For all Forms 1040 (series) and Schedules A and B, classify line item discrepancies based on the tolerances found in LEM 4.22.3.2 that are not verifiable using information in the case file. Also classify all large, unusual or questionable (LUQ) items. Do not consider total itemized deduction phase-out rules based on income, per line 28 on Schedule A. For Schedule A deductions limited by AGI (i.e., Medical and Dental Expenses and Job Expenses and Most Other Itemized Deductions), consider the items after the AGI limitation is taken into account. LUQ is defined in IRM 4.10.2.3.1.

However, there are three exceptions:

Classify every income item on the return that cannot be substantiated by case building materials or if case building materials indicate unreported income. Classify all Schedule C and Schedule F income unless it can be verified by the case building materials.

Classify the income issue if the taxpayer's occupation provides a likely opportunity form moonlighting, receipts of tips, bartering, constructive dividends, etc. Note the reason in the Remarks section of the NRP Classification Checksheet. Consider indications on the return that taxpayers had insufficient income to support their standard of living.

For Schedules C, E (rentals) and F, classifiers will classify all income items, cost of goods sold (for Schedules C and F), LUQ expense items, IRP discrepancies, and processing errors.

These schedules will be entered on the NRP Classification Checksheet in the order they are attached to the tax return. If there are more than 3 Schedule Cs or Es or more than 2 Schedule Fs, the supplemental page of the NRP Classification Checksheet must be used (see Exhibit 4.22.3–1, NRP Classification Checksheet).

For Schedule E, E-1 on the NRP Classification Checksheet refers to page 1 of the first Schedule E, etc. Classifiers will identify Property A, B, or C in Remarks.

For Schedule D, classifiers will classify all capital gain/loss items that have an unsubstantiated basis, sales price, or capital gain/loss based on the tolerances found in LEM 4.22.3.2, and any IRP discrepancy or processing error.

For Form 2106, classify all items that have a discrepancy based on the tolerances found in LEM 4.22.3.2, LUQ items, IRP discrepancies or processing errors.

If Form 2106 is attached to the return and supports a Schedule A deduction for unreimbursed employee business expense, classifiers will not classify the deduction as a Schedule A item. Instead, they will classify it in the Form 2106 portion of the NRP Classification Checksheet.

Classifiers will select for examination any return with negative AGI, even though it cannot be overcome by disallowing other classified items. For example, if a return has negative AGI of $80,000 and classified items with total potential for adjustment of $20,000, the classifier will select the return for examination.

Classifiers will classify returns with no tax per return in the same way they classify returns with tax per return.

Classifiers must classify every income item on the return that cannot be substantiated by case building materials or if case building materials indicate unreported income. Schedule C and Schedule F income should be classified unless they can be verified by the case building materials.

If there are indications the taxpayer may have unreported income from moonlighting, receipt of tips, bartering, constructive dividends, etc., the classifier will classify the income issue and note the reasons in the Remarks section of the NRP Classification Checksheet.

Classifiers will consider indications on the return that taxpayers had insufficient income to support their standard of living. For example, if gross itemized deductions exceed AGI, classifiers should classify "Other Income" Item 41021 and write "Indirect Method" in Remarks.

For lines 23 through 31a on Form 1040, classifiers will classify any discrepancy based on the tolerance found in LEM 4.22.3.2.

Classifiers will classify items from Form 1040, page 2 that are large, unusual or questionable (LUQ).

Classifiers will classify interest or dividend income received from other than a financial institution or a publicly traded company. They will also consider whether the income is from a related entity as discussed in IRM 3.5.17, Flow-Through Entity Items and/or Related C Corporations.

Classifiers may use the EITC/Family Issues Job Aid ( See Exhibit 4.22.3 - 2) to identify classification criteria for family issues.

EITC/Family Issues are:

If the accepted criteria on the EITC/Family Issues Job Aid are not met, classifiers will classify the issue(s) on the NRP Classification Checksheet (including any necessary remarks). Use of the Job Aid is not required. If it is used, it should be left in the case file with the NRP Classification Checksheet.

For operational audits, classifiers consider the amount by which the itemized deductions exceed the standard deduction. For NRP, the issue will be classified even if the potential change is minimal.

On returns without a Schedule A, classifiers should consider personal expenses that may be erroneously deducted on Schedule(s) C, E, or F.

High medical expenses for large families, deceased taxpayers, or older taxpayers are usually not classified for operational audits. For NRP, classifiers should classify the issue.

Classifiers should classify large cash and non-cash contribution deductions (donated land, collectibles, stock, artwork, etc.), or contribution carryovers.

If there is any question as to entitlement or computation, classifiers will classify the issue without regard to the potential adjustment amount.

Consider whether:

Classifiers should classify any net operating loss deduction, whether or not the tax change from adjusting the issue will affect on the current tax year.

AMT issues should be classified regardless of AMT implications. If there are flow-through items from Forms 1065, there may be reportable tax preference items,

If International or Foreign Transactions are present on the tax return, classifiers should classify the applicable line items on the NRP Classification Checksheet. In addition, Foreign Tax Credit should be classified based on the tolerance found in LEM 4.22.3.2.

If it appears the primary purpose of the reported item is to provide tax benefits that not only offset current tax liability but may "shelter" future income, classifiers should classify the item.

For NRP, a high-income return is defined as one with total positive income (TPI) of $250,000 or more. These returns are found in Activity Codes 534, 537 and 539. For high-income taxpayers, classifiers will classify any identified structured transactions and investments that avoid or minimize tax.

The classifier will review the tax return with the case building materials to determine whether the taxpayer owns an interest or has an income/loss interest in C Corporations, S Corporations, Partnerships, or Trusts. Mere relationship to an NRP 1040 tax return does not mandate that a related return will be examined. The classifier will consider the nature and impact of the related return on the Form 1040.

To classify a related or flow-through entity, the classifier will enter the item in the Other Issues section on page 3 (items 4TH01 through 6TH01) of the NRP Classification Checksheet. The classifier will enter the name of the entity, it's EIN and the percentage of ownership calculation (as discussed below). The Additional Remarks section may be used or additional sheets may be attached to the NRP Classification Checksheet, if needed.

A return will be Accepted as Filed if the total of all classified issues is less than the total return tolerances (defined in LEM 4.22.3, Tolerances for NRP Classification), and there are no discrepancies related to IRP documents or processing errors.

If the return is Accepted as Filed due to tolerances, classifiers will write "tolerance" after "Accepted as Filed" under Classification Results on the NRP Classification Checksheet. They will also make a diagonal line across page 1 of the checksheet to indicate declassification due to tolerances.

All returns accepted as filed with no adjustments will be held at the Austin Field Compliance Services site until the end of the classification period.

After calibration returns have been selected for examination and forwarded to the areas in AIMS Status 07, EGC 1998, the remaining accepted as filed returns will be closed at the Austin Field Compliance Services site using Disposal Code 20.

Austin Field Compliance Services will provide a list of returns accepted as filed with no adjustments to the Detroit Computing Center to update the NRP database.

A return will be Accepted with Adjustments if it would have been Accepted as Filed except there are discrepancies related to IRP documents or processing errors.

Enter the IRP discrepancy or processing error (for example, a transcription error) on the NRP Classification Checksheet by circling the issue block, entering the amount, and writing an explanation in the Remarks area referring to the applicable case building document.

All returns that are Accepted with Adjustments will be held at the Austin Field Compliance Services site in AIMS Status 07, EGC 1998 until the end of the classification period.

After calibration returns have been selected for examination and forwarded to the areas, the remaining Accepted with Adjustments returns will