The National Research Program (NRP) Office and SB/SE will manage and monitor NRP operations, and provide guidance and assistance as needed.

Area Directors have responsibility for NRP examinations within their areas.

Territory managers have responsibility for NRP examinations within their territories.

Chief, Area Planning and Special Programs coordinate NRP with the area, including but not limited to control, receipt and assignment of NRP returns. They monitor and report on the status of the area program, approve transfer of cases and have second line authority for approval/disapproval of exclusion requests.

Group Managers are responsible for NRP cases within their groups, including timely assignment of NRP cases, and counseling examiners on the scope and requirements of these examinations. (See Auditing Standards in IRM 4.10 and the Scope and Depth for NRP cases in this IRM at 4.22.4.4.1). They are also responsible for maintaining a workflow throughout the entire examination cycle that ensures timely completion, minimizing the number of submissions based on estimated information. To ensure the quality of NRP examinations, managers should review in-process cases according to IRM 4.22.4.7.1.

Tax returns, labels, Forms 5546 (Examination Return Charge-Out), MACS prints, CBRS, ChoicePoint data, IRP transcripts and other case building information will be packaged into an NRP case file at the Austin Field Compliance Services Site and forwarded to the Area NRP Coordinators.

Upon receipt of an NRP case files, the NRP Coordinator will immediately verify that case files are complete and agrees with the accompanying transmittal list. If case files are incomplete, secure missing data to complete case files.

After verification, the original and one copy of transmittal lists must be signed and dated on each page by the Area NRP Coordinator. Receipt of cases must be acknowledged within three workdays after receipt in the area office (ten workdays for initial shipment).

The Criminal Investigation (CI) function will receive copies of transmittal lists from the Field Compliance Services Site - Austin and notify the Area NRP Coordinator within ten workdays of any examination that is to be coordinated. Monthly follow-up by the Area NRP Coordinator will be made until the function releases the case or the NRP Program is completed.

NRP cases are processed as part of the normal examination workload unless otherwise specified herein.

NRP Area Coordinators will promptly assign cases to NRP Examination Groups after receipt of cases from Field Compliance Services - Austin.

After receipt of NRP cases from the NRP Coordinator, NRP Group Managers will promptly assign cases to examiners. Examiners will initiate taxpayer contact as quickly as possible using NRP contact letters.

NRP examinations will be completed promptly without sacrificing quality.

NRP Examiners will elevate to their managers items that appear abusive in nature, (e.g. , abusive trusts, tax havens, IRC 861 arguments, etc.).

NRP selection is not a basis for reopening a previously examined return or for expanding the scope of an examination that was in process prior to its designation as an NRP return. For any return closed (particularly "pickups" ) prior to its designation as an NRP return, an NRP report will be completed based on the results of such examination if NRP determines the results are valid for study purposes.

The Area NRP Coordinator will monitor the Partnership Control System (PCS) and ensure examiners are notified when an NRP return is under a related return's PCS control.

Because NRP results are used for Discriminant Function (DIF) formula development, among other uses, it is essential that examinations be thorough.

Examiners must use their professional judgment concerning the depth of examination required for any particular item on the tax return bearing in mind the research nature of the examination. See IRM 4.22.4.4.2 below.

In the examination of all NRP cases, examiners should be especially alert to discovering unreported income, as well as allowing taxpayers any additional deductions or credits to which they are entitled. Given the variety of taxpayers, and types and sources of income and deductions, it is not practical to give specific guidelines for the scope and depth of such inquiry. This is a matter of judgment in each case. Some considerations for probing for income are:

Examiners should be familiar with appropriate appropriate indirect methods used for determining unreported income and the techniques used during income probes. In all NRP examinations, a preliminary Cash T is required. If the Cash T shows a potential for unreported income, another appropriate indirect method should also be used. Information on these subjects is contained in IRM 4.10.4.3 (Examination Techniques). Additionally, IRM 4.10.3 outlines examination techniques for certain small businesses and other resources, such as Audit Technique Guides, are available.

For classified items not specifically addressed on in the report of examination, the examiner must state on Form 4318 or Form 4700 (Examination Workpapers), or report of interview, what action was taken to fulfill the requirements of an NRP examination. Like items may be grouped for the purpose of this statement. For example, if a general ledger was scanned for several items not specifically commented on or verified, the examiner should so state.

Form 4318 or Form 4700 must explain what inspections of records or documents were made to verify reported or possible unreported income, deductions and credits. Without sufficient documentation, it is not possible for Group Managers and quality review personnel to review the examiner's work and be assured that the thoroughness of the examination or the basis for the examiner's professional judgment are adequate for NRP purposes. It will also be difficult for Area coordinators and Headquarters personnel to properly assess the quality of examinations during program visitations or case management reviews without sufficient documentation.

The research nature of these examinations requires care in evaluating evidence. Evidence tends to prove a fact or point in question.

NRP examiners should gather facts to determine the accuracy of any item classified for examination. This determination should include all the facts supporting both sides of an issue.

Documentary evidence is emphasized in the conduct of an NRP examination. Records kept contemporaneously with the occurence of an event generally reflect accurately of that event. Books of original entry should be obtained if they exist. The contemporaneous records, invoices, bank statements, cancelled checks, and any other documents to support the books and records should be inspected to a depth adequate to support the accuracy of those books and records.

In situations where contemporaneous books and records do not exist or are incomplete, secondary written records (e.g. copies of original documents obtained from third parties) or other reconstructions of records, if credible, may be used.

Oral testimony by a taxpayer is direct evidence which must be thoroughly considered. The degree of reliability placed on a taxpayer's oral testimony must be based on the credibility of the taxpayer and the surrounding circumstantial evidence.

Oral testimony by other than the taxpayer may also be credible if that person has first hand knowledge of the facts and circumstances.

The steps to obtain evidence and the evaluation it should be documented in the issue's workpapers.

The guidelines contained in IRM 4.10.7.3, Evaluating Evidence, should be utilized to make reasonable determinations in NRP examinations.

Due to the research nature of NRP examinations, de minimis adjustments will be captured within RGS even though the examiner may not include them in the RAR sent to the taxpayer.

If an examiner makes de minimis adjustments, the examiner will:

To determine the tax impact of de minimis adjustments, the examiner:

Income and deduction amounts reported by the taxpayer are used in the classification process even though such amounts may be entered on the wrong lines of a return. NRP data includes, information concerning substantive changes to reported income and deductions. Examination changes which result in only a change to the account name for the misclassified item can have a harmful effect on the development or improvement of return selection systems when combined with substantive changes. For this reason, it is important that examiners avoid showing changes on the report that are nothing more than a change in the account name for an income or expense item.

An entry on a tax return that represents an account misclassification either in its entirety or one or more transactions within the account can occur for a number of reasons.

Misclassifications which do not benefit the taxpayer should not be adjusted, such as:

Misclassifications that do benefit the taxpayer should be adjusted, such as:

Misclassifications may also be technical adjustments. For example, the taxpayer writes off a $500 capital expenditure as a repair expense and it is determined that the expenditure should be depreciated over five years using the straight-line method. In completing the report, the examiner should make an adjustment to repair expenses for $400.

Misclassifications may affect different schedules of the return. For example, an interest expense that is misclassified and included on Schedule F should not be adjusted to simply reflect the deduction on the proper schedule unless a tax change results (e.g., a shift from Schedule F to Schedule A).

Cases with flow-through income and expenses to other entities have special considerations. Form 1065, Form 1120S, and Form 1041 provide for items of income and expense to be distributed as ordinary income or (loss) and as separately distributed items (per Schedule K-1 and return attachments). In completing a report for examination changes at the conduit level, the examiner should not reflect changes that are in name only and no tax change results (e.g., a change from Ordinary Income to Interest Income at the partnership level may or may not change tax on the related NRP Form 1040).

Even though misclassified items may not affect the determination of taxable/ordinary income, their true nature can have a definite effect on the determination of tax liability for NRP return. These changes, such as those to self-employment tax, minimum tax, earned income credit, etc., should be reflected on the report. In addition, misclassified items on Form 1065, Form 1120S, and Form 1041 may result in changes to the partner/shareholder/beneficiary return due to statutory or other limitations at the recipient's level.

All possible efforts should be made to contact taxpayers whose cases are to be examined. The following letters have been developed specifically for NRP purposes, must be used.

Letter 1130 (09-2002) will be used to schedule an appointment for office examination of cases selected for NRP examination. This letter requests a taxpayer to call the local IRS office to schedule an appointment. It includes a list of issues to be examined and records requested for the year indicated. If no contact is made see the following IRM sections for guidance:

Letter 3628 (09-2002) will be used as a second notice to the