IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 5. TE/GE AIMS Manual

Section 3. TE/GE AIMS Special Processing Procedures (Cont. 1)

4.5.3  TE/GE AIMS Special Processing Procedures (Cont. 1)

4.5.3.12 
Adjustments Involving Married Taxpayers

4.5.3.12.5  (06-01-2003)
Invalid Joint Return-Husband Not Required to File Separate Return

  1. Zero out the incorrect joint account by preparing Form 5599 with the appropriate TCs and amount in Item 12 to reduce to zero all tax and penalties assessed.

    1. Make whatever entries are necessary in Item 15 to reduce the unrefunded prepayment credit by the amount allowed as a credit on the wife’s separate account.

    2. Process Form 5599 with the original joint return.

    3. Transfer cash payments with Form 2424 to the wife’s separate account.

     

  2. Prepare and process a substitute return (TC 150 -0-) to set up the wife’s separate account. The received date for the substitute return should be the same as that of the joint return.

    1. When the TC 150 posts to the MF, establish the account on AIMS.

    2. Prepare and process Form 5599 for the wife’s return entering in Item 12 the total tax including any adjustment by TE/GE.

    3. Enter in Item 15, the withholding credit equal to that which was decreased on the joint account.

    4. Process Form 5599 with a copy of the substitute return numbered in the 90X blocking series.

     

4.5.3.12.6  (06-01-2003)
Innocent Spouse-Public Law 91-679

  1. Public Law 91-679 provides that in certain cases a spouse will be relieved of liability arising from a joint income tax return. The three types of situations that can occur:

    1. An assessment against the culpable spouse only

    2. Two assessments-one against the culpable spouse, and one against the joint account

    3. An assessment against the culpable spouse and an overassessment to the innocent spouse

     

  2. Cases must be flagged with a Form 3198, noted "P.L. 91-679, " and the type of situation must be identified. An appropriate notation in Item 31, Form 5403 should identify Innocent Spouse cases received from Appeals. A transcript of the account must be secured before the adjustment(s) can be processed.

4.5.3.12.6.1  (06-01-2003)
Processing Form 5599 and Form 3177

  1. Assessment against the culpable spouse only.

    1. On a new or copy of Form 5599 for the joint account, line out the name of the innocent spouse and note in the top center of the form " Innocent Spouse Case."

    2. Do not process through the terminal. Process as an NMF assessment - the account must not be transferred to the MF. Process the joint Form 5599 with DC 02 and TC 300 with a zero ($0.) amount, through the terminal. If the deficiency IS NOT fully paid, input TC 130 on Form 3177, Notice of Action for Entry on Master File, with the names as they appear on the MF. Exhibit 4.5.3-5 and Exhibit 4.5.3-6for instructions on completing Form 3177.

     

  2. Form 3177 should:

    1. Include the form number and tax period of the outstanding liability

    2. Include any cross-reference taxpayer ID numbers

    3. Annotate as "Innocent Spouse Case"

    4. Rout to the Campus Center "Attn: CP 44 Processing Unit. "

     

  3. Assessment against both the culpable spouse and the innocent spouse.

    1. The RAR must show the amount to be assessed jointly and the additional amount of the assessment against the culpable spouse.

    2. Prepare two Forms 5599, one for the joint account and one for the culpable spouse only.

    3. Process Form 5599 for the culpable spouse as an NMF assessment. Do not process through the terminal. DO NOT transfer it to the IMF.

    4. Process Form 5599 for the joint account through the terminal. Refile the case under the refile DLN assigned this Form 5599.

    5. If the deficiency IS NOT fully paid, input TC 130 on Form 3177 with the names as they appear on the MF. See (2) above.

     

  4. Assessment against a culpable spouse, overassessment to an innocent spouse.

    1. The RAR must show the amount to be assessed and the amount of the overassessment.

    2. Prepare one Form 5599 for the joint account and another Form 5599 for the culpable spouse.

    3. Process Form 5599 for the culpable spouse as an NMF assessment and DO NOT transfer it to the MF. Do not process through the terminal.

    4. If the overassessment of the innocent spouse will result in a refund, prepare Form 3753, so the refund will be issued in the name of the innocent spouse only. Enter the amount of allowable interest.

    5. The joint Form 5599 must be used to process the overassessment for the innocent spouse, but a name change should NOT be initiated.

    6. Process through the terminal, use Hold Code 1 in Item 07, and include in Item 12, TC 770 with a zero amount.

    7. Submit both Forms 5599 and Form 3753 at the same time.

    8. If the deficiency IS NOT fully paid, input TC 130 on Form 3177. See (2) above. The case must be filed under the refile DLN of the joint Form 5599.

     

4.5.3.13  (06-01-2003)
Joint Committee Cases

  1. IRC 6405(a) provides that "no refund or credit" of income, profits, estate or gift tax, or any tax imposed by Chapters 41 through 44 in excess of $200,000 will be made until after the expiration of 30 days from the date a report is submitted to the Joint Committee on Taxation (here-in-after referred to as Joint Committee) giving the name of the person to whom the refund or credit is to be made, the amount of such refund or credit, and a summary of the facts and the decision of the Commissioner or Deputy Commissioner (see Delegation Order No. 154, as revised). Thus, in any case involving the allowance of an IRC 6405(a) net refund or credit in excess of $1,000,000, review by the Joint Committee is required.

4.5.3.13.1  (06-01-2003)
Cases Requiring Review by Joint Committee on Taxation

  1. To get 6405(a) refunds out to the taxpayers quicker, the expedite refund request procedures were instituted several years ago. Under the expedite refund request procedures, the Service may issue the refund if the Committee does not express an objection within 30 days from the time the report is submitted to them. However, the expedited refund procedures should not be applied in cases where the expiration of the statute of limitations is imminent, or where the Service may have difficulty in recouping the refund.

  2. IRC 6405(b) provides a similar rule for Joint Committee review of a refund or credit made under IRC 6411, which relates to carry back adjustments. In such a case, if the net tentative refund or credit is more than $1,000,000 it will not be reported to the Joint Committee before making the refund or credit, but will be reported when the correct amount of tax is determined. If such determination results in a deficiency, but with a net refund or credit previously allowed under IRC 6411 (i.e., partial recoupment of the tentative allowance), the procedure as to Joint Committee review will be the same as with a refund or credit more than $1,000,000 not involving IRC 6411.

  3. If more than one taxable year is involved, only the overpayment, for each taxable year is to be considered. Any taxable year, for which there is no net overpayment, is not considered.

    Example:

    In a case involving two taxable years, the determined overpayment must be reported to the Joint Committee if a net overpayment is more than $1,000,000 for either year, or if there is a net overpayment for each year and, added together, they total more than $1,000,000.

     

4.5.3.13.2  (06-01-2003)
Processing Joint Committee Cases

  1. After the case clears the Joint Committee on Taxation, the following documents should be in the case file:

    1. Completed Form 4081, Transmittal Memorandum Joint Committee Case.

    2. Completed Form 5466B, Multiple Record of Disclosure, (Privacy Act of 1974). (For individual taxpayers only).

    3. Yellow copy of the report to the Joint Committee signed on behalf of the Commissioner.

    4. Copy of the letter of notification from the Joint Committee to the Commissioner that no exception has been taken (the Joint Committee letter should sometimes contain a list of unrelated taxpayers).

    5. The case files, if previously forwarded to the Joint Committee.

     

  2. Upon receiving the above documents, the Tax Examiner must compare the taxpayer’s name on the yellow copy of the report to the Joint Committee with that listed on the letter from the Joint Committee. The name on the Joint Committee letter should be compared exactly with that on the yellow copy. In the case of a variance in the names, return the cases to the Technical Staff for further guidance.

  3. All Joint Committee cases require that a manual refund be issued if the monies have not already been refunded.

  4. Upon receiving acknowledgment of receipt by the Joint Committee of an "Expedite Refund Request" report, the examining area office QMS should promptly forward a "dummy" work file to ESS to start refund processing. The work file must be transmitted with Form 3198, specifying the scheduled date for the refund. The scheduled refund date should be 31 days from the day the Committee received the "Expedite Refund Request" report. ESS must coordinate with the Campus Center to schedule the refund to go out on the specified date. If the area office QMS is notified that the Joint Committee objects to the release of the refund, QMS must immediately contact ESS to stop the processing of the refund.

    Note:

    To expedite all 6405(a) refunds, send via Federal Express to:

     

    Internal Revenue Service
    Office of Compliance Specialization
    901 D St. SW, Room 108
    Washington, D.C. 20024

4.5.3.14  (06-01-2003)
Claims

  1. Request for Refund or Abatement - A claim, tentative allowance or other request submitted by or for a taxpayer to reduce liabilities previously assessed. Such requests for refunds or abatements include:

    1. Form 843, Form 1040X, Form 1045, Form 1120X, Form 1139, Form 8038-R, informal claims, or amended TE/GE returns filed after the due date and showing a decrease in liability;

    2. A letter or other document (informal claim) which contains all facts necessary to decide that a reduction in tax liability is involved;

    3. A claim for abatement of excise, windfall profit, or employment tax assessed as the result of a prior examination.

     

4.5.3.14.1  (06-01-2003)
Identification of Claims and Returns Showing Increase in Tax

  1. Campus Center personnel must scrutinize all requests for refunds (Form 843, Form 1045, and Form 1139). Campus Center personnel are responsible for processing tentative refunds and forwarding all other TE/GE types of claims to the Area Office. All Form 1040X and Form 1120X, indicating the original return is under TE/GE jurisdiction, must be forwarded to the Directors of the Business Units (i.e., EP, EO, FSLG, ITG or TEB).

  2. In TE/GE, claims are generally filed for:

    1. Form 11-C, Special Tax Return and Application for Registry-Wagering

    2. Form 730, Tax on Wagering

    3. Form 940, Employer's Annual Federal Unemployment Tax

    4. Form 945, Annual Return of Withheld Federal Income Tax

    5. Form 990PF, Return of Private Foundation Exempt from Income Tax

    6. Form 990T, Exempt Organization Business Income Tax Return

    7. Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons

    8. Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapter 41 and 42 of the IRC

    9. Form 5330, Return of Excise Taxes Related to Employee Benefit Plans.

    10. Form 8038-T, Arbitrage Rebate or Penalty

     

  3. Taxable Increase Adjustment - An amended individual or corporation return which shows an increase (additional) tax over that reported on the original return.

  4. Superseding Return - Any return filed prior to the due date changing the data reported on the original return.

  5. When a Campus Center Adjustment Branch receives a timely filed TE/GE claim, they must secure the original return (Index Card and the ANMF transcript for NMF returns) and determine whether the organization or plan is under examination. If it is under examination (TC 420 in the module), they must forward the entire case to the Director of the Business Unit (EP, EO, FSLG or ITG). Forward TEB claims to the Manager of Field Operations.

  6. If the organization/plan is NOT under examination, the entire case must be forwarded to the Campus Center Examination Branch for AIMS opening input. Campus Center personnel should not generate overassessment transactions on TE/GE returns, unless directed or requested by local TE/GE offices except for math or Campus Center errors.

  7. Upon receipt, Campus Center Examination Branch must prepare and input the following Forms:

    1. Form 5597, TE/GE IMF/BMF/EPMF Request, to open IMF, BMF or EPMF accounts on AIMS.

    2. Form 5588, TE/GE NMF Request, to open a NMF account on AIMS for a claim filed on Form 4720A or Form 5330 (pre-2001).

     

  8. Claims should have a Source Code of 30 on Form 5546, Examination Return Charge-Out. After the account is established on AIMS and the charge-out is received, the entire case file must be forwarded to the specific Primary Business Code.

4.5.3.14.2  (06-01-2003)
Amended Returns

  1. An amended return is a second return filed, after the due date, which changes information submitted on the original return. The taxpayer will send their amended return to the Campus Center where the original return was filed. The amended return should then be posted to the taxpayers account on MF with a TC 976/977. If TC 420 is present, then a TC 470 will post to MF.

  2. In some instances, amended returns may require consideration by TE/GE to change tax liability on the IMF or BMF. For amended returns referred to TE/GE, all assessment/overassessment documents are included in the administrative file. However, the file must be checked to determine if a change in tax liability has been made as evidenced by a CP-36 or CP-193 notice with a TC 290 or 291 or computer notices indicating an adjustment has been made. If the form is not included and doubt exists, a transcript of account should be secured to make this determination. Any necessary adjustments to refundable credits on individual or corporate returns, except estimated tax payments or credits, should be reflected in the workpapers.

  3. If an amended return is filed with the Examiner and an examination is not warranted, process the amended return directly to the Campus Center for input to the BMF/IMF/EPMF following the applicable delinquent return procedures in Section 2.3.19. Do not establish on AIMS.

4.5.3.14.2.1  (06-01-2003)
Additional Tax Due on Amended Return

  1. When the taxpayer has filed an amended return showing additional tax due, secure a current transcript using CC BMFOL/IMFOL to determine if a change in tax liability has been made (TC 29X or 30X). Be sure to verify this to prevent the taxpayer from being assessed twice. Also, compare the 4549 (or the equivalent), with the figures on the report to the amended return to determine if the increase has been considered in the examination.

  2. Whenever an amended return has posted to a taxpayer’s account, a 976/977 freeze code is generated.

    1. To release this freeze, use Priority Code 1.

    2. Use Priority Code 3 to bypass an unpostable condition that normally occurs when the settlement amount (Item 10, Form 5599) does not match the total corrected tax on MF and to release the 976/977 freeze on MF.

     

4.5.3.14.3  (06-01-2003)
Surveyed Claims

  1. Claims for refund, including amended returns and informal claims, other than TEB claims, may be surveyed after assignment if it is determined that the claim issue is clearly allowable in full and the return does not warrant examination.

  2. The Examiner must complete Form 1900, Income Tax Survey After Assignment or Form 2503, Survey After Assignment-Excise or Employment Tax, for cases involving carry backs, if the information upon which the survey is based is not disclosed on the returns affected. The Examiner must also explain the reason for survey on Form 1900. The Group Manager must sign these forms.

  3. If the correct claim amount is not shown on Form 5546 or AMDISA, Examiners must prepare a Form 5598, TE/GE Correction Request or a Form 5901, EP Correction Request to update AIMS with the correct amount.

    Note:

    The only claims that cannot be surveyed are those requiring Appeals consideration or Joint Committee cases.

     

  4. Form 1139, Corporation Application for Tentative Refund, is not treated as a claim when the amount requested has been refunded, although a claim form with the same issue and tax period was filed at the same time.

  5. Surveyed claims require a DC of 34 in Item 13 of Form 5599. Other required entries on Form 5599 include P7-18, P21-22, P24-29, P31-34, C, P36, P38-40, P52-54 and Items 12 and 36. Additional optional entries include Items 02, 6a, 6b, 6c, 07, 09-11, 15, 39, 40, 43 and 50-54.

4.5.3.14.4  (06-01-2003)
Claim Disallowance

  1. In cases involving the disallowance of a claim for refund, whole or in part, a notification letter must be issued to the taxpayer. The area office issues certified notices of disallowance. The Examiner prepares the following forms to inform the taxpayer of a full or partial disallowance of their claim.

    1. Form 2297, Waiver of Statutory Notification of Claim Disallowance.

    2. Form 3363, Acceptance of Proposed Disallowance of Claim for Refund or Credit.

    3. L569(P), Partial and/or full disallowance (accompanies the forms listed above). The Examiner must also prepare a report, unless they disallow a claim in full, and there are no other adjustments.

     

  2. Refer to Exhibit 4.5.3-5, Claim Forms for the proper forms prepared for the examination of claims by an Examiner.

  3. If a certified notice of claim disallowance is to be issued, use of Form 3198, should notify ESS or designee, with the appropriate blocks checked. The following letters are to be forwarded to the taxpayer by ESS or designee to inform the taxpayer of the full or partial disallowance of their claim:

    1. Letter 905(DO) - For claims partially disallowed

    2. Letter 906(DO) - For claims disallowed in full

     

  4. The reason for the disallowance must be at the bottom of the letter.

4.5.3.14.5  (06-01-2003)
Conditions That Extend Refund Statute Expiration Date (RSED)

  1. Specific provisions extending the time for filing claims are listed in the following cases:

    1. Overpayment resulting from bad debts and worthless security losses, or their effect on carryovers and carry backs.

    2. Overpayment resulting from Net Operating Loss (NOL) or capital loss carry backs or certain credit carry backs.

    3. Overpayment resulting from foreign tax credit.

    4. Certain overpayment of self-employment tax.

    5. Overpayment attributable to reduction of life insurance companies of policyholders, surplus accounts.

    6. Overpayment relating to employee plan distributions included in income and later recaptured in connection with plan termination.

     

    Note:

    Claims for Refund of Arbitrage Rebates do not have a Refund Statute Expiration Date.

     

  2. Special rules are also provided for certain manufacturing sugar payments, for overpayments attributable to items of Federally registered partnerships for windfall profit tax, and trade rubber.

  3. Windfall Profit Tax (WPT) - The statute is based on when the WPT was paid rather than the personal income tax payment date. Amounts of WPT withheld are treated as having been paid by the producer on the due date or extended due date of the income tax return. (The credit for overpayment of WPT has been repealed effective for tax periods beginning after August 1988.) All claims or requests for adjustments to WPT are forwarded to the Austin Campus Center (AUSC).

  4. Self-Employment Tax - If an agreement by a state or subdivision, under Section 218 of the Social Security Act, covering its employees, results in a retroactive reduction of their self-employment taxes, an otherwise barred claim for refund will be timely if made by the last day of the second year after the calendar year of the agreement [IRC Section 6511(d)(5)].

4.5.3.15  (06-01-2003)
Conversions

  1. Taxpayers often file the wrong type of tax return. Their income, type of business, or the structure of the business may have changed during the tax period. The Examiner discovers the discrepancy and makes the adjustments to convert to the correct type of tax return.

4.5.3.15.1  (06-01-2003)
Form 1120S Converted to Form 1120

  1. If it is found that a corporation does not qualify as a small business and the business is terminated, Form 1120S Return must be converted to a regular Form 1120. The Examiner must identify the case by attaching a Form 3198 to the file and should prepare Form 5598, to change the Form 1120S Activity Code to the appropriate code for Form 1120, as indicated on Form 3198.

  2. Form 5599 for the Form 1120S Return should also be used for Form 1120. Tax Examiners must complete coding and editing in the normal manner.

  3. For unagreed cases closed to the Appeals Office, the appropriate DC (07 or 11) must be entered on Form 5599.

  4. For agreed cases, two additional steps are required:

    1. Prepare Form 2363, to input TC 091, changing the filing requirements to those of a corporation. Process Form 2363 two cycles ahead of Form 5599. Refer to Exhibit 4.5.3-6 and Exhibit 4.5.3-7, for instructions on completing Form 2363 for a TC 091.

    2. Prepare a routing slip addressed to the Campus Center Entity Control. The routing slip must include the statement, "Form 1120S converted to Form 1120 by TE/GE Division; update Form 2553." (Form 2553, Election by Small Business Corporation.)

    3. Furnish to Entity Control the following information: The taxpayer’s name, address and EIN; the effective date of termination; the reason for the termination; the district office code; and, a statement that Form 2363 has been input.

     

4.5.3.15.2  (06-01-2003)
Form 1041 Converted to Form 1120

  1. This kind of case must be identified with Form 3198. The case file may include the original or a copy of Form 1120.

    1. In agreed cases the file should contain a Form 1120 or a photocopy of Form 1120 marked "1041 Converted to 1120 by TE/GE Division. "

    2. In unagreed cases, the file must include a Form 1120 marked " Substitute for Return Prepared by TE/GE Division."

     

  2. The procedures for conversion are as follows:

    IF And IF THEN
    1. The case is agreed   close Form 1041 in the normal manner.
    The examination results in a tax decrease, Enter Hold Code "1" on Form 5599.
    Transfer all credits to Form 1120.
      Prepare Form 2363 to input TC 016 to eliminate the 1041 filing requirements. Refer to Exhibit 4.5.3-7.
    Secure a transcript using CC BMFOL to determine if Form 1120 has posted to the MF.
    The account is not on MF,
    After the return has posted to the MF, input Form 5597, to establish the account on AIMS.
    Process Form 5599 for Form 1120 in the normal manner, using return copy procedures.

     

  3. For unagreed cases place the converted Form 1120 substitute for return in the case folder.

    1. Do not forward the return to the Campus Center for processing to MF or establish the AIMS account. Process Form 5599 for Form 1041 in the normal manner by closing the case to Appeals. Do not change the filing requirements.

    2. If necessary, Appeals should take action to process Form 1120 to MF, open the case on AIMS and request a change to the filing requirements.

     

4.5.3.15.3  (06-01-2003)
Form 1065 Converted to Form 1120 or Form 1041

  1. Examiners must identify conversion cases on Form 3198 attached to the file.

    1. Agreed cases should be processed in the same manner as conversion of Form 1041 to Form 1120 ( refer to IRM 4.5.3.15.2. above), except that the return forms involved will be Form 1065, Form 1120 or Form 1041, as appropriate.

    2. Unagreed cases should be processed in the same manner (except the return forms involved) as conversion of Form 1041 to Form 1120 ( refer to IRM 4.5.3.15.2).

     

4.5.3.15.4  (06-01-2003)
Form 990 Converted to Form 1120

  1. This kind of case must be identified with a Form 3198 attached to the case file. Agreed case files should contain a Form 1120 or a photocopy marked Form 990 converted to Form 1120.

  2. In order for the Form 1120 to post to MF, the MF should reflect compatible filing requirements and status, refer to Exhibit 4.5.3-8. Once the Form 1120 has been secured, change the filing requirement and status in order for the Form 1120 to post. After Form 1120 has posted, change the filing requirement and status back to the original filing requirement and status in order to close out the Form 990 as a revocation.

  3. Submit Form 5599 with Form 990 to close off the AIMS data base as a revocation, using DC 09. Item 414, Delinquent Return Amount on Form 5599 should reflect the tax liability and penalties of the delinquent Form 1120.

  4. For unagreed cases, place the converted Form 1120 substitute for return in the case folder. Do not forward the return to the Campus Center for processing to MF or establish the AIMS Account. Process Form 5599, for Form 990, in the normal manner by closing the case to Appeals. Do not change the filing requirement. If necessary, Appeals must take action to process Form 1120 to MF, open the case on AIMS, and request a change to the filing requirements.

4.5.3.15.5  (06-01-2003)
Conversion to Form 1041

  1. In the event that an examination results in the revocation of the exempt status of the trust, follow the procedures below in disposing of Form 1041, U.S. Fiduciary Income Tax Return. Form 5500 Series Returns will be closed upon final disposition of the examination.

  2. When converting a Form 1041, the Campus Center will follow these procedures:

    IF THEN
    Form 1041 was timely filed, a. The Campus Center processes return and TC 150 posts to the EPMF.
    b. The return is screened in the Campus Center EP Classification Section.
    c. If the return is selected for examination, the Campus Center EP Classification Section prepares and processes Form 5597, TE/GE IMF/BMF/EPMF Request, to establish AIMS control. The return is then sent to the TE/GE Area Office function as soon as the Examination Assembly is received.
    Form 1041 was not timely filed, a. The return is unpostable. No TC 150 is posted to the EPMF.
    b. The return is screened in the Campus Center EP Classification Section.
    c. If the return is selected for examination, the Campus Center EP Classification Section prepares and processes Form 5588, TE/GE NMF Request, to establish temporary AIMS control. The return is then sent to the TE/GE Area Office as soon as the Examination Assembly is received.

     

  3. At the time of closing, the Examiner will print in the top margin of Form 1120 and on Form 3198, Special Handling Notice, "Form 1041 Converted to Form 1120 by TE/GE" . The Examiner will also add the activity code of the new Form 1120 to the Form 3198.

  4. The "received date" on the new return is the date of the timely filed return, if the return being converted is timely filed. Otherwise, it is the date that the return being converted was filed. The amount of tax resulting directly from the conversion is shown in the tax computation of Form 1120 or Form 1041.

    1. a. If AGREED - Transmit the newly prepared form to the Campus Center for processing through ESS. When appropriate, instruct the Campus Center to transfer credit for tax payments. Keep the original return in the case file until the final disposition of the case. Re-establish the account on AIMS after the newly converted return has been processed. Close the original AIMS control through the terminal using the original Examination Assembly.

    2. If UNAGREED - Forward the unprocessed Form 1120 or Form 1041 with the original return to Appeals.

     

4.5.3.16  (06-01-2003)
Processing Delinquent and Substitute Returns

  1. A delinquent return is a return that was not filed before the due date, including extensions, which the taxpayer voluntarily files with the Service.

  2. A substitute return is prepared by the Examiner and is used to establish an account for a taxpayer who refuses to file, or is unable to file, a required tax return.

  3. Refer to Exhibit 4.5.3-9 for a listing of the campus addresses used for transmitting delinquent and substitute for returns.

  4. Once ESS forwards the original return that is under examination to the appropriate Campus Center and the Command Code AM424 or AMNON is input to establish the return on AIMS, a photocopy of the delinquent/substitute package is maintained in suspense.

  5. Secured delinquent returns not under examination or delinquent returns received with remittance should be sent directly to the Campus Center by the Examiner.

4.5.3.16.1  (06-01-2003)
Delinquent Returns and Substitute for Returns Procedures

  1. When evidence that a required return has not been filed, the Examiner will request a transcript of the account to document what action has been taken. The request can be submitted on Form 6882, IDRS/Master File Information Request, or on-line research can be performed using CC EMFOL/INOLES for EP, CC BMFOL/INOLES for BMF, CC IMFOL for IMF or CC SUMRY and TXMODA for EP, BMF and IMF.

  2. Based on the above, a transcript of the account must accompany each delinquent or substitute for return. This transcript will be attached to the return when submitted to the Campus or ESS. The transcript will be used by ESS to perform their verification responsibilities and will be kept in a suspense file.

    1. EP - Do not submit a delinquent or substitute return if a TC 150 has posted.

    2. EO/GE - Do not submit a delinquent or substitute return if a TC 150 has posted. A TC 150 posting with no tax liability followed by a TC 240 posting for $500, W-4 penalty, indicates that the Campus Center has posted a dummy return. Any adjustments must be made as subsequent adjustments, i.e., TC 300.

    3. If a return has not been filed (TC 150), then TC 599 Closing Code (CC) 96 (EO, GE or EP Form 5330's) or TC 599 CC 97 (EP) should be input into IDRS to close any Collection controls and halt any notice that may be issued requesting the return. Form 4844, Request for Terminal Action is used to input these codes.

     

  3. The current or appropriate year’s tax form should be used. Substitute for returns should contain entity information only. Do not attach additional schedules.

  4. The Examiner will mail all delinquent return packages not under examination and delinquent/substitute return packages with payments to the appropriate Campus Center.

  5. The Examiner will mail delinquent return packages under examination, without payments, to ESS for review and perfection for processing.

  6. Delinquent/Substitute Returns must be established on AIMS as soon as it is known that an examination will be made or when examination time is first applied. The appropriate Push Code must be used when establishing the case on AIMS in order to hold the TC 424 at the EPMF, BMF or IMF until the TC 150 posts. It is extremely important that the delinquent or substitute be submitted for processing since a CP 87 or CP 187 will be generated after the TC 424 posts, if a TC 150 has not posted. Establishing the returns on the EPMF, BMF or IMF, immediately establishes inventory controls and avoids unnecessary delays in closing.

4.5.3.16.1.1  (06-01-2003)
Delinquent Returns

  1. Upon receipt of a delinquent return, the Tax Examiner must ensure that the following items are on the return prior to forwarding to the Campus Center:

    Name of the employer or organization The employer’s or organization’s name must be typed or printed legibly, with no strikeovers. When possible, it must duplicate the name used on a previously filed return with the same Employer Identification Number (EIN). The name used with a recently acquired EIN should duplicate the employer’s/organization’s SS-4, Application for Employer Identification Number. If the name is not correct, prepare or secure a corrected return and solicit the employer’s/organization’s signature on the corrected delinquent return. Mark an "X" across the face of the incorrect return. Write the word "Invalidated," sign and date below the notation.
    Address of the employer or organization Verify with the employer or organization that the address shown on the return is the employer’s or organization’s current address.
    Employer Identification Number Verify the EIN shown on the return is correct by researching AIMS, EPMF or BMF. If the employer or organization does not have an EIN, refer to IRM 4.5.3.16.7.2.
    Required forms and schedules Verify that all forms and schedules are present and the computations are correct. TE/GE is responsible for the accuracy of the return and no further verification is done.
    Signature and Date The employer’s or organization’s original signature and the date the return was signed.
    Taxable Period Use the current or appropriate year’s tax form depending on local Campus Center preference.

     

  2. The Tax Examiner will write in red on the top margin of the original return, "DELINQUENT RETURN SECURED BY TE/GE." .

    Reminder:

    Room in the upper right corner must be left for the DLN to be entered by the Campus Center.

     

  3. The Examiner must date stamp the delinquent returns when they are accepted. If a date stamp is not available, the Examiner should annotate in the middle of the return over the wording, but not over the numbers, " Received" , the date received and the Examiner's name and title. The Examiner should keep a copy of the tax return for the examination file.

  4. Write in red on the bottom margin of the original delinquent return, "TC 599-CC 96" (EO, GE or EP Form 5330) or "TC 599-CC 97" (EP Form 5500).

  5. Attach Form 3198, Special Handling Notice, to each return being submitted to indicate if the delinquency penalty should or should not be assessed. Also attach Document 13133, Expedite Processing Cycle, to the front of each return being submitted. Check the box for "DELINQUENT RETURN." It is essential that a separate Document 13133 be prepared for each tax period.

  6. For EP Form 5500 - If not on AIMS, prepare Form 5597, TE/GE IMF/BMF/EPMF Request. In Item 8, place a "1" or "3" since a return is not requested. In Item 9, enter the Push Code 080 for delinquent returns. In Item 22, Reason for Request, write "DELINQUENT RETURN SECURED BY TE/GE."

  7. For EO/GE - If not on AIMS, prepare Form 5597, TE/GE IMF/BMF/EPMF Request. In Item 8, place a "1" or "3" since a return is not requested. In Item 11, enter the Push Code 020 for delinquent returns. In Item 22, Reason for Request, write "DELINQUENT RETURN SECURED BY TE/GE."

  8. Forward, with the return package, a copy of a recent (not more than sixty days old) transcript which was used in the determination of the employer's or organization's failure to file.

    Reminder:

    Attaching a current transcript is mandatory.

     

  9. If payment is secured, the Examiner will prepare Form 3244A, Payment Posting Voucher Examination, following normal procedures. Indicate payment as remittance with return, TC 610. A copy of Form 3244A should be attached to the delinquent return.

  10. Both an original and a copy of the delinquent return package with payment are necessary. The original delinquent return, Form 3198, and Document 13133 should be sent to the Campus Center. The copy is kept by the Examiner and is closed out with the EP, EO or GE administrative file when the examination is completed.

  11. If a secured delinquent 5500 Series Return is to be examined, Form 5734, Non-Master File Assessment Voucher, should be completed by the Examiner showing the IRC section and dollar amount of penalties to be assessed if the Examiner is recommending assessing the penalty. The Form 5734, if present, will be sent to the Campus Center along with the original delinquent return. Form 3198 should not be submitted if Form 5734 is submitted. The penalty information should be retained by the Examiner to be used when completing Form 5650 on closing.

  12. For EP Form 5500 - If the secured delinquent return is closed agreed, Item 603 - Penalty/Section, of Form 5650 should be completed in cases where the examination resulted in no additional assessments. These examinations should be closed using DC 06.

4.5.3.16.2  (06-01-2003)
Delinquent MF Returns Processing Procedures

  1. The Tax Examiner must perform a review and perfection of the delinquent return package under examination upon receipt prior to being sent to the Campus Center for processing.

  2. The following steps should be taken:

    1. Review the tax return for an official date stamp and notation " Delinquent Return secured by TE/GE." return the package to the initiator.

    2. Review the transcript of account using CC BMFOL (BMF), IMFOL (IMF), or EMFOL (EPMF), SUMRY and TXMODA, attached to the return to determine that a TC 150 (posting of the return) is not present or pending.

    3. Review the transcript to confirm the month in which the fiscal year ends (FYM) and the filing requirements. If the FYM on the return is different from that on the transcript and/or the filing requirements are not present, send the package back to the initiator explaining the reason for return. For EO returns, also confirm that a submodule is present.

      Exception:

      A submodule should not be present if the return is a 990T (401(a) Trust) or 990T (408(e)). A 990T (401(a) Trust) is not an Exempt Organization Return (refer to d. below.)

       

    4. Special Situations - If a Form 990T is received with the block checked "Type of Organization" as a Section 401(a) or Section 408(e), review the transcript to ensure the filing requirement is a Form 990T-2. An Exempt Organization submodule should not be present. A Form 990T, 401(a) or 408(e), must have an Employer Identification Number for the trust, not that of the plan sponsor. Check CC INOLES with a "P" behind the EIN number to ensure that the EIN on Form 990T is not the same Identification Number as the plan sponsor.

    5. Ensure that the filing status and exemption blocks are completed for Forms 1040 only. If the blocks are not completed, return the package to the initiator.

    6. Verify the taxpayer’s SSN/EIN and name with the transcript.

    7. Review the package for presence of Form 4571, Explanation for Filing Return Late or Paying Tax Late, and/or Form 3198, (which must be on each return if a Form 4571 is not available) annotated to either "Assess Delinquency Penalty" or "Do Not Assess Delinquency Penalty-Reasonable Cause Established."

    8. If Form 4571 and/or Form 3198 is not present, the Examiner must make a determination of whether or not to assess the penalty or waive the penalty.

    9. Verify entries on Document 13133, Expedite Processing Cycle, for name, address and phone number of the initiator, and name, TIN, MFT, plan number or report number (if applicable) and tax year of the taxpayer.

    10. Ensure that Form 4844, is notated either TC 599-97 for EP Form 5500 Returns and EP Form 5330 Returns or TC 599-96 for EO/GE Returns.

    11. Verify all entries on Form 5597.

    12. Attach the transcript research data that verifies that a TC 150 has not posted for each delinquent return.

    13. Ensure that Form 3198 and Document 13133 are attached to the package. Also attach Form 4571.

    14. After package verification is completed, verify that Form 5597, has Push Code 080 for EP Form 5500 Series Returns and 020 for EP Form 5330 returns, EO or GE Returns, indicating that a delinquent return is being processed to ensure that the TE/GE examination request remains on MF, pending the posting of TC 150.

    15. The tax return, with Document 13133, Form 3198, Form 4571 (if present) and the transcript research data should be forwarded to the Campus Center Receipt and Control Branch. If a delinquent return requires quick assessment processing, do not send the package to the Receipt and Control Branch. Process the return according to procedures contained in IRM 4.4.

    16. Maintain a tickler file comprised of a copy of the entire package submitted to the Campus Center for posting of the TC 150. Maintain the file until the TC 150 posts to MF.

     

    IF THEN
    1. A TC 150 is posted on the module The Examiner must keep the return for his file as the return has already been posted.
    2. Payments are posted on the account that were transferred to the Excess Collections File Complete Form 8758, Excess Collection File Application and forward it to the Campus Center Accounting Branch with a transcript of the account showing the payment/credit.

     

    IF the submodule And IF THEN
    1. Is present and the Status is 41 (No Reply to Solicitation)   Prepare Form 2363A to TC 022 the account only if the EIN is that of the Trust if it is a Form 990T.
    the return is other than a Form 990-T and the application data went unpostable, Prepare a Form 2363 or Form 2363A to correct the Master File.
    the return is submitted to the Campus Center, it will not post to the Master File and will create an unpostable condition 329-1 or 329-2.
    2. Reflects a Status 40 (Application Pending-Inactive No Exemption)   Determine whether or not the organization is exempt for preparation of Form 2363A.

     

    Reminder:

    Refer to Document 6209, ADP and IDRS Information for Filing Requirements, Status Codes and Unpostable Codes.

     

    IF THEN
    1. The EIN is the same, Research CC NAMEE to secure the correct EIN.
    2. A submodule is present as well as a 990T-2 filing requirement, Contact the Ogden Campus Center to remove any 990-T's that should have a trust EIN and re-post to the Trust.
    3. A filing requirement is a 990T-1 or not present, Research must be conducted to ensure that the 990T-1 filing requirement was done in error. If the filing requirement of 990T-1 is incorrect then a TC 022 must be used to remove the submodule. This should only be done if the account is positively identified as that of the Trust. If the T/P is filing 990T-1 type of returns, research must be done to secure the Trust EIN.

     

    IF THEN
    1. The name is incorrect, If the name on the Master File is incorrect, prepare Form 2363 to correct the name.
    2. The TIN is incorrect, Contact the Ogden Campus Center to have the account resequenced to the appropriate EIN.
    3. The return is annotated "taxpayer unwilling to obtain SSN/EIN, temporary SSN/EIN necessary," Contact the Campus Center Entity Control Section to obtain a temporary SSN and the assignment of a permanent EIN.

     

    Note:

    Form 5734, Non-Master File Assessment Voucher, instead of Form 3198, may be present for Form 5500 Series Returns to assess the penalties. Form 5734 should not be used to assess penalties against secured delinquent returns, Form 4720A, and Form 990BL. See IRM 4.5.3.16.3, Delinquent NMF Returns Processing.

     

    Note:

    One instance where a quick assessment would need to be done, would be for the receipt of Form 4720 when either IRC 4912(b), IRC 4941(a), IRC 4944(a)(2), IRC 4945(a)(2), IRC 4955(a)(2) or IRC 4958(a) contain an entry. The statute for Form 4720 is ruled by the filing of Form 990, Form 990EZ, Form 990PF or Form 5227, not by Form 4720.

     

    Exception:

    If one of the above returns was not filed, then the filing of the signed Form 4720 will begin the statute. Otherwise, the delinquent return package must be transmitted on Form 3210.

     

4.5.3.16.2.1  (06-01-2003)
Monitoring the Delinquent MF Suspense File

  1. Secure a transcript to verify the status of the TC 150. If the TC 150 has posted, and a full AIMS account is not present, take the necessary action to establish the account on AIMS (may be a "Hanging" 424). Once established, close the case in the normal manner. If a TC 150 has not posted, attach a history sheet, to the front of the case file to record each follow-up action.

  2. Each case in the suspense file must be pulled at least once a month, for follow-up action. Refer to IRM 4.5.3.16.3 below, for delinquent NMF return procedures.

4.5.3.16.3  (06-01-2003)
Delinquent NMF Returns Processing

  1. Tax Examiners must review and perfect the NMF delinquent return package under examination without payment, upon receipt prior to sending the package to the Campus Center for processing.

  2. The following returns are processed in accordance with NMF procedures.

    1. Form 990BL (EO)

    2. Form 4720 (EO), IRC 4912(b), IRC 4941(a), IRC 4944(a)(2), IRC 4945(a)(2), IRC 4955(a)(2) or IRC 4958(a)

    3. Form 5330 (EP) - prior to 01/01/2002.

    4. Form 8038 Series Returns (TEB) - prior to 01/01/2001.

     

  3. The following steps must be taken by the Tax Examiner:

    1. Review the tax return for an official date stamp and notation " Delinquent Return Secured by TE/GE Division."

    2. Access the ANMF to review the NMF transcript of the account to determine if a TC 150, posting of the return, is not present. If a TC 150 is posted on the module, return the package to the initiator, explaining that a return has already posted for the taxpayer.

    3. Since a Form 4720 can also be processed as a NMF return when IRC 4912(b), IRC 4941(a), IRC 4944(a)(2), IRC 4945(a)(2), IRC 4955(a)(2) or IRC 4958(a) applies, retrieve a transcript of the MF Form 4720 to ensure that a TC 150 has not posted to the MF in error.

    4. Research CC INOLES to verify the taxpayers SSN/EIN and name against the delinquent return. If the name or SSN/EIN is incorrect, return the package to the initiator with an explanation.

    5. Review the package for presence of Form 4571, Explanation for Filing Return or Paying Tax Late, or Form 3198, notated to either "Assess Delinquency Penalty" or "Do Not assess Delinquency Penalty/Reasonable Cause Established" . If Form 4571 and/or Form 3198 is not present, return the package to the initiator explaining that he/she must make a determination of whether to assess the penalty.

    6. Verify entries on Document 13133, for name, address and phone number of the initiator and name, TIN, MFT, plan number (Form 5330 only) or report number (GE - MFT 46 only) and tax year of taxpayer.

    7. Form 4844, with a TC 599-97 for EP Form 5500 Returns and EP Form 5330's Returns, or TC 599-96 for EO or GE Returns.

    8. Verify entries on Form 5648 and/or Form 5588.

    9. Attach the research data to the back of each return.

    10. Form 3198, and Document 13133, must also be attached to the package and/or Form 4571.

    11. After package verification is completed, submit Form 5588, to the Terminal Operator for input.

     

    IF THEN
    1. IRC Sections on the delinquent return are IRC 4912(b), IRC 4941(a), IRC 4944(a)(2), IRC 4945(a)(2), IRC 4955(a)(2) or IRC 4958(a), Process the return using NMF delinquent return processing.
    2. The return has posted the MF in error, Return the package to the initiator to prepare an audit report or Form 3870, Request for Adjustment, to request abatement of taxes, interest, and penalties that are reflected on the MF transcript.
    3. Payments were made on the MF account in error, A Form 3198 should be attached, notating the transfer of payments to the NMF Form 4720. Form 3198 should also be notated that the payment was erroneously applied to the MF Form 4720.

     

    Note:

    For Form 5330 cases with a minimum funding deficiency, the delinquent return should reflect the employers EIN/SSN, and for prohibited transaction cases, reflect the EIN/SSN of the disqualified person.

     

    Note:

    Immediately upon terminal input the NMF account will establish a full AIMS account.

     

  4. The tax return, with Document 13133, Form 3198, Form 4571 (if present), and research data must be forwarded to the Campus Center Receipt and Control Branch. If the Delinquent Return package requires quick assessment processing, do not send the package to the Receipt and Control Branch. Process the return in accordance with procedures contained in IRM 4.4. Quick Assessment Procedures would apply in the following situations:

    1. Delinquent Form 4720 contains entries under IRC 4912(b), IRC 4941(a), IRC 4944(a)(2), IRC 4945(a)(2), IRC 4955(a)(2) or IRC 4958(a). The statute for Form 4720 is ruled by the filing of Form 990, Form 990EZ, Form 990PF or Form 5227, not by Form 4720.

    2. Delinquent Form 5330 reflects entries under IRC Section 4975. The statute for Form 5330 is ruled by the filing of Form 5500. For prohibited transactions the return must be assessed Non Master File only if the statute is imminent.

     

    Exception:

    If the applicable return was not filed, then the filing of the signed Form 4720 will begin the statute. Otherwise, the delinquent return package must be transmitted on Form 3210.

     

    Note:

    For prohibited transactions, the statute of limitations is six years whenever adequate disclosure was not made on Form 5500. If adequate disclosure was made on Form 5500, the statute is three years.

     

  5. Maintain a tickler file comprised of a copy of the entire package submitted to the Ogden Campus Center for posting of the TC 150.

  6. Inform the Examiner when TC 150 posts to MF.

4.5.3.16.3.1  (06-01-2003)
Monitoring the NMF Suspense File

  1. Access ANMF to verify the status of the TC 150. If a TC 150 has not posted, attach a history sheet, to the front of the case file to record each follow-up action.

  2. Each case in the Suspense File must be pulled at least once a month, for follow-up action. Once the return has posted, the copy of the entire file may be disposed.

4.5.3.16.4  (06-01-2003)
Delinquent Returns Received with Remittances

  1. Examiners are responsible for insuring that any delinquent returns received with remittance are forwarded to the appropriate Campus Center by Certified Mail within one workday of receipt.

4.5.3.16.5  (06-01-2003)
Closing Delinquent Return MF Cases

  1. EP