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Overview & Responsibilities
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Pre-Contact Resp. Cont.
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Examination Techniques Cont.
Examination of Income
Examination of Income Cont.
Required Filing Checks
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Report Writing Cont.1
Report Writing Cont.2
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Partnership page 1
Partnership Page2
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Report Writing Cont.2

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4.10.8  Report Writing (Cont. 2)

4.10.8.14  (05-14-1999)
Report Transmittal: Form 4665

  1. Report Transmittals are used as a cover document for confidential information or as a summary of the attached documents.
  2. Circumstances requiring use of Form 4665 include, but are not limited to:
    1. Partially agreed and unagreed cases
    2. Joint investigation cases
    3. Criminal investigation cases
    4. Criminal prosecution cases
    5. Presentation of inconsistent "whipsaw" issues
    6. Transmittal of Engineer’s or International Examiner’s report

     

  3. Form 4665 and attachments are not normally furnished to the taxpayer. Not withstanding, examiners should avoid comments based on hearsay, rumor or gossip; comments of a derogatory nature; or identification of an informant (or other source of confidential information) by name, occupation, or relationship.

4.10.8.15  (05-14-1999)
Inadequate Records Notices: Overview

  1. Every taxpayer is required by law and regulations to maintain accounting records sufficiently detailed to prepare a proper return. This requires the maintenance of such permanent books of account and records sufficient to establish the amounts of gross income, deductions, credit, or other matters to be shown on the taxpayer’s return.
  2. Taxpayers who maintain automated records can enter into a record retention agreement with the Area Director. This agreement limits retained records to those specifically identified as needed to perform auditing procedures.
  3. Inadequate Records Notices place taxpayers on notice that their recordkeeping practices are deficient and must be improved to meet the requirements of the law. The issuance of an Inadequate Records Notice may result in a follow-up examination and is a tool to enforce taxpayer compliance with legal requirements to keep adequate records and properly report tax liabilities.

4.10.8.15.1  (05-14-1999)
Determination of Taxpayer Compliance

  1. The determination that a taxpayer has not maintained adequate books and records, or has not complied with a record retention agreement, is a matter of judgment and should be based on the facts of the individual case. Factors to be considered include, but are not limited to:
    1. An alternative or indirect method was used to establish the amounts of gross income, deductions, credit, or other matters shown on the taxpayer’s return because the taxpayer’s records were not sufficient,
    2. Prior history and present degree of noncompliance,
    3. Indications of willful intent or evidence of refusal to keep adequate books and records,
    4. Probability that the inadequacies in recordkeeping will result in significant underreporting of tax liabilities, or
    5. Other evidence of harm to the Government.

     

4.10.8.15.2  (05-14-1999)
Examination Procedures

  1. The following section addresses examination procedures for handling inadequate records issues.

4.10.8.15.2.1  (05-14-1999)
Time Charges

  1. All time for the development of inadequate records issues by examiners should be charged to the case.

4.10.8.15.2.2  (05-14-1999)
Factual Development

  1. Examiners should avoid criticizing the work of the taxpayer’s employees, accountants, or attorneys in a way that would suggest wrongdoing or negligence. Examiners should focus on explaining how the taxpayer’s books and records are inadequate and what steps need to be taken to bring them into compliance with applicable statutes.

4.10.8.15.2.3  (05-14-1999)
Case File Documentation

  1. Examiners should document:
    1. The nature of the inadequacies of the taxpayer’ s records,
    2. Examiner/manager discussions, and
    3. Basis for the conclusion reached.

     

4.10.8.15.2.4  (05-14-1999)
Group Manager Involvement

  1. If an examiner determines that the taxpayer has not substantially complied with the law and regulations for maintaining adequate books and records or record retention agreements, the examiner should discuss the inadequacies with the group manager to determine if an inadequate records notice should be issued.

4.10.8.15.2.5  (05-14-1999)
Record Retention Agreements

  1. If the case includes a record retention agreement, the computer audit specialist must be contacted.

4.10.8.15.3  (05-14-1999)
Required Forms and Exceptions

  1. Generally, Letter 979 will be used to notify the taxpayer.
  2. If the taxpayer is within the racketeer classification, engaged in illegal activities, or is willfully disregarding the law, the examiner will prepare Form 2807, Agreement to Maintain Adequate Books of Account and Records, and Letter 978.

4.10.8.15.3.1  (05-14-1999)
Completion of Forms

  1. The designated contact identified on Letter 978/979 should be the individual in PSP, responsible for monitoring the taxpayer’s future compliance.
  2. The Form 2807 or Letter 979 narrative must include the following:
    1. The date the taxpayer was orally notified that the records were inadequate or not in compliance with a record retention agreement,
    2. The tax year(s) examined,
    3. A clear and concise statement specifying how the taxpayer’s records were inadequate or not in compliance with a record retention agreement, and
    4. Form 2807 should specify the books and records which will be maintained.

     

4.10.8.15.3.2  (05-14-1999)
Group Manager Approval

  1. Form 2807 and Letter 978, or Letter 979, are approved and signed by the group manager.

4.10.8.15.4  (05-14-1999)
Delivery of Inadequate Records Notices

  1. Inadequate Records Notices should be personally served by examiners or sent by certified mail.

4.10.8.15.4.1  (05-14-1999)
Record of Service

  1. The examiner will complete the record of service on Letter(s) 978/979 at the time of delivery or before it is sent certified mail. The record of service should also be completed on all retained copies.
  2. If sent by certified mail, the return receipt will constitute the record of service and will be attached to the copy of Letter 978/979 retained in the case file.
  3. If Form 2807 is mailed, Letter 978 should be held 15 days to give the taxpayer an opportunity to execute Form 2807.

4.10.8.15.4.2  (05-14-1999)
Notices for Joint Returns

  1. If a notice is addressed to a husband and wife because a joint return was filed, the notice will be delivered to the person primarily responsible for keeping all or a part of the necessary records. If both participate in the recordkeeping responsibilities, each spouse will receive a duplicate original notice.

4.10.8.15.4.3  (05-14-1999)
Notices for Corporate Returns

  1. When a notice is addressed to a corporation, it should be delivered to an officer authorized to sign tax returns and preferably to the officer who signed the return under examination.

4.10.8.15.4.4  (05-14-1999)
Notices for Non-TEFRA Partnerships

  1. In the case of a partnership, the notice will be addressed to all the partners and will show the name in which the partnership is doing business. The original notice will be delivered to the partner who signed the return or, if this is not possible, to a partner who takes an active part in the business. A copy of the notice, including the record of personal service or the mailing receipt, will be sent by registered or certified mail to all the other partners. Receipts from these mailing will be associated with the copy of the notice retained in the case file.

4.10.8.15.4.5  (05-14-1999)
Notices for TEFRA Partnerships

  1. For partnerships and S-corps subject to TEFRA procedures, the original notice will be addressed to the tax matters partner or shareholder. A copy of such notice will be sent by registered or certified mail to each general partner or shareholder. The tax matters partner or shareholder will inform all non-notice partners. Examiners should consult their area TEFRA Coordinator for additional information.

4.10.8.15.4.6  (05-14-1999)
Field Exam

  1. Revenue agents should deliver the Letter 979, or Letter 978 and Form 2807, at the closing conference.
  2. In cases where Form 2807 is required, the taxpayer will be given the opportunity to execute the agreement, specifying the books and records which will be maintained.

4.10.8.15.4.7  (05-14-1999)
Office Audit

  1. Tax auditors should give the Letter 979, or Letter 978 and Form 2807, to the taxpayer at a subsequent appointment.
  2. In cases where Form 2807 is required, the taxpayer will be given the opportunity to execute the agreement, specifying the books and records which will be maintained.

4.10.8.15.4.8  (05-14-1999)
Joint Investigations

  1. In joint investigations, the criminal investigator will determine the appropriate time to inform the taxpayer of the inadequacies of the records and issue the notice letter. The criminal investigator is also responsible for delivering the Inadequate Records Notice.

4.10.8.15.5  (05-14-1999)
Taxpayer Agreement

  1. Letter 978/979 serves as notification to taxpayers that their records are inadequate and execution of Form 2807 is not necessary to close the case. Whether or not the taxpayer signed Form 2807 will be noted on Letter 978.

4.10.8.15.6  (05-14-1999)
Taxpayer’s Appeal Rights

  1. If the taxpayer does not execute Form 2807 and the case is unagreed, the taxpayer will be informed of the further opportunity to discuss the matter at an Appeals conference.
  2. An Appeals conference is not given to taxpayers who agree to proposed adjustments but do not execute Form 2807.

4.10.8.15.7  (05-14-1999)
Completing Form 5346

  1. Examiners will prepare a detailed Form 5346, Examination Information Report, following the instructions on the back of the form. The "other" section should state that the package is documentation for an Inadequate Records Notice. The package should include:
    1. Copies of pertinent workpapers
    2. Copy of the audit report
    3. Copy of Letter 978/979
    4. Original Form 2807, if applicable

     

  2. A copy of the completed Form 5346 should be included in the workpapers with other documentation of the issue.
  3. The original Form 5346 and documentation should be forwarded to Planning and Special Programs (PSP) for suspense and follow-up action.

4.10.8.15.8  (05-14-1999)
Planning and Special Programs Support (PSP) Responsibilities

  1. PSP is responsible for monitoring the taxpayer’s future compliance with requirements to keep adequate books and records.

4.10.8.15.8.1  (05-14-1999)
Form 5346 Follow-Up

  1. PSP will complete the following actions:
    1. Forward a copy of the Form 5346 and Letter 978/979 to the service center, requesting unfiled subsequent year returns.
    2. Suspend the original Form 5346 and documentation. The area will maintain controls to monitor the follow-up actions of all inadequate records notice cases.
    3. The service center will associate the copy of Form 5346 and Letter 978/979 received from the area with the income tax return for the first full taxable year filed after the date the inadequate records notice was delivered to the taxpayer. This return will be sent to the area PSP.
    4. If the return is not filed within one year after the close of the first full taxable year after the delivery date of the notice, the service center will forward a copy of the notice to the area PSP function with the notation "NO RECORD" . These notifications will be associated with the suspended case file and appropriate follow-up action taken.
    5. PSP will classify and assign the returns or examination as warranted.

     

4.10.8.15.8.2  (05-14-1999)
Taxpayer Response to Letter 979

  1. Letter 979 requires the taxpayer to notify the Service of actions taken to correct their recordkeeping to meet the requirements of the law within six months after the notice was delivered.
    1. Statements from taxpayers regarding improvement of the recordkeeping will be associated with PSP’s case file and considered when determining the need for follow-up action.
    2. In cases where statements from the taxpayer are required, but are not timely received, PSP will call the taxpayer or use Letter 1022(DO) to request submission of the information in accordance with the notice letter.

     

4.10.8.15.9  (05-14-1999)
Follow-Up Examinations

  1. Follow-up examinations will be conducted when appropriate. These examinations should be started with sufficient time to be completed within established audit cycles.

4.10.8.15.9.1  (05-14-1999)
Case File Documentation

  1. The case file should document consideration of the inadequate recordkeeping issue and state whether the taxpayer has corrected the inadequacies in the recordkeeping practices.

4.10.8.15.9.2  (05-14-1999)
Substantial Compliance By the Taxpayer

  1. If the examiner concludes that the taxpayer is substantially complying with requirements to keep adequate records, the inadequate records notice information should be included in the case file when the examination is closed.

4.10.8.15.9.3  (05-14-1999)
Continued Noncompliance By Taxpayer

  1. If the examiner concludes that the taxpayer is NOT substantially complying with requirements to keep adequate records, then consideration of additional enforcement measures, such as the assertion of penalties, is warranted.

4.10.8.16  (05-14-1999)
Examiner Case Closing Requirements

  1. In addition to preparing all necessary reports to document audit findings and organizing the contents of the case file, examiners have other critical case closing requirements.

4.10.8.16.1  (05-14-1999)
Completion of Form 5344

  1. Completion of Form 5344 is required prior to the closing of a case.
  2. Use of Form 5344 in RGS is required.
  3. Required entries for examiners are outlined in IRM 4.4 AIMS/Processing.
  4. Some entries to Form 5344 are required before completion of the Compliance Evaluation Screens (see 8.16.2 below).
  5. Special Note: Since grading of cases is the responsibility of the group manager (but an entry in this field is required for an agent to forward a case) , examiners should enter their own grade unless instructed to enter another grade by their manager. Managers are also required to review this entry on Form 5344 prior to case closing to ensure accuracy.

4.10.8.16.2  (05-14-1999)
Examination Operational Automation Database (EOAD)

  1. EOAD was designed to provide data that would allow the tracking of examination adjustments by issue and related cause. This data will be used to enhance the ability to identify specific areas of noncompliance based on examination results. Data will be captured by Revenue Agents and Tax Auditors for examinations for 1040, 1120, 1120S and 1065 returns. This data capture will be accomplished through the "Compliance Evaluation" option (found in the Manage Case menu) of RGS. Data capture for EOAD should be done just prior to closing the case (after completion of the examination report and automated 5344).

4.10.8.16.2.1  (05-14-1999)
Requirement for Completion

  1. Completion of the Compliance Evaluation Screens to capture EOAD data is mandatory for all examinations of Individual, Corporate, S Corporation and Partnership returns.
  2. EOAD data must be entered for all issues examined, both adjusted and nonadjusted items.

4.10.8.16.2.2  (05-14-1999)
Completion of RGS Tax Computation and Form 5344

  1. Before the Compliance Evaluation Screen can be completed certain RGS actions must be taken.
  2. The tax computation must be completed using RGS.
  3. The following fields in the RGS Form 5344 must be completed:
    1. Examination Technique Code — this is the one digit field that designates how the examination was conducted (i.e. correspondence, interview etc.).
    2. Examination Time — this is the total time charged to the case, including the time of any specialty examiners other than employment tax.
    3. Disposal Code — This is the two digit code reflecting how the case was closed. Refer to IRM 4.4 AIMS/Processing or Document 6036 for information defining valid disposal codes.

     

4.10.8.16.2.3  (05-14-1999)
Completion of Compliance Evaluation Screens — Form 1040

  1. The compliance evaluation information is entered on two screens. The first screen contains tax return data and the second screen contains data relating to the adjustments made during the examination.
  2. The following entries for Screen 1 (Tax Return Data) will be imported from other parts of RGS.
    1. Tax Period in YYYYMM Format
    2. Examination Technique Code (Form 5344),
    3. Examination Time (Form 5344),
    4. Report Date (Tax Computation),
    5. Disposal Code (Form 5344),
    6. Activity Code (entity information),
    7. Source Code (entity information),
    8. Project Code (entity information).

     

  3. The following entries for Screen 1 (Tax Return Data) must be made by the examiner:
    1. Primary Occupation Code — this is a three digit code that identifies the occupation (based on wages) of the primary taxpayer for the year being examined. The code selected should be based on the taxpayer’s largest source of wage income. The field is completed even if the primary taxpayer has both wage and self-employment income (based on wage income only) . No entry is made if the primary taxpayer has no wage income. RGS provides a list of valid options.
    2. Amount Paid at Closing — this is the total amount paid at the time the examination concluded.
    3. PIA/PBA Code or NAIC Code per Return — this is the code for the Schedule C or F with the largest gross receipts as determined during the examination. Examiners should use the code entered by the taxpayer or as perfected by the service center during processing for this business. RGS provides a menu of valid options.
    4. PIA/PBA Code or NAIC Code per Exam — this is the corrected code, based on examiner’s determination, for the Schedule C or F with the largest gross receipts, as determined during the examination. If the code per return or as perfected by the service center is correct, enter that code here. RGS provides a menu of valid options.
    5. Study Type — this field will be left blank currently. It is a three digit field that will be used to track cases for special surveys or research studies (not the same as current project codes).

     

  4. The following entries for Screen 2 (Adjustment Data) will be imported from other parts of RGS:
    1. Issue Name (tax computation),
    2. Adjustment Amount (tax computation), and
    3. Categorization information (tax computation).

     

  5. The following entries for Screen 2 (Adjustment Data) must be made by the examiner:
    1. Uniform Issue List (UIL) Code — the importance of accuracy in selecting UIL codes cannot be over emphasized. This information will form the basis for analysis that will support compliance activities, including return selection criteria, classification criteria and recommendations for legislative changes. The UIL code is used to pinpoint the IRC section that best describes the legal authority for the adjustment. The UIL is available in Publication 1102, Office of Chief Counsel — Uniform Issue List. The format for the UIL code is an IRC section followed by two subsections (for example an adjustment to gross income might have an associated UIL code of 61–02–02) . If there is more than one possible code section that could be the legal basis of the adjustment, examiners should use their best judgement in determining the most appropriate code (use the code that would be selected if the issue were unagreed). RGS provides a list of valid codes for the code subsections (the initial IRC section must be entered).
    2. Causal Code — two digit code that identifies the reason/behavior that caused the adjustment. A list of valid codes is provided in RGS.
    3. PBA/NAIC Code per Return — the code entered by the taxpayer as perfected by the service center during processing for the Schedule C or F that is the source of the issue being adjusted. A list of valid codes is provided in RGS.
    4. PBA/NAIC Code per Exam — the code, as corrected during the examination, for the Schedule C or F that is the source of the issue being adjusted (if correction not needed, enter PBA Code per Return) . A list of valid codes is provided in RGS.
    5. Form/Schedule — the form and schedule applicable to the adjustment. A menu of valid form and schedule options is provided in RGS.
    6. Line Number — the line number of the form or schedule for the issue being adjusted. No list is provided in RGS, so this field must be entered.

     

4.10.8.16.2.4  (05-14-1999)
Completion Compliance Evaluation Screens — Forms 1120, 1120S, and 1065

  1. Completion of the Compliance Evaluation data for these return types is also entered on two screens. Screen 1 is for return data and Screen 2 is for adjustment related data. The procedures for data entry are very similar as the procedures for Form 1040 therefore, only the differences are fully described in this section.
  2. The following entries to Screen 1 (Return Data) are imported from other parts of RGS:
    1. Examination technique code, Examination time, disposal code, activity code, source code, Tax project code, and tax due/overpayment code.

     

  3. The following entries to Screen 1 (Return Data) must be made by the examiner:
    1. Year — this is a six digit entry for the tax period (format YYYYMM).
    2. Primary Business Code — this is the four digit code that identifies the correct type of business for the return being examined.
    3. Payment Collected at Closing — same as "Amount Paid at Closing" for Form 1040.
    4. Study Type — same as for Form 1040.
    5. Filing Indicator

     

  4. The following entries to Screen 2 (Adjustment Data) are imported from other parts of RGS:
    1. Issue name, adjustment amount, categorization information, PBA/NAIC code (same as Primary Business Code) , Form/Schedule, and line number.

     

  5. The following entries to Screen 2 (Adjustment Data) must be made by the examiner:
    1. Uniform Issue List (UIL) Code — same as for Form 1040.
    2. Causal Code — same as for Form 1040.

     

4.10.8.16.2.5  (05-14-1999)
Forwarding EOAD Data

  1. Examiners will forward all data for closed cases to diskette (using RGS menu option) and include this diskette in case file. The EOAD data is automatically included on the diskette in the forwarding process.
  2. Examiners will also include a print of the Compliance Evaluation Screens (print screen option available in RGS) as part of the closed case file.

4.10.8.17  (05-14-1999)
Standard Explanations for Report Writing

  1. RESERVED

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