4.10.7  Issue Resolution (Cont. 1) 
Researching Tax Law 
Court Decisions and Case Law  (01-01-2006)
Citators: Researching Case History

  1. Knowledge of the judicial history of a tax case is important and research of case law is not complete until the history of a case is reviewed in a citator. For example, examiners should consider whether a case is current, whether there are other cases on the same point of law that should be considered, or whether a ruling is still valid. A citator lists court decisions alphabetically by case name and shows where the full text of the decisions may be found. The citator traces the case history from its original entry into the court system through the Supreme Court, if appealed.

  2. Decisions reached in a lower court are sometimes reversed in the appellate or Supreme Court. When this happens, the lower case decision has no legal sanction and may not be cited as an authority. A citator will show whether a higher court reversed, affirmed, modified or otherwise disposed of a lower court decision.

  3. Revenue Rulings and Procedures may be revoked, modified, amplified, etc. A citator findings list will indicate whether or not this is the case.

  4. A citator will also direct examiners to subsequent cases or rulings that deal with the same legal principle in the setting of other Code sections or fact patterns. It lists everything that has been said about a case, ruling, or procedure.

  5. Citators are published by commercial publishers of tax services such as CCH Incorporated and Research Institute of America. While formats differ, commercial citators provide basically the same information.  (01-01-2006)
Citator Examples

  1. The following examples are taken from the Main Citator Table of CCH Incorporated’s Standard Federal Tax Reporter on compact disc.

  2. Example 1: Case Citator

    1. Batman, Ray L. ANNOTATED AT . . . 96 FED 2250.66; 8586.0358; 8706.075; 8706.11; 11, 025.3801; 13, 709.2261; 25,424 .95

    2. SCt—Cert. denied, 342 US 877; 72 SCt 167

    3. CA–5—(aff’g TC), 51–1 USTC P9305; 189 F2d 107

    4. Miller, CA–10, 61–1 USTC 9156, 285 F2d 843
      Finley, CA–10, 58–1 USTC 9517, 255 F2d 128
      Batman, CA–5, 57–1 USTC 9247, 239 F2d 283
      Christopher, CA–5, 55–1 USTC 9504, 223 F2d 124
      West, CA–5, 54–2 USTC 9480, 214 F2d 300
      Wofford, CA–5, 53–2 USTC 9637, 207 F2d 749
      Mauritz, CA–5, 53–2 USTC 9495, 206 F2d 135
      Tomlinson, CA–5, 52–2 USTC 9543, 199 F2d 674
      Seabrook, CA–5, 52–1 USTC 9294, 196 F2d 322
      Culbertson, Sr., CA–5, 52–1 USTC 9233, 194 F2d 581
      Alexander, CA–5, 52–1 USTC 9232, 194 F2d 921
      Tilden, Inc., CA–5, 51–2 USTC 9501, 192 F2d 704
      Britt Est., CA–5, 51–2 USTC 9414, 190 F2d 946
      Scott, DC—Ark, 53–1 USTC 9166, 110 FSupp 165
      Lewis, TC, Dec. 20,733, 23 TC 538
      West, TC, Dec. 19,435, 19 TC 808
      Tomlinson, TC, Dec. 18,513(M), 10 TCM 828

    5. TC—Dec. 17,553(M); 9 TCM 210

  3. Explanations of the above citations are as follows:

    1. Case name (Batman, Ray L.) and paragraph references to CCH Federal Standard Tax Reporter.

    2. Batman was appealed to the Supreme Court; however, certiorari was denied.

    3. Fifth Circuit Court of Appeals heard Batman and affirmed the Tax Court Decision.

    4. These cases deal with the same legal principle or fact pattern and cite Batman.

    5. Tax Court heard Batman and case was appealed to Fifth Circuit Court of Appeals.

  4. Example 2: Rulings Finding List

    1. Rev. Proc. 75–25, 1975–1 CB 720 ANNOTATED AT …96 FED 8471.90; 29,663.90 1975 CCH 6595

    2. Amplified by: Rev. Proc. 78–25

    3. Cited in: Jones, Dec. 49,862(M), 67 TCM 2997, TC Memo. 1994–230 Notice 91–4 T.D. 8408 Haynsworth, TC, Dec. 34,581, 68 TC 703 Rev. Rul. 76–247

    4. Obsoleted by: Rev. Proc. 92–29

    5. Superseding: Mim. 4027

    6. Example 2 is self-explanatory.  (01-01-2006)
Importance of Court Decisions

  1. Decisions made at various levels of the court system are considered to be interpretations of tax laws and may be used by either examiners or taxpayers to support a position.

  2. Certain court cases lend more weight to a position than others. A case decided by the U.S. Supreme Court becomes the law of the land and takes precedence over decisions of lower courts. The Internal Revenue Service must follow Supreme Court decisions. For examiners, Supreme Court decisions have the same weight as the Code.

  3. Decisions made by lower courts, such as Tax Court, District Courts, or Claims Court, are binding on the Service only for the particular taxpayer and the years litigated. Adverse decisions of lower courts do not require the Service to alter its position for other taxpayers.  (01-01-2006)
Action on Decision

  1. It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings of lower courts in certain cases. An Action on Decision (A.O.D.) is the document making such an announcement. An Action on Decision is issued at the discretion of the Service only on unappealed issues, decided adverse to the government. Generally, an Action on Decision is issued where guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.

  2. An Action on Decision may be relied upon within the Service only as the conclusion, applying the law to the facts in the particular case at the time the Action on Decision was issued. Caution should be exercised in extending the recommendation of the Action on Decision to similar cases where the facts are different. Moreover, the recommendation in the Action on Decision may be superseded by new legislation, regulations, rulings, cases, or Actions on Decisions.

  3. Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions. The Service expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. Accordingly, the Service may acquiesce or nonacquiesce in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal. Regardless of the court deciding the case, the recommendation of any Action on Decision will be published in the Internal Revenue Bulletin.

  4. The recommendation in every Action on Decision is summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both "acquiescence " and "acquiescence in result only" mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. The following differences are noted:

    1. "Acquiescence" indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions.

    2. "Acquiescence in result only" indicates disagreement or concern with some or all of those reasons.

    3. Nonacquiescence signifies that, although no further review was sought, the Service does not agree with the holding of the court and generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a nonacquiescence indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.  (01-01-2006)
Publication of Action On Decisions

  1. Action on Decisions are published in the weekly Internal Revenue Bulletin and consolidated semiannually. The consolidation appears in the first Bulletin for July and in the Cumulative Bulletin for the first half of the year. The annual consolidation appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.  (01-01-2006)
Citing Actions on Decisions

  1. If the Commissioner has published an acquiescence, acquiescence in result only, or nonacquiescence in a Tax Court or Board of Tax Appeals decision, it must be included in the citation, as in the following examples:

    1. Merle P. Brooks, 36 T.C. 1128 (1961), acq., 1962–2 C.B. 4.

    2. Rodney Horton, 13 T.C. 143 (1949), acq. in result, 1959–2 C.B. 5.

    3. Forest Lawn Memorial Park Ass’n. , 45 B.T.A. 1091 (1941), nonacq. 1960–2 C.B.  (01-01-2006)
Private Letter Rulings and Technical Advice Memorandums

  1. A Private Letter Ruling (PLR) represents the conclusion of the Service for an individual taxpayer. The application of a private letter ruling is confined to the specific case for which it was issued, unless the issue involved was specifically covered by statute, regulations, ruling, opinion, or decision published in the Internal Revenue Bulletin.

  2. Technical Advice Memorandums (TAM) are requested by IRS area offices after a return has been filed, often in conjunction with an ongoing examination. TAMs are binding on the Service in relation to the taxpayer who is the subject of the ruling.

  3. A private letter ruling to a taxpayer or a technical advice memorandum to an area director, which relates to a particular case, should not be applied or relied upon as a precedent in the disposition of other cases. However, they provide insight with regard to the Service’s position on the law and serve as a guide.

  4. Existing private letter rulings and memorandums (including Confidential Unpublished Rulings (C.U.R.), Advisory Memorandums (A.M.), and General Counsel Memorandums (G.C.M.)) may not be used as precedents in the disposition of other cases but may be used as a guide with other research material in formulating an area office position on an issue.

  5. Whenever an area office finds that a C.U.R., A.M., or G.C.M. represents the sole precedent or guide for determining the disposition of an issue and cannot to its own satisfaction find justification in the Code, regulations, or published rulings to support the indicated position, technical advice should be requested from the Headquarters Office.

  6. Technical advice should be requested where taxpayers or their representatives take the position that the basis for the proposed action is not supported by statute, regulations, or published positions of the Service. If it is believed that the position of the Service should be published, the request for technical advice will contain a statement to that effect. Instructions for requesting technical advice from the Headquarters Office are contained in the second revenue procedure issued each year. Questions regarding the procedures should be addressed to the functional contacts listed in the revenue procedure.  (01-01-2006)
Publication of PLRs and TAMs

  1. Letter rulings and technical advice memorandums are available at www.irs.govI and from commercial publishers.  (01-01-2006)
Citing PLRs and TAMs

  1. Letter rulings and technical advice memorandums are cited PLR or TAM, respectively, followed by a seven digit number. For example, PLR 8210019 or TAM 9643001. The first two digits indicate the year the ruling was published, for example, 1982 and 1996, respectively.  (01-01-2006)
General Counsel Memorandums

  1. General Counsel Memorandums (GCM) are legal memorandums from the Office of Chief Counsel prepared in connection with the review of certain proposed rulings (Rev. Ruls., PLRs, TCMs) . They contain legal analyses of substantive issues and can be helpful in understanding the reasoning behind a particular ruling and the Service’s response to similar issues in the future.  (01-01-2006)
Technical Memorandums

  1. Technical Memorandums (TM) function as transmittal documents for Treasury Decisions or Notices of Proposed Rule Making (NPRMs) . They generally summarize or explain proposed or adopted regulations, provide background information, state the issues involved, and identify any controversial legal or policy questions. Technical Memorandums are helpful in tracing the history and rationale behind a regulation or regulation proposal.  (01-01-2006)
Engineering Citator

  1. The Engineering Citator, Document 5262, contains annotations (short summaries of cases and rulings) and citations of precedents and published tax law developments pertinent to administering Internal Revenue Code provisions involving engineering matters.

  2. Copies of the Citator and supplements are distributed to Service personnel most concerned with engineering issues.  (01-01-2006)
Other Research Sources

  1. A wide range of tax literature is available to Service personnel. Monthly publications such as The Journal of Taxation, Taxation for Accountants, and Taxation for Lawyers, published by Warren, Gorham & Lamont.

  2. Numerous books presenting detailed analyses of tax laws and issues are available and provide excellent sources of information. One of the better known is Federal Income Taxation of Corporations and Shareholders by Bittker and Eustice, published by Warren, Gorham & Lamont, which has been cited by the Supreme Court.

  3. A number of tax services are available from commercial publishers that provide explanations and annotations on a variety of tax issues. For example, CCH Incorporated’s Standard Federal Tax Reporter, Bureau of National Affairs’ Tax Management Portfolios , and Research Institute of America’s American Federal Tax Reports.

  4. There are numerous sources of information available through on-line research. IRS has electronic access to thousands of data bases. See IRM for more detail.  (01-01-2006)
Electronic Tax Research

  1. Electronic tax research using computers, compact discs, and on-line tax services is also available. Information can be accessed quickly and all references to a given topic, obtained by searching, by specific words or word groups. Most of the documents discussed above are available from commercial vendors on compact disc or online.  (01-01-2006)
Electronic Research Services

  1. Employees needing access to electronic research tools should consult with their manager and visit the SPDER Reference Net website at http://rnet.web.irs.gov/. This site provides information on available services, training, and password access information.  (01-01-2006)
Examination Specialization and Technical Guidance

  1. The Examination Specialization and Technical Guidance (ESTG) Program Office focuses on compliance on an industry segment basis, issue basis, or return type basis. ESTG analysts/technical advisors facilitate the development of examiners’ expertise by providing guidance on issues specific to certain industries or return types and provide technical support to field examiners. They are responsible for preparing issue guidance and Audit Technique Guides(ATG) (also know as MSSP Guides) that provide auditing techniques, assist with issue identification and development, and tax law interpretation. Audit Technique Guides are available to the public and can be accessed at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Audit-Techniques-Guides-ATGs.  (01-01-2006)
Technical Advisor Program

  1. The Technical Advisor Program, under the operation of the Large Business & International Business Unit (LB&I), has been established to:

    1. Ensure uniform and consistent treatment of issues nationwide.

    2. Provide for better identification, development and resolution of issues.

    3. Provide a vehicle for coordination of technical issues for LB&I and other Operating Divisions.

  2. Technical Advisors, each serving as a nationwide expert in a particular industry or issue area, ensure consistent treatment of all taxpayers within their specific industry or issue area. Visit the LBI Intranet web site for a current listing of all Technical Advisors and the industry or issue areas they represent, and also to access information available for their industry or issue areas.

  3. For more information about the Technical Advisor Program, see IRM 4.10.1.  (01-01-2006)
Evaluating Evidence

  1. Examiners gather facts to correctly determine a taxpayer’s tax liability. This determination must be made on the basis of all available facts, including facts supporting the taxpayer’s position. For this reason, examiners should determine all the facts supporting both sides of an issue.

  2. Examiners should pursue an examination to a point where a reasonable determination of the correct tax liability can be made. In the daily application of this responsibility, examiners must deal with problems of evidence and its evaluation. The following discussion is presented as a series of definitions and explanations to assist examiners in determining the nature and sustaining value of various types of evidence.  (01-01-2006)
Evidence Defined

  1. Evidence is something which tends to prove a fact or point in question. Evidence is distinguished from proof, in that proof is the result or effect of evidence.  (01-01-2006)
Oral Testimony

  1. The Internal Revenue Code requires all taxpayers to keep adequate records. There are times, due to unusual circumstances, when records do not exist. In such cases, oral testimony may be the only evidence available. Therefore, oral statements made by taxpayers to examiners represent direct evidence which must be thoroughly considered. Although self-serving, uncontradicted statements which are not improbable or unreasonable should not be disregarded. The degree of reliability placed on a taxpayer’s oral statements must be based on the credibility of the taxpayer and surrounding circumstantial evidence (IRM below). The following general guidelines should also be considered:

    1. Oral evidence should not be used in lieu of available documentary evidence.

    2. If the issue involves specific recordkeeping required by law and regulations (e.g., IRC § 274), then oral evidence (testimony) alone cannot be substituted for necessary written documentation.

    3. Oral testimony need not be accepted without further inquiry. If in doubt, attempts should be made to verify the facts from other sources of evidence.

  2. In some instances a summary of a conversation or statement made by a taxpayer or witness should be prepared as documentation of the oral testimony and the taxpayer (or third party) should be requested to sign the document. It should always be signed by the examiner or examiners party to the interview. If the taxpayer or third party does not sign the documentation, then it is considered a report of the interview. This summary document should always contain:

    1. Date, time and place of contact,

    2. Name of the parties present, and

    3. Description of what transpired.

  3. Sometimes a more formal written statement is needed when documentation is not available and oral testimony will significantly affect the outcome of the case. In these cases examiners should assume that the case may eventually be resolved through litigation and should use formal written statements such as affidavits to record taxpayer or third party statements. An affidavit is an attested statement and has great validity when properly prepared and voluntarily given. Affidavits should be completed using Form 2311. Affidavits may be used:

    1. When other documentary evidence is unavailable,

    2. When the examiner wants the taxpayer’s statements to become part of the case file,

    3. To help accumulate complete and accurate information.

    4. To record the testimony of a witness, and

    5. To prevent a taxpayer from changing testimony.

  4. If oral testimony is accepted or where oral testimony is not allowed, the workpapers should reflect a full development of the facts, oral statements, corroborating evidence and conclusions, including an explanation of the factors supporting the conclusion. "Per oral testimony" or "as reasonable" are insufficient unless the amounts are both de minimis and reasonable.  (01-01-2006)
First Hand Knowledge

  1. One of the basic rules of evidence is that witnesses (either taxpayers or third parties) can testify only about facts of which they have first hand knowledge. In other words, witnesses must be able to say the facts to which they testify are true.  (01-01-2006)
Expert Testimony

  1. Some issues are so difficult that the ordinary person needs assistance from someone more familiar with the subject to understand and resolve the matter at hand. An expert opinion is made by someone with the education and experience to qualify as an expert. Thus, expert testimony is needed.


    An examiner is not compelled to accept expert testimony; expert testimony can be challenged.  (01-01-2006)

  1. Hearsay is what a witness says another person was heard to say. It is a secondary source of information and generally the reliability and trustworthiness of the evidence rests upon the veracity and reliability of a person giving testimony.

  2. A common example of hearsay evidence is testimony of taxpayers’ representatives. It should therefore be recorded in the workpapers by examiners. Hearsay often leads to primary sources of information.  (01-01-2006)
Admission Against Interest

  1. A statement that is harmful to the person making the statement is considered an "admission against interest" . When an admission is made voluntarily and with deliberation, it represents substantial evidence that the fact admitted is probably true.


    If someone tells a friend that they shoot par golf, the friend may be skeptical. But if they said that they have trouble breaking 100, the friend might be inclined to believe them because it would be more likely.  (01-01-2006)

  1. An opinion is a belief not based on absolute certainty, or a judgment or evaluation of what seems to be true. Opinions are statements of personal feelings.

  2. An opinion is not conclusive evidence of a fact. But opinions may be the only evidence available. Before accepting an opinion as evidence, the examiner should solicit other documentary evidence.

  3. Opinions emphasize connotative meaning, that is, how someone feels about something; how they value it.

  4. Opinions cannot be proven or verified. The only criterion for testing an opinion is whether it is acceptable or not, believed or not believed.

  5. There are three primary types of opinions:

    1. Unqualified Opinion: An unqualified opinion is made by someone who is only guessing. The individual has neither the education or work experience to make an intelligent estimate.

    2. Biased Opinion: A biased opinion is made by someone whose relationship with the taxpayer influences the opinion. Suspect bias when a valuation or opinion is rendered by a family member or someone receiving a substantial benefit from the taxpayer.

    3. Expert Opinion: An expert opinion is made by someone with the education and experience to qualify as an expert, but biases, for example, family or employment relationships, should be considered. Any doubt about the validity of an expert’s opinion should be resolved by seeking a second expert’s opinion.  (01-01-2006)

  1. Observations are statements, judgements, or inferences of fact based on something observed. It is the act of recognizing and noting a fact or occurrence.  (01-01-2006)
Documentary Evidence

  1. Documents are another form of evidence. Documentary evidence is generally regarded as having great probative (providing proof or evidence) value. Writings made contemporaneously with the happening of an event generally reflect the actual facts and show what was in the minds of the parties to the event.

  2. While documentary evidence has great value, it should not be relied on to the exclusion of other facts. Facts can also be established by oral testimony and there will be occasions when courts will give greater weight to oral testimony than to conflicting documentary evidence.  (01-01-2006)
Circumstantial Evidence

  1. Circumstantial evidence is evidence from which more than one logical conclusion can be reached. To be useful, both the credibility of the evidence and the reasonableness of the conclusion should be evaluated.  (01-01-2006)
Best Evidence

  1. The best evidence rule requires that, when possible, original evidence be used. Therefore, examiners should always ask to the see original documents when there is reason to believe such documents are available.  (01-01-2006)
Secondary Evidence

  1. Secondary evidence is used when original evidence is unavailable. Examples of acceptable secondary evidence are copies of original documents made by an examiner. In the absence of original documents, copies made by the examiner become the best evidence available.  (01-01-2006)

  1. The fact in dispute can, in some cases, be proved by showing other facts from which the fact can be inferred. In other words, as a matter of logic, an inference can be made from facts to decide a disputed fact.

  2. An inference is a logical conclusion based on facts. Things beyond the range of what can be observed are inferences.  (01-01-2006)
Arriving at Conclusions

  1. After all the facts have been gathered through taxpayer interviews; examination of the books, records and supporting documents; interviews with third parties; and, having researched questionable items, the examiner has all the information to be considered in resolving the issues. At this point the examiner will use his/her professional judgement in considering all the information to arrive at a conclusion.

  2. Examiners are expected to arrive at a definite conclusion by a balanced and impartial evaluation of all of the evidence. Examiners are given the authority to recommend the proper disposition of all identified issues, as well as any issues raised by the taxpayer.

  3. Once the examiner has reached a conclusion for an issue, the examiner should communicate their decision to the taxpayer and/or representative. Copies of the examiner’s workpapers may be provided to the taxpayer and/or their representative. The examiner should attempt to resolve issues as the audit progresses.

  4. Examiners will employ independent and objective judgment in reaching conclusions on issues being examined and in all aspects of their duties and will decide all matters on their merits, free from bias and conflicts of interest. Fairness will be demonstrated by:

    1. Making decisions impartially and objectively based on consistent application of procedural and the applicable tax law,

    2. Treating individuals equitably,

    3. Being open-minded and willing to seek out and consider all relevant information, including opposing perspectives,

    4. Voluntarily correcting mistakes and improprieties made by themselves or someone else in the Service and refusing to take unfair advantage of mistakes or ignorance of citizens, and

    5. Employing open, equitable, and impartial processes for gathering and evaluating information necessary to decisions.

  5. Examiners will use their professional judgment in evaluating all evidence to reach a conclusion. Examiners seldom have all of the information they would like to have to definitively resolve an issue. Examiners, therefore, must decide when they have enough, or substantially enough, information to make a proper determination for all issues under consideration. The sooner this point is reached, the more timely the case can be completed and the less burden will be placed on the taxpayer.

  6. IRC section 274(d) specifies recordkeeping rules that are required in certain situations. Treasury Regulations 1.274–5(c)(2)(v) states that it is permissible to allow a deduction without complete documentation if the taxpayer can show he or she has "substantially complied" with the adequate recordkeeping requirements. The examiner will use his/her skill and judgement in developing the surrounding evidence when less than the required documentation is available, so that the taxpayer is treated fairly, but does not profit from failure to keep records.

  7. To determine if the taxpayer has "substantially complied, " the following factors should be considered:

    1. Number and type of expenditures involved,

    2. Elements of documentation missing,

    3. Reason(s) why deduction was not properly substantiated,

    4. Availability of other information to substantiate the expenditure,

    5. Materiality of unsubstantiated items, and

    6. Relative tax significance of the items.  (01-01-2006)
Taxpayer Credibility

  1. A determination of taxpayer credibility is most often required in connection with evaluating oral evidence presented by taxpayers (see IRM, Oral Testimony).

  2. It is the responsibility of examiners to establish the taxpayer’s or third party’s credibility as part of the evaluation of oral evidence. Corroborative or contradictory details will have an important bearing on determining the reasonableness and probability of the statements.

  3. If the statements of taxpayers, in the judgment of examiners, suggest some degree of unreliability, the decision to accept some, all or none of the oral statements as credible evidence should take this into account. However, unless taxpayers’ statements are found to be wholly unreliable, they must be given some weight in the conclusion reached.  (01-01-2006)
Reasonable Determinations

  1. When deductions (such as exemptions for dependents) are based on a substantial number of small expenditures all of which cannot be substantiated by documentary evidence, examiner judgement will be used to reach a reasonable determination. This is provided there is basis for allowance under the law and regulations.

  2. These instructions are not intended to relieve taxpayers of the burden of proof, nor to sanction their failure to comply with the recordkeeping requirements of the law and regulations. Rather, they are intended to give examiners flexibility in the evaluation of incomplete evidence that is often encountered in everyday administration of the tax laws.

  3. Examiners will exercise sound judgment to make reasonable determinations. The examiner must be sure that there is a basis for each allowance. This involves consideration of the following elements, which will vary according to the nature of the items involved and the circumstances of the case:

    1. Considering the extent to which detailed documentation is required,

    2. Examining all existing records essential to adequate substantiation, and

    3. Determining the weight to be accorded oral statements and explanations.

  4. Close approximations of items, not fully supported by documentary proof, can frequently be established through reliable secondary sources and collateral evidence. For example, in questionable exemption cases, the fact that taxpayers cannot furnish documentary evidence in support of some of the amounts contributed need not be fatal to allowance of the exemption. Taxpayers may be able to demonstrate the total cost of support with reasonable certainty and satisfy examiners, for example, by third-party affidavits, that only nominal amounts were contributed by others.

  5. Due consideration should be given to:

    1. Reasonableness of the taxpayers’ stated expenditures in relation to the taxpayers’ reported income,

    2. Reliability and accuracy of the taxpayers’ records (determined by examining items on the return more readily lending themselves to detailed recordkeeping) , and

    3. General credibility of the taxpayers’ statements in the light of the entire record in the case.

  6. The practice of disallowing amounts claimed because there is no documentary evidence available, which will establish the precise amounts beyond any reasonable doubt (even though it is clear that the taxpayer did incur some expense) ignores commonly recognized business practice, as well as the fact that proof may be established by credible oral testimony. However, an arbitrarily computed portion of deductions in this situation will not be allowed merely for the purpose of expediting the closing of the case.

  7. For instance, if a taxpayer cannot precisely document amounts spent for expenses while away from home on business, examiners may establish that reasonable amounts were spent for such items if taxpayers can clearly establish the following:

    1. Time: Dates of departure and return for each trip away from home, and number of days away from home,

    2. Place: Destinations or locality of travel, for example, name of city or town,

    3. Business Purpose: business reason for travel or nature of business benefit derived or expected to be derived, and

    4. Proof that Expenditures were incurred: a reasonable showing, based upon secondary evidence, including oral testimony, that out-of-pocket expenses were paid.

  8. The extent of the allowance in (7) above should be governed by the principles stated in (4), (5) and (6) above. Allowances should be consistent with an appraisal of the facts and conservative to ensure that taxpayers do not profit from failure to keep required records of all elements of travel expenses.  (01-01-2006)

  1. The Internal Revenue Manuals(IRM) contain tolerances to be observed for deficiencies and various types of penalties. Consult the applicable IRM as needed.  (01-01-2006)
Significant Items

  1. The definition of "significant" or " material" depends on an examiner’s evaluation of a return as a whole and the items that comprise the return. There are several factors, however, that examiners must consider when determining whether an item is significant. These factors include:

    1. Comparative size of the item,

    2. Absolute size of the item,

    3. Inherent character of the item,

    4. Evidence of intent to mislead,

    5. Beneficial effect of the manner in which an item is reported, and

    6. Relationship to/with other item(s) on a return.

  2. Generally, automatic adjustments (obvious errors or omissions on the return) in excess of tolerances are to be considered significant items.  (01-01-2006)

  1. The impact on compliance within a segment of the population, sector of the economy, or similarly situated taxpayers will be considered when making a decision whether or not to raise an issue.  (01-01-2006)

  1. Once an examination has begun and a decision is made to limit the scope of an examination on account of collectibility, examiners will complete the examination at the earliest possible opportunity.

  2. In making the determination, the following should be considered:

    1. Are the taxpayers considering bankruptcy proceedings?

    2. Are there net operating losses that could be utilized in the current year to absorb any potential tax liability resulting from an examination?

    3. Are the taxpayer’s bank accounts overdrawn?

    4. Do the taxpayer’s liabilities exceed the taxpayer’s assets?

    5. Are there collectibility indicators on the Charge-Out document?

    6. Factors such as future earning power, age, assets, liabilities, education, profession or trade, and health.

  3. The steps taken to determine whether to limit the scope of the examination are to be documented in the case file.

    1. When an issue is examined and based on the findings, the examiner decides further issue development is not warranted, the examiner should use the Issue Lead Sheet to document what work has been performed, findings, and conclusions to support the examiner’s determination to get out of the issue

    2. For field examinations, if the examiner decides based on information developed during the examination that the examination of remaining issues as originally planned is no longer warranted, the examiner should use the Risk Analysis Workpaper to document the decision. The Risk Analysis Workpaper should be filed as a separate line item in Section 600.

    3. For office examinations, if the examiner decides based on information developed during the examination that the examination of remaining issues as originally planned is no longer warranted, a risk analysis workpaper is not required, only a comment on the leadsheet or Form 4700 is needed.

  4. The scope of the examination may be limited on an employment tax examination. However, examiners should avoid taking any action that would give the taxpayer a safe haven. As an alternative, examiners should limit the number of returns examined. This approach minimizes the potential tax liability, while avoiding the likelihood of giving the taxpayer a safe haven.

  5. When permission has been given to limit the scope of the examination due to collectibility, the following adjustments should be included in the audit report:

    1. Adjustments in the taxpayers’ favor,

    2. Automatic disallowances,

    3. Statutory adjustments,

    4. Other issues "developed," up to the point of limiting the scope of the examination.

  6. Judgment should be exercised when identifying which issues are to be considered "developed." The following areas should be considered in making the decision:

    1. The additional time required to complete the issue. Avoid raising an issue unless the audit work is substantially complete.

    2. The potential for future non-compliance,

    3. The extent of statutory authority. Avoid issues in which the statutory authorities are inconclusive unless there are overwhelming compliance considerations.

  7. Once a determination to limit the scope has been made and approved, the determined tax liability will always be assessed.  (01-01-2006)
Rollover vs. Tax Deferrals

  1. In examinations conducted by examiners using field techniques, timing issues should be dealt with at the planning level. Generally, planning an examination to include short-term timing issues is not an effective use of resources. However, unplanned timing issues which are uncovered or arise as a correlative adjustment during an examination of non-timing issues should be made if cost effective to do so.

  2. The pre-contact and/or examination plan should preclude the inclusion of timing issues, except those with long term, flagrant short term, indefinite, or permanent deferral features.  (01-01-2006)
Coordinated Issues

  1. Coordinated Issues may be proposed by LB&I Technical Advisors to ensure that key issues within particular industry or issue areas are raised, developed and resolved on a consistent basis. The purpose of Coordinated Issues is to provide examiners with guidance on significant national issues that are not being resolved consistently. Coordinated issues establish uniform positions within industry or issue areas. Examiners cannot deviate from such positions without the concurrence of the responsible LB&I Industry/Issue Team. See IRM, Industry/Issue Teams for more information on Industry/Issue teams.

  2. Visit the LB&I Intranet web site for a listing of coordinated issues.

  3. For more information on Coordinated Issues, see IRM, Coordinated Issues.  (01-01-2006)
Whipsaw (a/k/a correlative adjustments)

  1. The term whipsaw refers to situations where the government is subjected to conflicting claims by taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and correct reporting of the transaction may benefit one and adversely impact the other for tax purposes.

  2. A potential whipsaw situation could be present in almost any transaction; however, experience has shown the following issues to generate the majority of whipsaw cases:

    1. Goodwill vs. covenant not to compete,

    2. Alimony vs. child support,

    3. Allocation of purchase price,

    4. Buyer vs. seller,

    5. Sale vs. rental/royalty,

    6. Employee vs. independent contractor,

    7. Payments to widows (gift vs. taxable income),

    8. Dependency exemptions for children of divorced parents,

    9. Husband and wife filing separate returns,

    10. Grantor, trust, and beneficiaries,

    11. Parent and child,

    12. Decedent and decedent's estate,

    13. Taxpayers in which the Commissioner has invoked the provisions of IRC section 482, and

    14. Parent and subsidiary corporations .

  3. When whipsaw issues require ( i.e. material tax consequence), an examination of both parties, examiners will secure the name, address, and the tax identification number (TIN) of the related party. A transcript will be requested to determine the related party's examination status.

    1. If a related party is under examination, then the examiner assigned to the case will be notified.

    2. If the related party is not under examination, then the examiner will determine if they can examine the return or if a referral is needed. If a collateral examination is warranted, then Form 6229, Collateral Examination, will be prepared.

  4. The primary objective of requiring support examinations of these returns is to assure consistent treatment of related taxpayers or taxpayers involved in the same transaction.  (01-01-2006)
Proposing Adjustments to the Taxpayer and/or Representative

  1. Communication with the taxpayer or representative on an on-going and continuous basis is a critical part of the examination process. Generally, the taxpayer should feel more involved in the audit process and will be better informed of the status of the examination. The examiner should discuss the progress of the audit and issues proposed with the taxpayer and/or representative at frequent intervals as the examination continues.

    1. In office examinations, the examiner can discuss issues as they are concluded during a scheduled appointment or at the conclusion of the appointment. Whenever possible, the examiner should prepare an audit report at the conclusion of the appointment and discuss audit issues with the taxpayer and/or representative in a face to face meeting versus just mailing the report later.

    2. In field examination, the examiner should discuss issues as they are concluded. This allows the resolution process to begin as the examination continues. Each issue is discussed as it is completed and resolved so that at the conclusion of field work the status of each issue is known. The examiner can then take the appropriate steps to close the case.

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