IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 22. National Research Program (NRP)

Section 5. Field Compliance Services Site

4.22.5  Field Compliance Services Site

4.22.5.1  (10-01-2002)
Background

  1. The following explains the NRP process as it pertains to Correspondence Examination activities at the W & I Field Compliance Center.

  2. The Service does not have reliable, current measures of overall compliance. Without reliable compliance measures, the Service will have limited capacity to determine what key areas of noncompliance to address and what treatments to apply to maximize the use of its limited resources. As the Service's ability to detect noncompliance deteriorates, audits become less effective and compliant taxpayers continue to be burdened by unnecessary audits.

  3. The NRP approach is a hybrid of options for validating return information that maximizes use of data available to the IRS and, to the extent possible, minimizes intrusiveness and taxpayer burden while collecting data. The NRP approach to measuring reporting compliance balances research quality, efficiency and taxpayer burden.

  4. In moving forward with this concept, the following examination guidelines have been established for conducting NRP correspondence examinations. The returns selected for correspondence examinations were classified following the guidelines in the NRP IRM 4.22.3.

4.22.5.2  (10-01-2002)
Program Responsibility

  1. The following provides the program responsibilities for NRP Headquarters and the Field Compliance Centers.

4.22.5.2.1  (10-01-2002)
Headquarters

  1. The National Research Program (NRP) Office manages and monitors NRP operations and provides guidance and assistance as needed.

4.22.5.2.2  (10-01-2002)
Field Compliance Center

  1. The Director of Compliance Services in the designated Field Compliance Service Site have overall responsibility for NRP examinations.

  2. The Operations Manager, Examination (OME) may delegate the responsibilities of the Compliance Center NRP Coordinator to an appropriate person. The Compliance Center NRP coordinator will coordinate and control the receipt and assignment of NRP returns to groups. They monitor and report the status of the compliance center program, approve transfer of cases and have second line authority for approval/disapproval of exclusion requests.

  3. The Department Managers have overall responsibility for the NRP program within their departments.

  4. The Chiefs, Quality Review, are responsible for ensuring tax examiners' compliance with Auditing Standards found in IRM 4.19.1 and the scope and depth of NRP examination requirements. They are responsible for the quality of the final review of NRP cases. They are also responsible for appointing local NRP reviewers. These reviewers must be familiar with all the technical aspects of NRP and informing the OME of any problems encountered.

  5. The Team Leaders are responsible for NRP cases within their teams, including the timely and priority assignment of NRP returns, counseling examiners on the scope and high quality requirements (see Auditing Standards in IRM 4.19.1 and the scope and depth of NRP examinations in this IRM below). They are responsible for maintaining a workflow throughout the entire examination cycle that will ensure timely completion, minimizing the number of submissions based on estimated information. This will require NRP training. See Document 5707, Correspondence Examination Guidelines, Module D and also see IRM 4.22.5.4.1.

  6. The correspondence tax examiners assigned NRP cases must be thoroughly familiar with the NRP program procedures. This will require NRP training.

4.22.5.3  (10-01-2002)
NRP Examination Cycle

  1. Each NRP cycle has a specific time frame for completion. The Form 1040 cycle time frame is 18 months.

  2. Field Compliance Service examination officials must ensure that NRP examinations are completed promptly. Team Leaders play the leading role in ensuring that examinations are initiated and completed promptly without sacrificing quality.

4.22.5.3.1  (10-01-2002)
Receipt of NRP Returns

  1. 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 Field Compliance Service - Austin. The NRP case file will be forwarded to the designated Field Compliance Services' NRP Coordinator.

  2. Upon receipt of an NRP case file, the NRP Coordinator immediately verifies that the package is complete and agrees with the accompanying transmittal list. If the case is incomplete, secure missing data to complete the case file.

  3. After verification, the original and one copy of the transmittal lists must be signed and dated on each page by the NRP Coordinator. Receipt of returns must be acknowledged within three workdays after receipt in the Field Compliance Service Site (10 days for initial shipment). Receipt acknowledgment is to be sent to the Austin Field Compliance Center.

  4. Criminal Investigation (CI) receives copies of transmittal lists from the Field Compliance Service - Austin site and notifies the NRP Coordinator within ten workdays of any examination that is to be coordinated. Any case that CI places controls on at any point during the NRP process will be immediately transferred to the field. (See transfer procedures in IRM 4.22.5.4.3.)

4.22.5.3.2  (10-01-2002)
Control of NRP Returns

  1. The NRP Office will develop an NRP on-line Case Tracking System (CTS).

  2. The NRP Coordinator will reconcile any discrepancies between the NRP on-line CTS and AIMS status workload inventory report as well as any local reports.

  3. Contact will be made to any NRP coordinator to resolve discrepancies, as required.

4.22.5.3.3  (10-01-2002)
Processing of Returns

  1. NRP returns are processed under existing procedures as found in IRM 4.19.1 unless otherwise specified herein.

4.22.5.3.4  (10-01-2002)
Assignment of Returns in Field Compliance Centers

  1. NRP Coordinators should promptly assign NRP case files to the NRP Team Leaders after receipt from the Field Compliance Center - Austin site.

  2. After receipt of the returns from the NRP Coordinator, NRP Team Leaders should promptly assign cases to the NRP examiner. Examiners should initiate taxpayer contact as quickly as possible.

  3. NRP examinations should be completed promptly without sacrificing quality.

  4. NRP Examiners should elevate to their managers items that appear abusive in nature.

  5. NRP selections are not a basis for reopening a previously examined return or for expanding the scope of the examination that was in process prior to its designation as an NRP return.

  6. The NRP Coordinator should review the Partnership Control System (PCS) if AIMS has a Partnership Investor Control File (PICF) code present and ensure that examiners are notified when a NRP return is under a related return's PCS control.

  7. If a taxpayer's return selection was already under examination and is subsequently identified as an NRP examination, the case will be completed and the results will be included in the NRP tracking reports.

4.22.5.4  (10-01-2002)
Examinations in Field Compliance Service Centers

  1. Examinations must be initiated on all NRP returns and there will be no surveys before or after assignment.

  2. An exclusion should be requested if any of the following conditions apply (see LEM 4.22.4.4, Exclusions from NRP Examination).

  3. There are several systemic exclusions that will preclude certain taxpayers from the NRP sample. This includes taxpayers who were audited during the prior 1988 TCMP audit cycle and the EITC Compliance Study audits.

  4. Procedures for requesting an exclusion of NRP returns are in Exhibit 4.22.5-1. of this IRM.

  5. If the examiner finds that an examination cannot be made for other than those listed in (2) or (3) above, the NRP Coordinator should be notified for coordination with the NRP Office.

  6. If indications of fraud are discovered during the examination of an NRP or related return, a referral is made in accordance with IRM 4.19.1. The referral is to be labeled as an NRP case. Such identification is necessary so that it can be recognized as being an NRP return by the Chief, Criminal Investigation (CI) Operating Division. If CI accepts the referral and the case cannot be completed with a reasonable estimate of adjustment results, a request for exclusion should be submitted.

  7. NRP returns having related returns are given priority in examination to ensure timely completion. When establishing an AIMS control for a related return pick-up, Source Code 91 is to be used.

  8. When AIMS show a Partnership Inventory Control File (PICF) code indicating an NRP return is being controlled by the Partnership Control System (PCS), the NRP Coordinator should contact the agent working the related case to find out when reliable information can be expected concerning adjustments that affect the NRP examination. Follow-up should be made periodically to ensure that reliable information will be provided timely.

  9. Examinations of the NRP return and/or any related return that cannot meet the program completion date should be brought to the attention of the NRP Coordinator for resolution with the NRP Office.

  10. All situations or problems that arise which are not covered in this section should be brought to the attention of the NRP Coordinator for resolution with the Director of Reporting Compliance and Headquarters office of NRP.

4.22.5.4.1  (10-01-2002)
Scope and Depth of Examination

  1. Because NRP results are used for Discriminant Function (DIF) formula development, it is essential that examinations be thorough. Effective DIF formulas must reflect the actual error patterns found on tax returns regardless of amount and must, to the extent possible, be free of any bias resulting from judgmental errors on the part of the examiner.

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

    1. Every classified item must be examined.

    2. Additional items may be examined with approval from the Team Leader in accordance with established procedures. Such approval, when given, must be documented on the workpapers.

     

  3. The examiner must state on the workpapers what actions were taken to fulfill the requirements of the NRP examination.

4.22.5.4.2  (10-01-2002)
Initiating Examinations

  1. Letter 3624(SC) (09-2002) should be used as the initial contact letter to notify the taxpayer their return has been selected for an NRP examination. This letter requests the supporting records or information needed from the taxpayer for the issues identified in the letter.

  2. Letter 3626(SC) (09-2002) should be used when the NRP examination of the taxpayer resulted in no change to tax reported. This letter will advise the taxpayer(s) that the examination of the NRP return shows no change is required in tax reported and the return is accepted as filed.

  3. Publication 742 (9-2002), Why Your Return is Being Examined, should be used as an enclosure to Letter 3624(SC). This publication explains to the taxpayer how and why their return was selected for a NRP examination.

4.22.5.4.3  (10-01-2002)
Transfers to SB/SE Area Offices

  1. Taxpayers are sent an initial contact letter asking them to reply within 30 days of the date of the letter. An additional 15 days is afforded prior to any further action in order to allow the correspondence examination additional time to associate responses received on or shortly before the 30th day. If the taxpayer fails to respond to the 30 day letter and the additional 15 days have expired, at least two attempts will be made to contact the taxpayer by telephone. Telephone numbers may be found on the original tax return, on the entity module or by contacting directory assistance. If after two attempts the taxpayer cannot be located or no telephone number can be found the case will be immediately closed and shipped to the appropriate Area Office PSP.

  2. If the initial contact letter has been returned undeliverable, research for another address and telephone number will be conducted at that time. If neither can be found, the case will be closed and shipped to the appropriate Area Office PSP. If a new letter is mailed, the 30 day period will begin again.

  3. Any taxpayer who requests a face to face examination should be transferred to the appropriate Area NRP Coordinator.

  4. AIMS will be appropriately updated on all transfers from the Field Compliance Service site to an Area NRP Coordinator in PSP. The transfer package must be routed through the NRP Coordinator for review and update of control records. The NRP Coordinator should establish local procedures, with appropriate management approval, for expediting transfers, both into and out of the area.

  5. A completed Form 3210 (Document Transmittal) with the NRP survey cycle clearly entered in the "Comments" section should be used to transfer NRP case files and any related data from the Field Compliance Service Site to the Area NRP Coordinator. The Form 3210 should be addressed to the attention of the Area NRP Coordinator in PSP.

  6. Upon receipt of an NRP case file package, the Area NRP Coordinator must acknowledge receipt by updating the NRP Case Tracking System (CTS) and acknowledging the Form 3210. The NRP Coordinator should review the Forms 3210 periodically to see if the "Acknowledgment Copy" of the Document Transmittal (Form 3210) has been received. If it has not been received, within 10 business days, follow-up action should be taken by contacting the receiving NRP Coordinator to ensure transfer completion.

  7. Transfers should be completed early in the NRP cycle as a convenience to the receiving area office.

  8. The cutoff for shipping an NRP case to an Area NRP Coordinator is six-months prior to the program completion date unless permission for a different period is obtained from the transferee Area NRP Coordinator. If the Area NRP Coordinator determines that the examination process cannot be completed by the program completion date, an exclusion should be requested (see IRM 4.22.5.4.(2)). It is important to start all examinations promptly in order to avoid transfers that may occur within the six-month cutoff.

  9. Formal discussions between transferor and transferee areas are strongly recommended, particularly prior to the six-month transfer cutoff. This will eliminate questionable transfers.

  10. If the area office NRP Coordinator does not acknowledge Form 3210 within a reasonable period of time, the Compliance Center NRP coordinator will contact the area office by telephone.

4.22.5.5  (10-01-2002)
Disposition of All NRP Documents

  1. This section covers the disposition of all NRP documents.

4.22.5.5.1  (10-01-2002)
De minimis Adjustments

  1. Due to the research nature of NRP examinations, de minimis adjustments should be captured within RGS.

    1. a report showing the adjusted item(s) and indicating the actual de minimus tax liability amount. This information is needed for NRP research results and will be transmitted to the Detroit Computing Center for EOAD purposes.

    2. a second report showing the adjusted item(s) but indicating no tax liability due and processed for the case closing.

     

  2. Cases meeting this criteria should be flagged with Form 3198, Special Handling for these cases.

4.22.5.5.2  (10-01-2002)
Completed Examination Reports

  1. RGS database will be sent to the NRP coordinator and put in RGS status 52.

  2. Case will be reviewed by NRP coordinator for completeness of data fields.

  3. Cases that pass the Detroit Computing Center validation run (see IRM 5.5.3(2)) will be returned to the team leader and put in RGS status 51 for case closing actions.

4.22.5.5.3  (10-01-2002)
Transmission of Electronic Data to Detroit Computing Center

  1. NRP coordinator will transmit case data to Detroit Computing Center for validation check.

  2. DCC will run validation overnight. Cases that do not pass will be annotated on NRP Case Tracking System (CTS).

  3. NRP coordinator will review the CTS. Cases that do not pass will be corrected and resubmitted by NRP coordinator to DCC.

  4. After completed DCC validation, RGS data base will be update to status 51.

4.22.5.6  (10-01-2002)
Case Management and Program Monitoring

  1. The NRP Office and the operating divisions will evaluate a sufficient number of NRP cases to ensure examiner compliance with examination requirements discussed earlier in this IRM. Cases selected for evaluation will be representative of each Field Compliance Service Site. The evaluation will be completed during the early months of the NRP examination cycle, but not before sufficient cases are available for review so that the sample will include a representative mix of returns. This is necessary so that appropriate measures can be taken to improve quality if needed. Someone thoroughly familiar in NRP procedures and guidelines should evaluate these cases.

4.22.5.6.1  (10-01-2002)
Case Management

  1. Regular case management evaluation procedures should be followed, including the NRP objectives listed below:

    1. Determine the timeliness of assignment, examination and review of NRP returns, and whether the NRP examination records were promptly submitted to the DCC.

    2. Determine that the examiners have complied with the Auditing Standards found in IRM 4.19.1. The examiners must state in their workpapers what actions were taken to fulfill the requirements of the NRP examination. These workpapers, which include those items not otherwise commented on, should be general in nature and tailored to the taxpayer's individual examination.

    3. Determine whether the applicable NRP related case procedures were followed.

     

4.22.5.6.2  (10-01-2002)
NRP Program Monitoring - Field Compliance Service Centers

  1. The Field Compliance Service Centers should establish sufficient monitoring procedures to control and manage the program including in-process and closed case reviews. The Director of Field Compliance Service Centers should establish in-process case review teams, consisting of Department Managers, Team Leaders, and reviewers. These teams are encouraged to conduct at least quarterly reviews until the completion of this project.

4.22.5.6.2.1  (10-01-2002)
Examples Of Items To Consider When Evaluating NRP In-Process Cases

  1. In-process reviews are a critical in guaranteeing the highest quality development in all program cases. Completion of the in-process reviews will be documented in the manner set forth below.

  2. Reporting and control procedures:

    1. Prompt verification and acknowledgment of NRP return packages from the Austin Field Compliance Service Center;

    2. Prompt assignment to examination units;

    3. Timely disposition and acknowledgment of transfer cases;

    4. Exclusion procedures are being followed and input by authorized personnel;

    5. Prompt reconciliation of control reports.

     

  3. Completion of NRP examinations:

    1. Timely assignment of cases to examiners;

    2. Prompt opening and continued priority treatment of NRP cases;

     

  4. Timely processing of cases through Quality Review - Process Analysis Staff (PAS).

  5. Training

    1. Have all NRP team leaders received formal NRP training to ensure that quality examinations are conducted and that correct and complete NRP Report data have been entered?

    2. Have all the examiners working NRP returns received formal NRP training?

    3. Are there sufficient NRP examiners to handle the workload expeditiously?

     

  6. Scope and Depth of Examinations:

    1. Determine thoroughness of audit;

    2. Determine whether inquiry was made for possible unreported income, deductions and credits;

    3. Determine whether adequate comments were made in workpapers;

    4. Determine whether adequate consideration was given to substantiation documentation.

     

  7. Quality of NRP Examination Record:

    1. Review for technical correctness;

    2. Review for mathematical accuracy and completeness in entering and categorizing adjustments and accuracy of input to the EOAD fields;

    3. Review of procedural requirements.

     

  8. Verify that trends in error patterns on the quality of the examinations and NRP Examination Records are being transmitted periodically to NRP office.

4.22.5.7  (10-01-2002)
Review of NRP Cases

  1. All closed cases examined in the NRP program will be reviewed for quality.

    1. NRP cases will be subject to sample PAS review procedures in accordance with existing guidelines.

    2. NRP cases that are not part of the regular sample will then be pulled out for the national closed case review.

    3. Special attention must be given to cases with a de minimis adjustment. See IRM 4.22.5.5.1. .

     

  2. NRP PAS success rates can be segregated by running QRDB reports using the source code 80 as a discriminating factor.

4.22.5.7.1  (10-01-2002)
 Managerial Responsibilities

  1. The Team Leader or assistant will play a pivotal role by conducting in-process reviews for all aspects of case development.

  2. In-process reviews must take place before the case is put into 90-day or the case is closed. Completion of the in-process reviews will be documented as follows below.

    1. The NRP units will do a 100 percent peer review for the first month.

    2. The peer review will consist of having another tax examiner review for accuracy.

    3. If any error trends or concerns are noted, additional reviews will be considered for subsequent months.

     

4.22.5.7.2  (10-01-2002)
Documentation of In-Process Reviews

  1. A form entitled "Technical In-Process Review Guide" will be used during review(s) of NRP cases. This form is to document the progress of the case and to ensure that NRP procedures have been followed. When completing this form the following items should be considered: