Miscellaneous Examination Procedures
A collateral examination is requested when
an exchange of information between areas is essential to
resolve an issue of material consequence. Collateral
examinations are used only when the information cannot be
obtained from the taxpayer, the taxpayer's representative, or
third parties. Every reasonable effort must be made to secure
the information rather than to routinely request a collateral
Collateral activity is the performance of
work of short duration, work that does not require the
examination of books and records, and work that calls for
little independent judgement or conclusions. For example, a
collateral examination would be justified where:
An interview is required to get
specific information for the examiner;
A document is to be obtained;
A transcript of an account or a
listing of invoices is needed; or
A summons needs to be served.
All collateral requests must receive
priority treatment. If the collateral examination results in a
finding of nationwide interest, the receiving area will
furnish the information to Headquarters. A Technical
Coordination Report would be used to furnish this information
to Headquarters (See IRM 4.2.3).
Collateral examination requests involving
tax shelter cases will be identified as such on the top of
Form 6229, Collateral Examination. The receiving area will
acknowledge receipt of the collateral request and provide a
status report to the requesting office within 45 days and
provide status reports to the initiating area every 30 days.
Collateral Examination Procedures: Initiating Area
Form 6229, Collateral Examination, is used
by all areas to request or exchange information between
areas to resolve an issue(s) of material consequence. Form
6229 is prepared as early as possible in each examination
when a collateral examination is needed from another area.
The examiner assigned the return will
prepare the original Form 6229. Part 2 of the form is
retained in the case file. The original Form 6229 and three
copies are forwarded.
The narrative section of Form 6229
must include sufficient background information to
clearly state the problem. Additional schedules and
attachments are included as needed. A copy of the
out-of-area return is also included, if available.
Be specific on the exact information
The examiner's name and telephone
number must be included so the receiving area has the
correct person to contact for clarification of the
issue, if needed.
The completed Form 6229 is submitted
to the group manager for review. After approval, the
group manager will forward Form 6229. If Campus action
is required (i.e., requesting the return), Form 6229
is forwarded to the Campus servicing the receiving
area. If no Campus action is required, the initiating
area will submit the request to the applicable
Territory Manager of the receiving area. The
initiating area will photocopy the retained Part 2 and
put an "X" next to the "Follow-up"
line when furnishing information to the receiving
Collateral Examinations: Receiving Area
The receiving area must acknowledge
receipt of the request by completing Part 3 of Form 6229 and
returning it to the initiating area.
The receiving examiner must include
his/her name, address, telephone number and date
received. If the case is reassigned, the new examiner
must notify the initiating area of the change.
Photocopies of Part 4 of Form 6229
are used for subsequent communication with the
The receiving examiner must provide
a clear, concise response to each question raised.
If the receiving area believes the results
of the collateral examination would not justify the time and
cost involved, a memorandum explaining that decision is
attached to Form 6229 and forwarded to the initiating area.
The Territory Manager will approve any declination
memorandum with a copy sent to the respective Planning and
Special Programs (PSP) sections. Territory Managers should
resolve disagreements between the initiating and receiving
areas concerning the need for a collateral examination. Area
Directors will resolve any disagreement between the
respective Territory Managers.
Examination of Returns with APO/FPO Addresses
Returns of taxpayers who are stationed
overseas having APO/FPO addresses are selected under the DIF
system. Military personnel stationed overseas or on ships
generally file these returns. Examinations of returns with
APO/FPO addresses are conducted by SB/SE, Area 15. Any
questions should be referred to the Area 15 Planning and
Special Programs (PSP) Chief.
Extensions of the Replacement Period of Involuntarily
Applications for extension to replace
involuntarily converted property are filed with the Area
Director or Director of Field Operations (DFO) where the
return is filed for the first taxable year when any gain from
the involuntary conversion is realized. The Area Director or
DFO forwards the application to the Area Technical Services
(Exam) for determination.
The request is more likely to be received
by the Commissioner's Representative in miscellaneous mail
forwarded by the Campus.
If the converted property is owned by
several taxpayers under the jurisdiction of different Area
Directors' offices, the Area Technical Services (Exam) where
the property is actually located will conduct the
investigation to determine whether reasonable cause exists for
not replacing the converted property within the required time
Involuntarily Converted Property Extension Procedures
The Area Director forwards the extension
request to the Technical Services (TS) staff, who reviews
the request and determines whether the request to extend the
replacement period is timely and meets the requirements of a
proper request to include reasonable cause. TS will take
final action to approve or deny the request as delegated by
SBSE Delegation Order 4.24 (subject to revision). (See IRM
If the extension request is granted,
Letter 1039 is used to advise the taxpayer that an extension
has been granted. Generally, extensions longer that one year
are not granted. The taxpayer must notify the Service when
the property is replaced.
Letter 1954 is used to follow-up on the
extension granted in Letter 1039.
If the extension is not granted, the
taxpayer is notified the extension has not been granted and
the reason(s) why.
When the extension response relates to
involuntary conversions that result from condemnations, a
statement should be included informing the taxpayer that
interest received on the award is taxable as ordinary
income. This interest is paid to compensate the taxpayer for
a delay in payment of the award and is not included in the
gain or loss computations.
Identification of Bad Payer Data
During the examination of Information
Returns Selection System (IRSS) cases, examiners may determine
that information provided by the payer is incorrect.
Bad payer data is defined as any situation
where the payer made an error on the information return of a
type that could occur on other information returns.
Where errors have occurred on ten or more of
these documents filed by one payer or transmitter, bad payer
Examples of bad payer data include but are
not limited to:
Duplicate filing of Forms W-2 or 1099;
Corrected Forms W-2 or 1099 not
identified as a corrected, thus appearing to duplicate
the original filing;
Additional digits added to amounts;
Nontaxable income reported as taxable;
Income reported on the wrong form.
When examiners determine that bad payer data
exists, they will briefly explain the identified reason on a
copy of the IRSS transcript and route this copy to the
Territory Manager or designate. The Territory Manager or
designate will ensure the reasons are clear and will forward
all copies to the Campus on a weekly basis. The copies will be
directed to the attention of the IRP Magnetic Media
Awards Received by Informants
Informant awards for confidential services
are often received from the Bureau of Customs, Federal Bureau
of Investigation, Central Intelligence Agency, Secret Service,
local Police Departments, and other similar sources. It is
imperative that the source of income not be revealed in the
examiner's report and that the identify of the informant be
When asked to explain the source of
unidentified income reported on the return or the source of
unreported income discovered during the examination, the
taxpayer may explain that the income was received for services
of a confidential nature.
If verification of the source of
income is necessary, then verification should be secured
through inquiry of the official in charge of making the
If the official is in the same
locality as the examiner, then the official will be
interviewed personally without any written communication
or other report. If a personal interview is not
possible, the examiner will prepare for the personal
signature of the Area Director, a letter to the official
marked "Personal -- To be opened by addressee
only." requesting verification of the payment for
If the taxpayer states that the unidentified
or unreported income was received for services of a
confidential nature, the case will be processed in the usual
manner without disclosing the source of the payment.
In the case file, the description of
the income will state " miscellaneous income
Correspondence used to verify the
source of income will not remain in the case file but
will be maintained in special file, confidential in
nature, under the personal control of the Area Director.
Recognition of Witnesses During the Examination Process
The taxpayer has the right to use the
services of any person he/she may elect as a witness to
explain the taxpayer's books, records, or returns to the
examiner during the examination process. The fact that the
person is not enrolled or ineligible to practice before the
Internal Revenue Service does not disqualify him/her to act a
Witnesses should be afforded courteous
treatment but should not be permitted to represent the
taxpayer as an advocate when controversies arise out of the
factual development of the case. To avoid misunderstandings as
to the role of a witness, the examiners should explain the
provisions of Rev. Proc. 68-29, 1968-1 C.B. 812, to the
taxpayer and the witness.