STANDARD #1

TITLE: AUDIT PLANNING

PURPOSE:

This standard measures whether the pre-audit plan identified material issues, whether initial requests for information were clear, concise, and appropriate and addressed the potential issues selected, and, if all necessary steps were taken to set the groundwork for a complete examination.

OVERVIEW:

This standard encompasses, but is not limited to, the following fundamental concerns:

1. Consideration of collectibility.

2. Time spent pre-planning.

3. Sharing pre-identified issues with the taxpayer and considering the type and availability of taxpayer's books and records.

4. Contact with the taxpayer regarding scheduling of appointment(s) and a clear identification of documents needed for the examination.

 

RATING GUIDE EXPLANATION

STANDARD	DEFINITION
A. Prior to taxpayer contact:
1. If collectibility was an issue, was it considered?	Consider the taxpayer’s financial activities. A single alpha code on the charge-out sheet is used to identify taxpayers with potential collectibility issues. B = Bankruptcy, N = Currently Not Collectible Account, C = Collection Code 26, Field Contact Activity.
2. Was pre-plan time commensurate with complexity of return?	Pre-plan activity was commensurate with the time charged, considering complexity of issues, research performed, internal sources queried, and documentation in the case file or activity record.
B. Taxpayer contact:
1. Location and availability of books and records determined?	During initial contact, inquired regarding the type of records maintained and available to enable completion of an accurate IDR.
2. Was the initial Information and Document Request clear/concise and appropriate? (Key Element)	Included documents needed to support issues identified during the initial contact with the taxpayer, listing specific records, information and documents needed at the initial appointment.

STANDARD #2

TITLE: AUDIT SCOPE

PURPOSE:

This standard measures whether consideration was given to the large, unusual, or questionable (LUQ) items on the return and those that become evident throughout the course of the examination. This standard also measures whether consideration was given to the filing and examination potential of all returns required to be filed by the taxpayer, including those entities in the taxpayer’s sphere of influence and responsibility. In addition, this standard measures whether appropriate steps were taken to ensure compliance when other taxpayers were affected.

OVERVIEW:

This standard encompasses, but is not limited to, the following fundamental considerations:

1. Absolute Dollar Value

2. Relative Dollar Value

3. Multi-Year Comparison

4. Intent to Mislead

5. Industry/Business Practice

6. Compliance Impact, etc.

This standard also considers the analysis of return information and, when warranted, the pick-up of related, prior, and subsequent year returns. The examination should include checks for filing of information returns.

RATING GUIDE EXPLANATION:

STANDARD	DEFINITION
A. Large, Unusual and Questionable (LUQ) Items )
1. Were LUQ income/deduction/ balance sheet/credit items considered? (Key Element)	Considered balance sheet, Schedule M items, all LUQ income/deduction credit or classified items. Identified accounts with irregular activity for in-depth analysis. Explained any LUQs appearing on the return, which if left unexplained, might raise doubts or cause confusion.
2. Were only material issues considered?	Considered only material or significant items. Items can be material in absolute dollar value, relative dollar value, material when viewed on a multiple-year comparison and/or material to the specific industry involved.
3. Was the scope appropriately expanded/contracted?	Limited or expanded the scope of the examination to the point that all significant items are properly considered for the correct determination of tax liability.
B. Multi-Year/Related Returns: Were prior year, subsequent and related returns included in the examination (including adjustments in favor of the taxpayer), where warranted? (Key Element)	Verified the filing of prior, subsequent, and/or related returns filed and analyzed them for any examination potential. Documented determinations in the case file.
C. Required Filing Checks: Were all filing/compliance requirements considered?	Considered questionable W-4 procedures, employment tax returns, independent contractor status, excise return, information returns, pension plan returns, Form 8300, and Currency Transaction Reports.
D. Compliance impact: If other taxpayers were affected, were appropriate actions taken?	Considered information reports, taxpayer education efforts and compliance initiatives as appropriate. Communicated available avenues to the taxpayer to foster voluntary compliance. Discussed any noncompliance areas with the taxpayer and the necessary means to correct such noncompliance.

 

Note:

Filing checks are applicable to both office audit and field examination cases. Limited scope examinations do not eliminate the need to rate this standard.

STANDARD #3

TITLE: INCOME PROBES/DETERMINATION

PURPOSE:

This standard measures whether the steps taken have verified that the proper amount of income was reported.

OVERVIEW:

The steps taken during the examination of income are dependent on the facts and circumstances of the case. Consideration should be given to tax return information and the taxpayer's books and records. Examiners should also consider responses to interview questions, the outcome of the minimum income probes, and the results of the financial activity analysis. Gross receipts need to be examined regardless of whether the taxpayer maintained a double entry set of books. For business returns, the taxpayer's internal controls should be evaluated to gain an understanding of the policies and procedures used to safeguard business assets and avoid material misstatements of financial information. Books and records are to be reconciled and tied to match the return.

RATING GUIDE EXPLANATION:

STANDARD	DEFINITION
A. Were appropriate techniques used to determine income? (Key Element)	Selected the appropriate examination technique(s) based upon tax return information, responses to interview questions, minimum income probe findings, books and records, and other financial information. Used sampling techniques as appropriate.
B. Were techniques applied correctly? (key Element)	Accurately completed and correctly computed the selected examination technique(s), taking into consideration nontaxable sources of income, if appropriate. Updated all income examination techniques with information developed during the course of the examination.

STANDARD #4
TITLE: AUDIT TECHNIQUES

PURPOSE:

This standard measures whether the issues examined were completed to the extent necessary to provide sufficient information to determine the substantially correct tax.

OVERVIEW:

The depth of the examination is determined through inspection, inquiry, interviews, observation, and analysis of appropriate documents, ledgers, journals, oral testimony, third-party records, etc., to ensure full development of the relevant facts concerning issues of merit. Interviews provide information not available from other documents. A properly planned and executed interview will provide an understanding of the taxpayer's financial history, business operations, and accounting records. Specialists should be consulted when expertise is needed to ensure proper development of unique or complex issues.

RATING GUIDE EXPLANATION:

STANDARD	DEFINITION
A. Were adequate interviews conducted?	Obtained information needed to make informed judgments about the scope and depth of the examination and correctly resolve issues. Planned to address items specific to the taxpayer under examination. Documented interviews in sufficient depth to give a clear understanding of the taxpayer and/or operations.
B. Were written requests for information appropriate?	Requested only relevant and necessary information needed to resolve the issue(s) or area(s) under consideration. Requests for information were clear and concise.
C. Were necessary follow-ups made?	Promptly followed-up on all outstanding IDR and third-party requests. Documented the case file when extensions were granted to allow additional time to submit outstanding information.
D. Were identified issues properly developed? (Key Element)	Developed issues to the point that the pertinent facts or data were gathered and issues were not overdeveloped or underdeveloped. Fully developed whipsaw issues or alternative positions, as appropriate. Considered oral testimony when appropriate. Requested specialist assistance when needed. Fully documented steps taken to reach conclusions.
E. Were indications of fraud properly pursued and developed? (Key Element)	When initial badges of fraud are uncovered, initiated a discussion with the group manager, and developed an action plan as soon as possible to document firm indications of fraud. The plan should be a joint effort of the examiner, manager, and when needed, the local fraud coordinator.

STANDARD #5

TITLE: WORKPAPERS/REPORTS

PURPOSE:

This standard measures the documentation of the examination's audit trail, techniques used, procedures applied, and the examiner's activity on the case. It also measures whether the reports and workpapers document the audit sufficiently to support the conclusions reached and whether computations are accurate.

OVERVIEW:

Workpapers are the principal support for the examiner's report. They document the procedures applied, audit tests performed, information inspected and obtained, and the conclusions reached during the examination. Reports are needed to summarize the written presentation of audit findings in terms of content, format and accuracy. All necessary information is contained in the report, so there is a clear understanding of the reason for each examination adjustment.

RATING GUIDE EXPLANATION:

STANDARD	DEFINITION
A. Were workpapers legible, concise and organized?	Workpapers were clear, concise, legible, initialed, and dated. Workpapers were indexed and organized, making it easy to locate the different parts of the audit. Correspondence with the taxpayer/representative was professional and courteous. Workpapers were easy to read and had a logical sequence of actions.
B. Was the activity record adequately documented?	Explained all examination activity and delays encountered. Documented hours charged each day and activities performed. Explained all contacts with taxpayers, representatives, and third- parties. Documented any research, report writing or other activity.
C. Did workpapers adequately document the audit trail, techniques and conclusions? (Key Element)	Adequately disclosed the audit trail followed during the examination and supported the conclusions reached for each issue. The workpapers documented procedures followed and audit techniques used. Where appropriate, workpapers cited applicable authority for conclusions reached. Case file included only relevant workpapers for respective issues. The file contained no extraneous photocopies.
D. Was the report tied/referenced to the workpapers?	Adjustments per the workpapers agree with Form 4318/4700 and audit reports.
E. Were reports prepared correctly? (Key Element)	Prepared reports in accordance with report writing procedures. The tax computation, including penalty computations and workpapers, per the audit report were correct and used the method most beneficial to the taxpayer.

STANDARD #6

TITLE: APPLICATION OF LAW/TAX DETERMINATION

PURPOSE:

This standard measures whether the conclusions reached were based on correct application of tax law.

OVERVIEW:

This standard includes consideration of applicable law, regulations, court cases, revenue rulings, etc., to support the technical and factual conclusions, including penalties.

RATING GUIDE EXPLANATION:

STANDARD	DEFINITION
A. Was appropriate research conducted?	Research includes, but is not limited to, the Internal Revenue Code, Income Tax Regulations, Internal Revenue Manual, court cases, MSSP guides, ISP position papers, and Revenue Procedures and Rulings. Research was appropriate to resolve an issue in which the examiner lacked the expertise.
B. Was the law correctly applied? (Key Element)	A correct interpretation, application and explanation of the law was reflected. Law is evaluated based on the facts of the case as presented.
C. Were penalties considered and applied as warranted?	Reflected consideration and, if appropriate, assertion of all applicable penalties, including, but not limited to: delinquency, negligence, substantial understatement, accuracy-related, information returns, and alternative penalty positions. Documented with sufficient explanation to support the decision whether or not to assert penalties.

STANDARD #7

TITLE: TIMELINESS

PURPOSE:

This standard measures the utilization of time, as well as timeliness of actions, throughout the examination process.

OVERVIEW:

Time is an essential element of a quality examination. This standard considers the use of time relative to the complexity of the issues. Time includes both the time span required to complete the case and the amount of time (hours) to complete the examination. All aspects of time are addressed by this standard. The elements of this standard isolate the following: whether time applied is commensurate with the work performed, whether the span is appropriate for the actions taken and whether the examiner kept the case moving in an ongoing progressive manner.

RATING GUIDE EXPLANATION:

STANDARD	DEFINITION
A. Was the examination started (or reassigned) within a reasonable timeframe?	Timely initiated or reassigned examination, taking into consideration factors within the examiner's or manager's control. Initiated examination within 45 days of "first touch" (for both office audit and field audit), taking into consideration reasonable documented delays caused by the taxpayer, representative, examiner and/or management.
B. Were actions taken timely?	Timely completed "actions" including appointments, contacts, and activities, considering factors within the examiner's or manager's control. There were no more than 45 days between significant activities for field examination and for office audit, taking into consideration reasonable documented delays. Delays in excess of the following time frames should be documented: 45 days to start the examination - first touch to first appointment; 45 days between significant activity; 1 day (next business day) to return telephone calls; 14 days to follow-up to correspondence; 10 days for case closures for agreed or no-change examinations - from the date the report is received or the date the no-change status is communicated to the taxpayer to the date the case is closed from the group; 20 days for case closures for unagreed examinations-from the date the 30–Day letter defaults or the date the request for appeals conference is received to the date the case is closed from the group. Note: All days are calendar days. Expedite processing requirements per the IRM will take precedence over the above time frames.
C. Was time spent on the examination commensurate with the complexity of the issues? (Key Element)	Examination activity was commensurate with the time charged to the case. Factors considered in determining appropriate use of time are issue complexity and potential, condition of the books and records, taxpayer and/or representative cooperation, documentation in the case file to support time charged, and other problems that affect use of time.
D. Was the time span of the examination reasonable? (Key Element)	Time span refers to months in process. Factors to be considered in determining the appropriate time span include: issue complexity and potential, use of specialists and submission of referrals, delays and postponements, and documentation in the case file to support the span of the examination and other problems.

STANDARD #8

TITLE: CUSTOMER RELATIONS/PROFESSIONALISM

PURPOSE:

This standard measures whether the taxpayer's needs were promptly addressed, the taxpayer's burden was reduced by prompt and professional communication and the rights of the taxpayer were respected.

OVERVIEW:

In an effort to promote good customer relations with the taxpayer, the IRS has pledged to provide service to each taxpayer to make filing easier, provide quality service to the taxpayer who needs help with returns or accounts, and provide prompt, professional, helpful treatment to taxpayers in cases where additional taxes may be due. Customer service means adopting business practices that make compliance easier and ensuring tax laws are applied fairly while observing the rights of the taxpayer.

RATING GUIDE EXPLANATION

STANDARD	DEFINITION
A. One Stop Service:
1. Were all taxpayer concerns with the IRS addressed?	The case file contained evidence of the examiner taking steps to fill the implied or expressed needs of the taxpayer.
2. Was partial agreement considered?	Explained to the taxpayer/representative the advantages of resolving the potential agreed issues at the lowest possible level versus waiting for Appeals to settle the entire case.
3. Was payment solicited (full, part, or installment agreement)? (Key Element)	Explained payment and refund procedures to the taxpayer and/or representative. Solicited full payment. Explained available payment options, including installment agreement.
B. Communication and taxpayer burden:
1. Were documented interactions and correspondence with taxpayer and/or representative courteous and professional? (Key Element)	Case file documentation, such as the activity record, correspondence, IDRs, interview notes, and workpapers reflected a courteous and professional tone and appearance.
2. Were taxpayers'/ representatives' issues addressed?	Case file documentation should indicate whether issues (oral or written) raised by the taxpayer or representative were addressed in an appropriate manner.
3. Were findings discussed with taxpayer/representative?	Once a conclusion was reached on the issues addressed, communicated the findings to the taxpayer and/or representative.
4. Was the taxpayer/ representative kept apprised of the status of the case throughout the examination?	Although obligated to observe the authorized power of attorney, kept taxpayer(s) informed of all stages of the examination. Sent copies of any correspondence, report and/or other material to the taxpayer at the same time it was sent to the representative.
5. Were the taxpayers'/representatives' scheduling/time needs adequately considered?	Attempted to schedule the initial appointment and any follow-up appointments at a time that was agreeable to the taxpayer and/or representative.
6. Was the level of managerial involvement appropriate?	Examiner did not wait for the examination to become a problem before asking for managerial assistance. Additionally, managers took a proactive part in their employees' examinations to avoid problems. Examples of ways the manager's assistance promotes good customer relations include: dealing with taxpayer/representative delays, dealing with examiner delays, case assignment/reassignment, time charged to the examination, time span of examination, taxpayer complaints, and issue resolution.
C. Taxpayer Rights:
1. Was the taxpayer/representative advised of all rights? (Key Element)	If initial contact was made by telephone, briefly explained the taxpayer's rights as outlined in Publication 1 and Notice 609. Answered any questions the taxpayer or representative had regarding their rights. If initial contact was made by mail, enclosed required publications with the letter. Provide required publications with the first report and 30–Day letters as appropriate.
2. Was the taxpayer's confidentiality protected? (Key Element)	Examiners must protect the taxpayer's confidentiality. Returns and return information are confidential and may not be disclosed unless authorized by statute. Examiners should ensure a valid power of attorney is secured or on file before disclosing information to the representative.

 

Included:

• SB/SE field examination and office audit income tax cases (corporations, partnerships, and individual returns),

• agreed, partially agreed, unagreed, no-change cases and protested to Appeals,

• secured delinquent returns not accepted as filed,

• returns selected for limited scope examinations as part of local and national programs (includes compliance initiative projects-CIPs),

• training cases,

• form 1041, 1042 and 1120F income tax returns examined by revenue agents,

• correspondence cases examined by revenue agents and tax auditors,

• EITC cases (excludes project code 692),

• pre-assessment innocent spouse cases,

• claims (excludes surveyed claims-disposal code 34),

• no show/no response cases, and

• audit reconsideration cases.

 

Note:

(employment tax cases are included if they are closed as related cases to an income tax case; the entire related case package is included)

Excluded:

• LMSB cases,

• secured delinquent returns accepted as filed,

• pure penalty cases not included as part of an examination case,

• surveyed returns,

• offers in compromise,

• post-assessment innocent spouse cases,

• electronic commerce compliance research project cases (project code 115),

• estate, gift and excise cases,

• employment tax cases are excluded only if not closed as a related case to an income tax case,

• EITC cases with project code 692, and

• claim cases with disposal code 34 (surveyed).

 

Each Case Processing function (including CAGL units) will identify and process cases for the EQMS sample. The following instructions should be followed to select a case and prepare it for closure. All references to Case Processing functions also include CAGL units.
Sampling Procedures

1. Date stamp cases when received in the Case Processing function.

2. Verify Form 3210 prior to sampling.

3. Cases subject to sampling.

   1. A case is defined as (1) an examination of one return for a taxpayer, or (2) any group of multiple year returns and/or related returns closed as a related package.

   2. All cases being updated to status 20, 25 or higher, including unagreed and protested to Appeals cases.
      
      If a case selected for EQMS review is updated by the Case Processing function to a status that is less than 90 (protested to Appeals), then the case is an "OPEN" case and should be forwarded to the key EQMS site immediately.
      Cases updated by the Case Processing function to status 90 are