IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 19. Liability Determination

Section 1. Campus Examination Operations (Cont. 3)

4.19.1  Campus Examination Operations (Cont. 3)

4.19.1.5 
EITC/Revenue Protection Strategy (RPS)

4.19.1.5.4  (01-01-2006)
Recertification

  1. After December 31, 1997 where EITC was denied for taxable years beginning after December 31,1996, the recertification indicator will be set at the National Accounts Profile (NAP) when a TC 30X and TC 765 post to the account. On the current return, address the EITC issues that were disallowed for the year in which the recertification indicator (RI) was set.

  2. Regulations issued in 2001 permit the IRS to change its recertification procedures. Changes will affect the indicator placed on TY 2002 tax returns that are examined and the EITC disallowed or reduced. A recertification indicator will remain until the taxpayer recertifies on the type of EITC that was previously denied.

    1. EITC reduced or disallowed for the tax year 2001 and prior. If the taxpayer is denied EITC because a claimed child(ren) is not qualifying child(ren), and the TP files the subsequent year’s return claiming EITC with no qualifying child(ren), the EITC will be allowed and the Recertification Indicator IS NOT REMOVED.

      Example:

      The taxpayer is denied EITC with a qualifying child for TY 2002. For TY 2003, the taxpayer claims EITC with no qualifying child(ren). The taxpayer will be allowed the EITC with no qualifying child(ren), and the Recertification Indicator will not be removed. The taxpayer will be required to recertify for the next year for which EITC with a qualifying child(ren) is claimed.

       

    2. EITC reduced or disallowed for any other reason. If EITC is reduced or not permitted for any other reason such as an adjustment to taxpayer’s income or expense(s), then the taxpayer will be required to recertify on his/her next return claiming EITC.

    When closing a case, that either reduces or does not permit EITC, Examination personnel will be required to: input TC971 with action code 156. This will place a new recertification indicator on the taxpayer's account. The new Recertification indicator will appear as 9 on the Masterfile. If the taxpayer has either a Recertification indicator of 1 or 9 on the Masterfile and claims EITC with qualifying child(ren) they will be required to attach form 8862 to their tax return.

    Example:

    The taxpayer’s EITC is decreased because of unreported Alimony in tax year 2002. Among other closing steps, the TE will input TC 971 with action code 156. If the taxpayer files tax year 2003 claiming EITC with or without qualifying child(ren), the TP will be required to recertify by attaching Form 8862 to his/her Form 1040.

     

  3. Taxpayers who are required to recertify but claim EITC with no Form 8862 attached, will be denied through Math Error procedures during the processing of the tax return under section 6213(g)(2)(K). Math error procedures are not available to disallow EITC claims made during years subject to the bans set out in section 32(k)(1).

  4. Masterfile programming was implemented in January 2004 that will have EITC recertification indicators (RI) 1 or 9 automatically removed when a case is closed and the taxpayer receives full EITC claimed under the conditions detailed below:

    1. TC300 for zero amount containing Disposal Code 02 if the module contains TC764 or TC768, or

    2. TC 421 with a Disposal Code 20 if the module contains a TC764 or TC768, or

    3. Current posted TC764 (doc code 47 or 54) with an amount that is equal or exceeds a prior TC765 with doc. code 47.

    All other conditions or Disposal Codes will still require the manual removal of the RI. This is done by inputting TC971 AC56.

    For Tax Years 2001 and Prior
    If and Then
    Taxpayers are denied EITC, in part or in full, through deficiency procedures which includes adjustments to income or expenses that affect EITC   The taxpayer is ineligible to file an EITC claim until the taxpayer provides evidence of eligibility for the EITC. Deficiency procedures include administrative procedures (other than procedures related to math or clerical errors) that result in an assessment of a deficiency in tax, whether or not a Notice of Deficiency is issued.
    The disallowance of EITC is a result of reckless or intentional disregard of the law or fraud   The taxpayer is required to recertify with Form 8862 on the first return on which EITC is claimed after the
    • two (2) year period (reckless or intentional disregard) or
    • ten (10) year period (fraud) has elapsed.
    EITC has been denied through deficiency procedures no Form 8862 Under IRC Section 6213(g)(2)(K), the EITC can be denied as a mathematical or clerical error.
    EITC has been denied through deficiency procedures Form 8862 attached Inventory will be received as a U coded return processed in the pipeline or as a referral from adjustments.
    Refund is frozen   CP 75 will automatically generate, informing taxpayer the refund will be held.
    Any EITC case containing a recertification indicator case is closed and taxpayer receives full EITC claimed. Release the indicator using TC 971 A/C 056 based on the rules below.
    1. A number 1 indicates the taxpayer must recertify the next time he/she claims EITC.
    2. A number 2 indicates the taxpayer cannot recertify until after two years after the year in which the disallowance occurs (this indicates two year ban has been imposed.
    3. A number 4 indicates the taxpayer cannot recertify until 10 years after the year in which the disallowance occurs (this indicates the 10 year ban has been imposed. Campuses cannot impose the ban.

    Note:

    Beginning in February 2002, CP 79, advising the taxpayer of the requirement to recertify, will be sent whenever EITC is disallowed, in part or in full, as a result of an examination on a tax return for years 1997 or subsequent. CP 79 will be automatically generated when the case is closed on Master File (CP 79 took the place of Letter 3094).
    For Tax Years 2002 and Subsequent
    If and Then
    Taxpayers are denied EITC, in part or in full, through deficiency procedures which includes adjustments to income or expenses that affect EITC   The taxpayer is ineligible to file an EITC claim until the taxpayer provides evidence of eligibility for the EITC. Deficiency procedures include administrative procedures (other than procedures related to math or clerical errors) that result in an assessment of a deficiency in tax, whether or not a Notice of Deficiency is issued.
    Taxpayers are denied EITC, in part or in full, through deficiency procedures by disallowance of qualifying child(ren).   The taxpayer is ineligible to file an EITC claim with qualifying child(ren) until the taxpayer provides evidence of eligibility for the EITC. Deficiency procedures include administrative procedures related to math or clerical errors that result in an assessment of a deficiency in tax, whether or not a Notice of Deficiency is issued.
    A determination is made that the EITC was claimed due to reckless or intentional disregard of the rules and regulations or fraud   The taxpayer is required to recertify with F8862 on the first return on which EITC is claimed after the
    • two (2) year period (reckless or intentional disregard) or
    • ten (10) year period (fraud) has elapsed.
    EITC has been denied through deficiency procedures no Form 8862 Under IRC Section 6213(g)(2)(K), the EITC can be denied as a mathematical or clerical error.
    EITC has been denied through deficiency procedures Form 8862 attached Inventory will be received as a U coded return processed in the pipeline or as a referral from adjustments.
    Refund is frozen   CP 75 will automatically generate, informing taxpayer the refund will beheld.

    Note:

     

    Beginning in 2005, CP 79A, notice to taxpayers advising them of the 2-year EITC ban will display the next year a taxpayer will be eligible to claim EITC again. (They are required to complete form 8862 if they claim EITC with qualifying children.) This year will also display on IDRS cc ENMOD in a new field:" EITC-EL-TXPD>" This field appears under the "EIC-RECRT-IND>" field.

  5. Starting in 2006, when an EITC Recertification indicator of 1 or 9 is removed by input of TC 971 action code 56 then Masterfile will send a new CP 74 to the taxpayer. CP 74 will inform the taxpayer that they have re-certified for EITC, and will receive a refund within 6 weeks, provided the taxpayers owes no other taxes or debts which the IRS is required to collect.

4.19.1.5.4.1  (01-01-2006)
EITC 2/10 Year Ban

  1. The technician’s decision to assert a penalty/ban or not needs to be documented and justified on the work papers on Report Generation System (RGS). The following table provides a starting point to help determine if the two-year ban is appropriate. This table is not all-inclusive

    If And Then
    This is the first year EITC audit for the taxpayer   A ban usually is not imposed for the first year UNLESS the taxpayer establishes blatant disregard for the rules and regulations.

    Example:

    During a conversation, the taxpayer admits he/she knew they did not meet the eligibility requirements but decided to "try it anyway" . In this instance, the ban would be justified since the taxpayer intentionally disregarded the rules and regulations
    This is a Recertification case Inadequate documentation is received from the taxpayer and the case results in the EITC being disallowed again Based on Facts and Circumstances presented apply the two-year ban. The taxpayer was previously informed of the requirements and the specific rules and regulations pertaining to EITC.
    A decedent’s SSN is used for a qualifying child The person died before the year under examination Based on Facts and Circumstances presented apply the two-year ban.
    The technician can determine that the taxpayer’s claim was due to reckless or intentional disregard rather than misunderstanding or confusion of the rules   The two-year ban should be imposed
    The taxpayer filed MFJ in prior tax years, is now filing as HOH, and our records show the taxpayers still live at the same address and/or are still married Is unable to establish he/she is divorced or legally separated (They may be splitting the children to maximize the EITC) The two-year ban should be imposed
    There is a lack of acceptable records The taxpayer understood what types of documentation could be accepted The two-year ban should be imposed
    The taxpayer is claiming different qualifying children each year When asked to identify the qualifying children, the taxpayer does not know who they are claiming The two-year ban should be imposed
    The taxpayer agreed with the assessment and denial of EITC in the previous tax year(s) Is again unable to verify eligibility for claiming the EITC and qualifying children The two-year ban should be imposed
    The taxpayer is filing an original return showing a filing status of "Single" with no qualifying children, then files a Form 1040X claiming qualifying children "forgotten" on the original return Is unable to verify eligibility for claiming the qualifying children and the EITC on the Form 1040X Based on Facts and Circumstances apply the two-year ban.

  2. 2 - Year Ban - (PC 697)Taxpayers who previously were denied EITC through a Deficiency proceeding and have been determined to have had intentional or reckless disregard for EITC rules will have a 2-Year Ban placed on their account. ENMOD will carry an EITC-Recertification Indictor "2" along with the year the Ban was placed.

  3. If the taxpayer claims EITC while under the Ban, the return will automatically be established on AIMS through the DDb in Project Code 697. RGS will systemically generate a Statutory Notice of Deficiency, Letter 3219, as the first contact letter. At this point EITC eligibility is not the issue of this examination and the taxpayer should not be asked to send in qualifying documentation. We are simply notifying the taxpayer that the EITC is disallowed since there is a 2/10 year Ban on the current tax period.

  4. W&I taxpayers are centralized in Austin and SB/SE taxpayers are centralized in Brookhaven.

  5. 10 Year Ban - (PC 698)Taxpayers who previously were denied EITC through a Deficiency proceeding and the error was due to fraud will have a 10 Year Ban placed on their account. ENMOD will carry an EITC-Recertification Indictor "4" along with the year the Ban was placed.

  6. If the taxpayer claims EITC while under this Ban, the return will automatically be established on AIMS through the DDb using PC 698. RGS will systemically generate a Statutory Notice of Deficiency, Letter 3219, as the first contact letter. At this point EITC eligibility is not the issue of this examination and the taxpayer should not be asked to send in qualifying documentation. We are simply notifying the taxpayer that the EITC is disallowed since there is a 2/10 Year Ban on the current tax period. If the Audit Reconsideration Unit determined that the Ban was erroneously set and the EITC was appropriately denied, close the Ban year off on AIMS with a disposal code 12. The Audit Reconsideration unit is responsible to advise taxpayer of the outcome of the reconsideration decision.

  7. For more information on the 2/10 Year Ban see IRM 20.1.5.13. Two-Ten Year Bans on Claiming the Earned Income Tax Credit (EITC).

4.19.1.5.4.2  (10-01-2004)
Correspondence Guidelines for Exam Technicians (CET)

  1. When taxpayers under the 2/10 Year Ban call or write in response to receiving a Statutory Notice of Deficiency L3219 CETs will:

  2. Inform the taxpayer that they are under the 2 or 10 Year Ban and they can not claim EITC until the Ban expires. Publication 596, chapter 5 explains how the Ban expires. The date on which EITC was denied and the date on which you file your tax return affects the years for which you are prohibited from claiming the EITC. ENMOD will carry an EITC-Recertification Indictor "2" (2-Year Ban) or "4" (10 Year Ban) along with the year the Ban originated. Future Masterfile programming will tell us when the taxpayer is eligible to claim EITC again.

    Note:

    The date the TC 300, TC 765, & TC 240 (2-Year Ban trigger) or TC 320(10 Year Ban trigger) posts to master file is the date the Ban was imposed. The Ban will apply to any tax year after this date.

     

    Example:

    Taxpayer claimed EITC on 2002 tax return, which was filed in March 2003. In October 2003, the IRS denied the claim and determined that there was reckless or intentional disregard of the EITC rules. You cannot claim EITC for tax year 2003 or 2004. If they wish to claim the EITC on the next year 2005, the taxpayer must complete F8862 and file it with their tax return if claiming EITC with qualifying child(ren).

     

    Example:

    The facts are the same as in the above example, except that the IRS did not disallow the 2002 EITC until after the 2003 tax return was filed. The taxpayer would not be able to claim EITC for tax year 2004 and 2005. They would be required to recertify in tax year 2006 if claiming EITC with qualifying child(ren).

     

  3. [2-Year Ban] - If taxpayer believes the Ban was incorrectly applied, advise them that they must provide documentation to show that they did not recklessly or intentionally disregard the EITC rules for the year the Ban was imposed.

  4. [10 Year Ban] - If the taxpayer believes the Ban was incorrectly applied, advise them that they must provide documentation to show that their EITC claim was not fraudulent for the year the Ban imposed.

  5. The documentation provided on the Ban year will be reviewed following IRM 4.13.3 guidelines. The Audit Reconsideration Examiner will forward Form 4442 to Correspondence Exam to advise of the disposition of the ban and EITC eligibility on the year the ban was imposed. The CET will be responsible to resolve EITC eligibility issues for any year currently under examination.

4.19.1.5.4.3  (10-01-2004)
Telephone Guidelines for Tax Examining Clerks (TEC)

  1. When a Taxpayer under the 2/10 Year Ban calls in response to receiving a Statutory Notice of Deficiency, Letter 3219, TEC will:

    • Inform the taxpayer that they are under the 2 or 10 Year Ban and they can not claim EITC until the Ban expires. Publication 596, chapter 5 explains how the Ban expires. The date on which EITC was denied and the date on which you file your tax return affects the years for which you are prohibited from claiming the EITC. "ENMOD" will carry an EITC-Recertification Indictor "2" (2-Year Ban) or "4" (10 Year Ban) along with the year the Ban originated.

     

    Note:

    The date the TC 300, TC 765, & TC 240 (2-Year Ban trigger) or TC 320 (10 Year Ban trigger) posts to master file is the date the Ban was imposed. The Ban will apply to any tax year after this date.

     

    Example:

    Taxpayer claimed EITC on 2002 tax return, which was filed in March 2003. In October 2003, the IRS denied the claim and determined that it there was reckless or intentional disregard of the EITC rules. You cannot claim EITC for tax year 2003 or 2004. If they wish to claim the EITC on the next year 2005, the taxpayer must complete F8862 and file it with their tax return if claiming EITC with qualifying child(ren).

     

    Example:

    The facts are the same as in the above example, except that the IRS did not disallow the 2002 EITC until after the 2003 tax return was filed. The taxpayer would not be able to claim EITC for tax year 2004 and 2005. They would be required to recertify in tax year 2006 if claiming EITC with qualifying child(ren).

     

4.19.1.5.4.4  (10-01-2004)
Petitions to Tax Court

  1. If the taxpayer petitions the tax court, in addition to the petitioned year, Counsel has indicated that they will require the tax year the Ban was first applied to properly defend the government’s position. This will require the campus to request the close administrative cases from files.

  2. The petitioned year case file must include the tax year the Ban was applied. In addition to the RGS case file, work papers and all correspondence received for the Ban tax period.

4.19.1.5.4.5  (10-01-2004)
Form 4442 Referrals from Audit Reconsideration Unit

  1. Ban and EITC Allowed for Ban Year by Audit Reconsideration Unit

    1. Check to see if EITC was disallowed for the same child(ren) claimed in the Ban year.


    Allow EITC if research shows the same children were claimed as in the Ban year.
    If research shows different child(ren) claimed continue examination

  2. Ban Reversed - EITC Disallowance Remains Unchanged in Ban Year

    1. Continue examination

     

4.19.1.5.5  (10-01-2003)
Dependent Database

  1. For guidance working Dependent Database cases see LEM 4.19.1.5.5.

  2. Returns will be sent through the DDb as the return is processed. If the return is selected, based on the scoring methodology and the business rules, the refund will be held with a TC 810 at the Master File. A CP 75 will generate to alert the taxpayer that his/her refund will be held pending an examination. The case will open on AIMS in Organization Code 5014, Project Code 099 and Source Code 06.

  3. Selected cases will be sent to the RGS server in their site based on that center’s mail out schedule.

    Note:

    All pre-refund cases opened through DDb will have the portion of the refund not in question released upon issuance of the initial contact letter using a systemic TC811 reversal amount memoed through RGS/CEAS. When a TC 421 is recognized in an account that has had this unique TC 810, a TC 811 will automatically generate, thus releasing the remaining credit.

     

    Note:

    Beginning in processing year 2004 a TC971 with AC135 will allow Examination to track the allowed child on an EITC assessment when one of the two questioned qualifying children is allowed using CC REQ77. Input TC971 and AC135 and SSN of the allowed child, only when making a partial assessment.

     

  4. Cases selected for each center will contain taxpayers throughout the country. Any cases in an Area Office not serviced by that center, will be established on AIMS, in the override Area Office for that center.

  5. DDb will not select cases with any of the following conditions:

    • Prior two year no changes,

    • CI Freezes,

    • EITC math error codes

     

  6. Through the use of the Command Code "DDBOL" the tax examiners will be able to access the DDb for the Classification Viewer Sheet

    • DDBOL is a command code designed to allow the T/Es access to the Dependent Database.

    • T/E’s will be able to view the rules, any cross references SSN’s and any other information that is on the DDb base.

    • This command code can be used on any EITC program since all returns will be scored (even if not selected) though the DDb.

    • DDBOL must be used to work the DDb cases. The information obtained from this command code will act as your classification sheet.

    • Command Code DDBKD allows access to the DDb using the child’s SSN. It includes Social Security information from the DM1 data, FCR data, KIDLINK