IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 24. Excise Tax

Section 2. Form 637 Excise Tax Registrations (Cont. 1)

4.24.2  Form 637 Excise Tax Registrations (Cont. 1)

4.24.2.7 
Registration Review Process

4.24.2.7.4 
Applications for Activities A, B, C, D, E, F, I, Q, and V

4.24.2.7.4.4  (02-01-2003)
Bonds

  1. A, B, C, D, E, F, I, Q, and V registrants are not subject to bonding.

4.24.2.8  (02-01-2003)
Action on the Application

  1. After an Excise Tax Examiner reviews an application for registration and makes an on-site visit (if necessary), they must then recommend approval or denial of the application.

4.24.2.8.1  (02-01-2003)
Approval

  1. When the Excise Tax Examiner reviewing the file has determined that the applicant meets the appropriate registration tests, a written narrative summarizing the fats will be made and kept in the file. If a bond is required, and a surety bond is used, a registration will not be issued before receipt of a letter from the surety company certifying a bond has been issued to the applicant.

  2. When it is determined by the Excise Tax Group Manager that the application should be approved, the Excise Tax Group Manager will issue a Letter of Registration. A copy of the approval letter will be kept in the registration file.

  3. Generally, one registration number with approved activity letters will be issued to each registrant. A person will not be issued multiple registration numbers unless they are registered as a UV and/or UP and some other activity. In this situation, one number will be issued for the UV registration, one number for the UP registration, and another number for all other activity letters. In the future, one registration number with approved suffixes will be issued to each registrant.

    Note:

    New registration numbers will be issued by ExTRAS. System will be operational in FY 2003.

     

  4. If a person later qualifies for registration for activities not covered by its current Letter of Registration, an additional activity letter will be added to the registration number. An updated registration letter will be issued to reflect the additional activity letter. The activity letters that designate the excise tax registration activities are listed in the Form 637 instructions.

  5. Each business unit that has, or is required to have; a separate EIN is treated as a separate person. A person is registered only if the Excise Tax Group Manager has issued a registration to the person and the registration has not been revoked or suspended. Registrations remain valid until revoked or suspended.

  6. The person who receives a Letter of Registration and a registration number is considered to be registered for the activity letters issued with the number. The effective date of the registration will be no earlier than the date on which the letter is signed by the Excise Tax Group Manager.

  7. Form 637 indicators must be input on master file. Form 2363 (Master File Entity Change) may be used. The file will be documented that this procedure was performed.

4.24.2.8.2  (02-01-2003)
Denial

  1. If the Excise Tax Examiner determines that an applicant does not meet the appropriate registration tests, the Excise Tax Group Manager will review the file and determine if they are in agreement with the Examiner's determination. If the Group Manager agrees, the applicant will be notified in writing notating the basis for the denial.

  2. Approval levels: Non-contested Denials:

    1. If the applicant has not responded within thirty (30) calendar days to a request for additional information relating to its application, the Excise Group Manager is authorized to sign the denial letter.

    2. Non-contested denials. These are denials where the applicant does not object to our determination.

    3. Activity test. If the reason for denial is that the applicant is not engaged in the appropriate trade or business to receive the registration, the Excise Group Manager is authorized to approve the denial letter.

    4. Other reasons for denial including adequate security test, the acceptable risk test, not having an acceptable filing, deposit, or payment history of all federal taxes. In these instances for non-contested denials, the Excise Group Manager is authorized to approve the denial letter.

     

  3. Approval levels: Contested Denials:

    1. Contested denials. These are denials where the applicant objects in writing to the determination. SBSE Headquarters Excise Tax Program Manager is authorized to sign the denial letter.

    2. The Excise Tax Examiner will write up the case file in an unagreed format (facts, law & argument, taxpayer position, and conclusion) after approval by the Group Manager.

    3. The case file will be forwarded to the Excise Tax Territory Manager for their review and comments

    4. The case file is then forwarded to the Excise Area Director for their comments.

    5. If either the Territory Manager or Excise Area Director believe the application should be granted, they should list their reasons for granting the application.

    6. The case file is then forwarded to the National 637 Program Coordinator to review the completeness of the file, prior to the review of the Excise Tax Program Manager. .

    7. The Excise Program Manager will return the case file to the National 637 Program Coordinator for issuance of a denial letter to the applicant and documentation of the case file.

    8. The case file will then be routed back to the appropriate group through the same channels.

    9. If the SBSE Headquarters Excise Tax Program Manager determines the registration will be issued the case file will be sent to the National 637 Program Coordinator who will notate the case file and forward the case file back to the group through the same channels so a Letter of Registration can be issued.

     

  4. The National 637 Program Coordinator will maintain a list of all applicants that contest the denial.

4.24.2.9  (02-01-2003)
Follow-up Actions After Approval

  1. After an applicant has been registered, the Excise Tax Group Manager must ensure the registrant is using the registration properly and is complying with the terms and conditions of its registration including all filing, payment, and deposit requirements.

    1. See Treas. Reg. Section 48.4101-1(h) for the terms and conditions of registrants for activities K, M, R, S, T, UV, UP, W, and X. See IRM 2.7.1.3 for registration tests.

    2. Registrations H and Y are governed by IRC Section 4101 and Notice 88-30, 1988-C.B. 497. See IRM 2.7.3.3 for registration tests.

    3. Registration activities A, B, C, D, E, F, I and Q, are governed by IRC Section 4222 and Reg. Section 48.4222(a)-1, 48.4222(b)-1, and 48.4222(c)-1. Registration for activity V is governed by Treas. Reg. Section 52.4682-5. See IRM 2.7.4.3 for registration test.

     

  2. The Excise Tax Manager will be responsible in seeing all mandatory Form 637 compliance reviews are completed by fiscal years end. The National 637 Coordinator randomly selects mandatory reviews each year using a statistically valid selection process.

  3. Each mandatory review will require an on-site visitation including reviewing the registrants historical case file and incorporating the new data as supplied by CCSC case building team. The Excise Tax Examiner must review transcripts, other IDRS research, CBDB research, an all other internal documents. The examiner must follow the procedures as listed in IRM 4.24.2.7(3)(4)(5). Examiners will inspect all certificates received or given by the registrant, inspect all claims filed and any other returns necessary to ensure compliance is being met since the previous Form 637 compliance review.

  4. All Form 637 case files must be documented thoroughly and meet the standardized case file criteria including but not limited to internal controls, business diagrams, financial analysis, questionnaire, etc. See IRM 4.24.2.5 (5) for the requirement of using a standard Form 637 compliance review case file assembly.

    1. Each compliance review will be maintained in an appropriate filing system with an activity record.

    2. The activity record will include all registrant contacts and will be documented sufficiently to show what was done during the review.

    3. The Excise Tax Examiner performing the review will document the follow-up actions and their determination.

     

  5. Any exceptions to the territory work plan must be presented by the Territory Manager in writing to the National 637 Coordinator.

  6. The Territory Manager and/or Excise Tax Group Manager may select other 637 reviews as needed other than those activities deemed to be correspondence compliance reviews at CCSC. If facts and circumstances warrant, reviews may be performed more frequently or as determined by management.

  7. It is mandated that the Excise Tax Examiner conducting the mandatory compliance review receive and review the original 637 case file.

  8. The registrant will receive a written letter (Deficiency/No Deficiency) summarizing the compliance review. A copy of the notice will be kept in the case file. See Exhibits 4.24.2-10 and 4.24.22-11.

  9. A 637 review is considered complete when the written letter is issued to the taxpayer.

4.24.2.10  (02-01-2003)
Examinations Resulting from Compliance Reviews

  1. When substantial noncompliance is found during a compliance review, the Excise Tax Agent will expand the scope into an examination after receiving approval from their Manager. The Excise Tax Agent will submit a request to establish an examination case on the Audit Information Management System (AIMS) at the earliest possible date. The Excise Tax Agent will establish the case on AIMS within three (3) business days or no later than the close of the pay period or the end of the month for reporting time - whichever occurs first - in which the determination was made to expand the compliance review into an examination.

  2. If a registrant is examined (other than as a result of a compliance review), a compliance review will be performed in conjunction with the examination. The Examiner should consider the date of the last 637 visitation and discuss with their Manager before proceeding. The Examiner will advise the 637 Coordinator of their findings, including any information uncovered that may affect the taxpayer's registration. The 637 Coordinator will include this information and a copy of the RAR in the registration file, and will evaluate the information and determine whether the registration should be revoked or if a bond will be required. The registration file and follow-up date will be updated accordingly.

  3. The registration status of taxpayers that file Form 720 must be checked during the course of excise tax examinations. A comment must be made in the examination file documenting what was done to check the status. A summary of what was done in the 637 compliance review will be documented in the examination case file, including, but not limited to the registration tests, financial analysis, etc.

4.24.2.11  (02-01-2003)
Maintaining and Updating Registration Files

  1. Control and maintenance of the 637 case files will be located in the Excise Tax Group where the 637 Coordinator is located to ensure the information is readily available when needed.

  2. All registration files for activities UP, UV, I and F will be centralized and reside at CCSC.

  3. All telephone contacts with registrants during the course of a review will be documented in the case file. All telephone contacts with registrants between compliance reviews will be documented in a memo and forwarded to the 637 Coordinator for association with the 637 case file and documented in the activity record.

  4. All telephone contacts with registrants whose files are in CCSC will be documented and forwarded to the CCSC 637 Coordinator to be associated with the 637 case files.

  5. All pertinent information and correspondence pertaining to the registrant will be documented in the 637 case files.

  6. After completion of initial registrations, compliance reviews, examination, or receipt of relevant information that could have significant effect on the registration, the 637 Coordinator will review the 637 case files.

  7. All records of denied or revoked registrations will be maintained for a period of at least three (3) years.

  8. When it is learned that a registrant has moved to another territory/state, the 637 Coordinator will notify the 637 Coordinator in the new territory/state of the registrant's relocation. The 637 case files will be forwarded to the new Excise office within thirty (30) days. The new 637 Coordinator will notify the Database Administrator (DBA) at CCSC who will transfer the record on ExTRAS from the old to the new Excise office. If a registrant contacts CCSC regarding a change in location, CCSC will notify both the old and new Excise offices and forward related information to the new office. In the future, the actual registration number will not change.

4.24.2.12  (02-01-2003)
Actions, Including Adverse Actions, Relating to Registrants

  1. The delegation of authority and the procedures to follow for revocation and suspensions of registration are the same as the denial of registration. Wherever the word "denial" is used in IRM 4.24.2.8.2, substitute the word "revocation" or "suspension." Wherever "applicant" is used substitute "registrant."

  2. If registrant disagrees, refer to IRM 4.24.2.8.2(c).

4.24.2.12.1  (02-01-2003)
Activities K, M, R, S, T, W, UV, UP, and X

  1. Mandatory revocation or suspension. The Excise Group Manager must revoke or suspend the registration of any person registered for activities K, M, R, S, T, W, UV, UP and X if it is determined that the registrant, at any time:

    1. Does not meet one or more of the applicable registration tests described in Treas. Reg. Section 48.4101-1(f) and has not corrected the deficiency within a reasonable period of time after notification by the Excise Group Manager;

    2. Has used its registration to evade, or attempt to evade, the payment of any tax imposed by IRC Section 4041(a)(1) or 4081, or to postpone or in any manner to interfere with the collection of any such tax, or to make a fraudulent claim for a credit or payment;

    3. Has aided or abetted another person in evading, or attempting to evade, payment of any tax imposed by Section 4041(a)(1) or 4081, or in making a fraudulent claim for credit or payment; or

    4. Has sold, leased, or otherwise allowed another person to use its registration;

    5. Fails to follow corrective actions for CP 241 notices under IRM 4.24.2.16.3.

     

  2. Mandatory revocation for failure to file Forms 720TO/CS

    During the 1980’s, Congress realized motor fuel evasion schemes was costing substantial revenue losses to the highway trust funds. The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) authorized development of a motor fuel tracking system, however; funding was not approved until June 1998. The tracking system developed is known as the Excise Summary Terminal Activity Reporting System (ExSTARS).

     

    The ExSTARS system requires monthly filing by approved terminal operators and bulk carriers beginning April 1, 2001. Terminal operators are required to report all bulk and non bulk receipts of liquid products into an approved terminal and all disbursements by position holder from an approved terminal. Pipeline and vessel operators are required to report bulk deliveries and receipts to and from an approved terminal with a Terminal Control Number (TCN).

     

    Section 4101(d) of the Internal Revenue Code authorizes the Secretary to require information reporting by any person registered under this section and by any other such person as the Secretary deems necessary to carry out this part. Under this authority, Regulation Section 48.4101-2 requires information returns (Forms 720TO/CS) to be filed in the form required by the commissioner and on a monthly basis. Registrants must file as a condition of maintaining their registration.

     

    The Area Director must revoke the registration of any terminal operator or carrier who fails to file Form 720TO or 720CS within a reasonable time after notification by the Area Director.

     

    Notification Letter procedures:

     

    If the ExSTARS Compliance Coordinator (ECC) determines that a 637-S or 637-X registrant that is required to file information reports for ExSTARS is failing to meet their filing requirements, the ECC will notify the appropriate Excise Group Manager and Territory Manager in writing the necessary steps they must fulfill before issuing a notification letter. The Excise Group Manager must contact the registrant within 10 calendar days after receiving this notice. The Excise Group Manager will call the ECC and acknowledge receipt of the notification letter.

     

    If this is the first ExSTARS notification letter for the registrant, the Excise Group Manager will notify the registrant that their registration will be suspended within 30 days of the notification. The registrant will be advised that to avoid suspension they must make satisfactory arrangements with the ECC for filing of all ExSTARS returns.

     

    The Excise Group Manager should coordinate these efforts with the ECC. Once the registrant comes into compliance with the required ExSTARS filings, the ECC will notify the Excise Group Manager and the registration will be reinstates.

     

    If this is the second notification letter for the registrant, the Excise Group Manager will notify the registrant that they have 15 calendar days to make satisfactory arrangements or their 637 registration will be revoked.

     

    If the registrant contests the revocation or suspension, the Excise Group Manager will document their actions and discussion with the registrant and forward to the ExSTARS Compliance Coordinator.

     

    The ExSTARS Compliance Coordinator will document the actions that have been taken to bring the registrant into compliance and forward to the National 637 Coordinator.

     

  3. Correction of deficiencies. The case file will be annotated to note actions taken to correct deficiencies to the registrant's activity test, acceptable risk test, and/or adequate security test. If these tests have not been corrected within the stated "reasonable time" , the registration will be revoked or suspended. Before a suspended registration can be reinstated, all deficiencies must be corrected.

    Note:

    There are not corrective measures to mitigate the taxpayer's actions described in IRM 4.24.2.12.1(b), (c),