer Advocate Service
    TC Transaction Code
    TCMP Taxpayer Compliance Measurement Program
    TCWMS Telephone Call Workload Management System
    TDI Taxpayer Delinquency Investigation
    TDO Treasury Department Order
    TE Tax Examiner
    TEFRA Tax Equity & Fiscal Responsibility Act of 1982
    TIA Taxpayer Information Authorization
    TIF Taxpayer Information File
    TIN Taxpayer Identification Number
    TMP Tax Matters Partner
    TO Territory Office
    TP Taxpayer
    TPNC Taxpayer Notice Code
    TPI Taxpayer Inquiry
    TY Tax Year
    UDOC Uniform Definition of a Child
    UHH Unmarried Head of Household
    ULC Universal Location Code
    UPC Unpostable Code
    URC Unpostable Resolution Code
    VMS Voice Messaging System
    WT Withholding Tax
    W & I Wage and Investment Operating Division
    YD Year Digit

     

4.19.1.1.2  (01-01-2006)
Some Publications used by Exam

  1. This list is not all inclusive

    • 17 Your Federal Income Tax

    • 78 Cumulative List of Organizations

    • 501 Exemptions, Standard Deductions, and Filing Information

    • 503 Child dependant Care Expenses

    • 515 Withholding of Taxes on Nonresident Aliens and Foreign Corporations

    • 519 U.S. Tax Guide for Aliens

    • 555 Community Property

    • 596 Earned Income Credit

    • 968 Tax Benefits for Adoption

    • 3498 The Examination Process

    • 3498A The Examination Process (Examinations by Mail)

     

4.19.1.1.3  (10-01-2004)
Some Forms used by Exam

  1. This list is not all inclusive

    • 886 H (family) Explanations of items Request for Supporting Documents

    • 3210 Document of Transmittal

    • 4549/4549EZ Income Tax Examination Changes

    • 5600 Statutory Notice Worksheet

    • 12140 Correspondence Examinations Telephone Memo

    • 13181 Examination RGS Closing Information

    • 11652 Questionnaire From 1040 Schedule C

    • 8693 Low Income Housing Credit

    • 8862 Information to Claim EIC after Disallowance

     

4.19.1.1.4  (10-01-2004)
Other IRMs Pertaining to Examination Programs

  1. Other IRM chapters provide information on single topics that pertain to more than one function. Examination employees are responsible for researching and utilizing information contained in all reference materials. The following is a list of IRM chapters pertaining to Examination programs (not all inclusive):

    • 1.4.17 Compliance Managers Guide

    • 1.5 Managing Statistics in a Balanced Measurement System

    • 1.10 Commissioner of Internal Revenue Correspondence

    • 4.3 Midwest Automated Compliance System (MACS) Handbook

    • 4.4 AIMS/Processing Handbook

    • 4.10.12 Frivolous Return Program

    • 4.13 Audit Reconsideration

    • 4.14, Statutory Notices of Deficiency

    • 4.20, Examination Collectibility Handbook

    • 4.23 Employment Tax Handbook

    • 4.25 Estate and Gift Tax Handbook

    • 4.27 Bankruptcy

    • 4.29 Partnership Control System (PCS) Handbook

    • 4.31 Flow-through Entity Handbook

    • 5.1.18 Locating Taxpayers

    • 9.1 Criminal Investigation Mission and Strategies

    • 11.3 Disclosure of Official Information (also see 21.13 General Disclosure)

    • 13. Taxpayer Advocate Service

    • 20.1 Penalty

    • 20.2 Interest Manual

    • 21.1 Accounts Management & Compliance Services Operations

    • 21.3.7 Processing Third Party Authorizations on the Centralized Authorization File

    • 25.1 Fraud Handbook

    • 25.2 Information and Informants’ Rewards

    • 25.6 Statute of Limitations

    • 25.12 Delinquent Return Refund Hold Program

    • 25.15 Relief from Joint & Several Liability

     

4.19.1.1.5  (10-01-2004)
Examination IRM References

  1. Examination employees are responsible for researching and utilizing information contained in all reference materials. The following is a list of IRM parts, chapters and sections pertaining to Examination programs (not all-inclusive):

    • Part 3 Submission Processing

    • Part 4 Examining Process

    • Part 8 Appeals

    • Part 9 Criminal Investigation

     

4.19.1.1.6  (01-01-2006)
Correspondence Examination Letters

  1. Letters used for correspondence issues are listed below. These letters are used by both W&I and SB/SE. The BOD owner of each letter has been indicated at the end of each description.

  2. Additional information about the originator/owner of each letter can be found by researching the Multimedia Publishing web site. Any revisions must be discussed with the BOD originator listed on the Multimedia Publishing web site.

    • CP 75 Pre refund initial contact letter

    • CP 75 A Post refund initial contact letter

    • CP 75 B KC Certification contact letter

    • 105C full claim disallowance (W&I)

    • 106C partial claim disallowance (W&I)

    • 525(SC) proposed letter of change to return and appeal rights (SB/SE)

    • 525A(SC) Appeals Test at PSC (SB/SE)

    • 528(SC) notifies taxpayer of examination transfer to area office (SB/SE)

    • 530(SC) no change for unallowable program and taxpayer has a refund remaining (W&I)

    • 531(SC) general statutory Notice of Deficiency (TEFRA-Non-TEFRA) (SB/SE)

    • 539(SC) reply to taxpayer when two or more returns are combined into one (W&I)

    • 545(SC) reply to taxpayer when return filed is recomputed as joint (W&I)

    • 555(SC) reply to taxpayer after statutory notice has been issued (SB/SE)

    • 565(SC/CG) request for additional information (W&I)

    • 566(SC) initial contact notifying taxpayer of examination and requesting additional supporting documentation (SB/SE)

    • 566(SC)/CG) initial contact notifying taxpayer of examination and requesting additional supporting documentation (W&I)

    • 566B(SC/CG) request for supporting documentation with report proposing change (W&I)

    • 566B-EZ (SC) Simplified Service Center 30 ICL/30 Day Combo Letter (W&I)

    • 566D(SC) additional info 1040X (W&I)

    • 566E(SC/CG) W2’s misrepresenting income or withholding (W&I)

    • 569(SC) letter of claim disallowance (W&I)

    • 570(SC) claim allowed in full (W&I)

    • 590(SC) no change and books and records examined (W&I)

    • 601(SC) closing letter advising TP of delay in refund (W&I)

    • 691(SC) reply to request for installment payments (SB/SE)

    • 692(SC) reply to request for reconsideration of findings (W&I)

    • 693(SC) reply to taxpayer request for reconsideration of assessment (SB/SE)

    • 694(SC) reply to taxpayer cannot pay but agrees to deficiency (SB/SE)

    • 711(SC) no change for Unallowable Item and no refund remains (SB/SE)

    • 713(SC) unallowable item and individual return program 30-day letter (SB/SE)

    • 718(SC) Self-employment tax quiz letter (SB/SE)

    • 907 request for statute extension (SB/SE)

    • 928 follow-up for statute extension (SB/SE)

    • 937 Transmittal Letter For Power of Attorney

    • 1024(SC) Closing Letter with survey after assignment and initial contact but records not examined (W&I)

    • 1226(SC) correction programs other than unallowable items when books and records have not been examined (W&I)

    • 1265–EIC disallowance (W&I)

    • 1384(SC) notice of deficiency (bankruptcy) (SB/SE)

    • 1543(SC) discrepancy in payer information (SB/SE)

    • 1576(SC) reply to taxpayer election to pay balance due within 15 days (SB/SE)

    • 1654(SC) reply to taxpayer who requests case be transferred to an Area Office (SB/SE)

    • 1862(SC) computed tax & penalties based on info available (SFR) (SB/SE)

    • 1902(SC) requests telephone number to resolve issues before transfer to Area Office (SB/SE)

    • 2083(SC) sending taxpayer information Form 4549–A (SB/SE)

    • 2194 (SC) alternative minimum tax proposal letter (SB/SE)

    • 2246(SC) sending TP F4549/4549EZ with adjustments & penalties (TEFRA) (SB/SE)

    • 2984A(SC) EIC dependency exemption or dependent filing and claiming exemption (Soft Notice) (W&I)

    • 2984B(SC) dependency exemption or qualifying child(ren) for EIC (Soft Notice)(W&I)

    • 2984C(SC) duplicated social security number(s) (Soft Notice) (W&I)

    • 2984D(SC) duplicate SSN-Dependent/Primary, Return of Dependent (Soft Notice)

    • 2984E(SC) claimed dependent over age 23 with income over limitation (Sort Notice)

    • 2984F(SC) dependent filed joint return with spouse (Soft Notice)

    • 3070(SC) no change letter (W&I)

    • 3077(SC) income subject to self employment tax (SB/SE)

    • 3164(SC) third party contact (SB/SE)

    • 3175-C Frivolous Correspondence

    • 3176-C Frivolous Information (SB/SE)

    • 3186(SC) refund hold letter for prior year audit (W&I)

    • 3219 (SC) statutory notice of deficiency (SB/SE)

    • 3274(SC) preliminary determination not considered IRC Sec. 6015(f) (W&I)

    • 3279(SC) final determination partial allowance IRC Secs. 6015(b) or (c) (W&I)

    • 3338C audit reconsideration acknowledgment letter (SB/SE)

    • 3339C audit reconsideration additional substantiation letter (SB/SE)

    • 3340C audit reconsideration denial letter (SB/SE)

    • 3454(SC) initial contact for discretionary programs - married filing joint

    • 3454A(SC) initial contact for discretionary programs - single

    • 3500 interim letter to correspondence from taxpayer (replaces 2834)

    • 3501 2nd interim letter to correspondence from taxpayer (replaces 2835)

    • 3581(SC/CG) No Change closing letter (SB/SE)

     

  3. All versions of Campus Correspondence Examination letters must have the approval of the W&I or SB/SE SPOC (single point of contact) before any changes can be made. All letter headers will contain:

    • Taxpayer Identification Number

    • Form

    • Year

    • Person to Contact Name

    • Contact Person Identification Number

    • Contact Telephone Number

    • Contact Fax Number

    • Contact Hours

     

  4. The correspondence letters can be prepared by the clerical staff or tax examiners.

  5. Extension routed phone numbers must be included on all replies to taxpayer correspondence.

4.19.1.1.7  (10-01-2004)
Research and Development Wage and Investment

  1. The W&I Headquarters Reporting Compliance Strategy and Selection analyst will coordinate all research and development programs/projects within W&I from the W&I Campus Operations Managers on any trends, schemes or ideas desired to assist in determining research items. Research & Development issues may be developed into tests or studies, in conjunction with the Research organization. Campuses participating in Research tests or studies will be asked to capture data for Research analysis via Data Capture Instruments (DCI).

  2. W&I Headquarters will control the source and selection of research and development returns. One source will be performing research on MACS to obtain population information by the W&I Headquarters analyst preparing the appropriate MACS filters. The W&I Headquarters analyst will also prepare The Midwest Automated Compliance System (MACS) filters to select the appropriate returns for research projects. Campus MACS access will be limited to return screening and classification

  3. All Research project returns will be established on AIMS using the Source Code and Project Code as designated by the Headquarters Reporting Compliance Strategy and Selection analyst.

4.19.1.1.7.1  (10-01-2004)
Research and Development Small Business/Self-Employed

  1. Compliance Teams (C-Teams) are established at each Campus for the purpose of early identification and resolution of taxpayer errors and non-compliance. The program goal is to improve compliance through a more timely identification and resolution of emerging issues.

  2. Program goals are accomplished as follows:

    1. Screening a sample of returns on the front end as they are filed.

    2. Utilizing a multi-functional approach to resolve identified problems at the lowest level which include:
      Taxpayer education
      Form revision
      Processing changes
      Projects identified for targeted areas to measure the extent of non-compliance and establish technical positions and legal precedence

     

  3. Compliance team personnel are expected to be innovative in their approach to identifying sources of returns with high potential for abuse or non-compliance and following through to secure and screen those returns and recommend corrective actions.

  4. MACS is a security-certified, menu driven computer system that contains a combination of the transcribed return transaction files and selected entity information. IMF (Individual Master File) includes Form 1040,1040A, 1040EZ, and 1040NR. BMF (Business Master File) includes Forms 990C, 1041, 1065,1120, and 1120S. EMF (Employment Master File) includes Forms 940, 941, 943, 945,1042, and CT-1. In addition, MACS contains fields calculated especially for the MACS data, such as activity codes, business operating division (BOD) codes, cash-T, gross profit percentage, market segment code, perfected NAICS code, total revenue, and others.

  5. Refer to IRM 4.3, MACS Handbook or the MACS web site http://www.aus.swr.irs.gov/macs/macseagle.html for additional.

4.19.1.1.7.2  (10-01-2004)
Communication -- Compliance Team Forum SB/SE

  1. The SB/SE Headquarters maintains a Compliance Team (C-Teams) Forum Section on the MITS (formerly IS) Support Bulletin Board.

  2. A User manual to access the C-Teams Forum on the MITS (formerly IS) Bulletin Board was distributed to all Compliance Team Program