4.10.8  Report Writing  (05-14-1999)

  1. This section includes guidelines for the preparation of audit findings, in terms of content and format; it also provides instructions for some case closing requirements.  (08-11-2006)
Audit Reports Overview

  1. Audit reports should contain all the information necessary to ensure a clear understanding of the adjustments and document how the tax liability was computed. Examination reports (unlike workpapers) are legally binding documents and, when executed, serve as the basis for assessment and collection action. Based on this importance, examiners should take all necessary steps to ensure report accuracy.

  2. Employee contact information will be provided to the taxpayer when a report is issued. Refer to IRM, Providing Taxpayers with Employee Contact Information.

  3. Report Generation Software (RGS) is required for generation of all income tax examination reports (with the exception of LMSB agents utilizing BNA Software) and for entry of all data required for the Examination Operational Automation Database (EOAD). See IRM 4.10.16.

  4. EOAD is designed to allow the tracking of examination adjustments by issue and related cause. This data helps identify specific areas of noncompliance based on examination reports. Procedures for use of RGS in report writing can be found in RGS User Guides and training materials. See IRM  (08-11-2006)
Publications to Include with Audit Reports

  1. IRC section 6212requires the Service to include an explanation of the examination and collection process, as well as information about assistance from the Taxpayer Advocate with any first report/notice of proposed deficiency. Publication 3498, The Examination Process, will be used for this purpose. Publication 3498 incorporates Publication 1,Publication 5, and Publication 594into one document.


    Publications sent to the taxpayer should always agree with the enclosures listed on the cover letter to avoid confusion.

    The following procedures will be followed:

    1. Office Examination – Publication 3498 must be provided with the first report/notice and Letter 915(considered a 30-day letter). No other notices or publications are required and none should be sent. Generally, taxpayers should never be provided the first report/notice without a Letter 915.Some circumstances, such as imminent statute cases, may dictate Letter 915not be mailed.

    2. Field Examination – Publication 3498must be provided with the first report/notice of proposed deficiency that is provided to the taxpayer, and with all preliminary (30-day) letters.

    3. Publication 3498is not required to be provided again to the same taxpayer for report/notices issued subsequent to the first report/notice that is not a formal 30-day letter (i.e., corrected and supplemental reports). However, Publication 3498 must accompany all 30-day letters issued.

    4. All first letter(s)/notice(s) of a proposed deficiency, 30-day letters and required publications must be mailed or provided in person separately to each spouse for all joint filers. If the taxpayer has a representative, then the representative should also get a copy of the correspondence.

    5. Issuance of notices and publications, as well as the issuance of separate notices and publications to each spouse for joint filers, must be documented by examiners on Form 9984,Examining Officer’s Activity Record.


      Publications are not required to be included in no-change with adjustment (not-adjustments) reports, but should be included in no-change with adjustments reports.

    Publication  (08-11-2006)
Reports Sent to the Power of Attorney

  1. If Form 2848,Power of Attorney and Declaration of Representative (POA), is on file for a taxpayer, it will be reviewed prior to issuance of a report to determine who should receive a copy of the report. Centralized Authorization File, CAF, research on IDRS should be performed since it is possible that the POA may have been changed by the taxpayer submitting a new POA through channels other than the examiner. Refer to IRM 21.3.7,Processing Third Party Authorizations.

  2. Per Statement of Procedural Rules § 601.506, examiners should forward any correspondence (or copy), discussions, reports and/or other material to the taxpayer at the same time it is sent to the representative. For more detailed information on how to mail correspondence when a POA is involved, see IRM,Notices and Communications .  (06-10-2005)
Execution of Audit Reports and Payment

  1. Agreement forms are considered "executed" when the taxpayer(s) signs the form. Executed agreement forms should also indicate the date received by the IRS (agreement forms should be date stamped upon receipt).

  2. Taxpayers, upon receipt of an audit report, may wish to pay the deficiency immediately. Form 3244,Payment Posting Voucher, should be processed with the funds if payment is received. Attach a copy of the completed Form 3244to the face of the tax return.

  3. Cases may be processed without an executed agreement form if a full paid remittance, not specifically designated as a "6603 deposit " is received in response to a proposed liability.


    1. The American Jobs Creation Act of 2004, P.L. 108–357, 118 Stat. 1418 (the " Act" ) was enacted on October 22, 2004. Section 842 of the Act added new section 6603 to permit taxpayers to make deposits to suspend the running of interest on potential underpayments of tax. Rev. Proc. 2005–18 provides guidance establishing procedures for taxpayers to make, withdraw, or identify deposits to suspend the running of interest on potential underpayments under section 6603. This revenue procedure supersedes Revenue Procedure 84–58, 1984 C.B. 501, which provided procedures for taxpayers to make remittances (cash bonds) in order to suspend the running of interest on deficiencies. Under section 6603, the terminology "cash bond" is obsolete. Remittances submitted to suspend the running of interest under this section are referred to as "6603 deposits."


    2. Section 6603 codifies the taxpayer's right to make a deposit in lieu of a payment to stop the running of interest on a potential deficiency, and provides for the accrual of interest on a deposit returned to the taxpayer to the extent that the deposit is attributable to a disputed tax. Deposit remittances submitted after October 22, 2004, are allowed credit interest if, by request, the deposit is returned to the taxpayer.


    3. Remittances submitted prior to October 22, 2004, that were posted as "cash bonds" (per Rev. Proc. 84–58), may upon written request be "converted" to a " 6603 deposit" for purposes of earning credit interest if the " converted" deposit is returned to the taxpayer. Any portion of a cash bond made under Rev. Proc. 84–58 will not earn interest (if returned) unless the Service receives a written statement to identify/convert these previously posted cash bonds a "6603 deposits."


    4. Case file documentation is critical when a taxpayer requests that an amount be treated as a 6603 deposit or a previously posted cash bond is " converted" to a 6603 deposit. The date of the taxpayer letter requesting the "conversion" must be reflected in the source documents maintained with the case file. To document the request, date stamp the original letter maintaining it in the case file and provide the taxpayer a copy advising to maintain it for their records.  (08-11-2006)
Fax Signatures

  1. The Tax Administration Council (TAC) approved the use of faxes for receiving information and documents from taxpayers and practitioners where contact with the taxpayer has been made and documented in the case history. Documentation in the case history must include the date of the contact and a notation that the taxpayer wanted to send information by fax.

  2. Documents, forms, letters, and returns related to post-filing inquiries and interactions can be allowed via fax unless there is a specific prohibition. Refer to IRM, Specific Guidance on Use of Faxes in Tax Administration Processes.

  3. Consents to assess additional tax (i.e., Form 4549and Form 870) and Closing Agreements of $25,000 or less can be accepted by fax. Consents and Closing Agreements in excess of $25,000 should be secured with original signatures.

  4. Item 416 on Form 5344, Examination Closing Record, should contain a "1" if a faxed agreement is received.

  5. Form 9984,Examining Officer's Activity Record, and the workpapers that the case was closed as agreed via faxed form with signature(s).  (08-11-2006)
Time Frames in Closing a Case from the Group

  1. Generally, cases should be closed from the group within the following time frames:

    1. 10 days for case closures for agreed or no-change examinations – from the first date that the report is received or from the date that the no-change status is communicated to the taxpayer,

    2. 20 days for case closures for unagreed examinations – from the date the 30-day letter defaults or from the date that the request for Appeals conference is received from the taxpayer,

    3. 4 days for case closures for agreed high dollar unpaid deficiency or overassessment cases - see IRM 4.4.18,Large Dollar Cases, for more information.  (06-10-2005)
Suspension of Interest Overview

  1. IRC section 6404(g) provides for the suspension of interest when the Service fails to provide timely and adequate notice of a tax liability. Examination report Form 4549is sufficient notice if it contains an explanation of each item of adjustment. See IRM, which addresses the requirements and delivery of the notice to the taxpayer.  (08-11-2006)
No-Change Report Overview

  1. No-change cases will be closed by issuing a no-change report to the taxpayer upon the completion of the no-change examination. See IRM  (06-10-2005)
No-Change/No Liability Cases

  1. This section contains procedures for closing a case when no changes or no additional liability is established as a result of an examination.  (08-11-2006)
Multiple Year Exams Including No-Change Years

  1. When an examination results in both change and no-change years, the appropriate basic report should be prepared for all years. The column for the no-change years should have "None" or zero on lines 2, 14 and 19 of RGS Form 4549or Form 4549A,Income Tax Examination Changes , or line 2 of Form 4605or Form 4605A,Examination Changes.


    Although change and no-change years may be prepared on the same RAR, it is recommended that Letter 3401, No-Change Report Transmittal Letter, be issued with a separately prepared no-change report to avoid confusion.

  2. See IRM for procedures for closing cases which contain at least one agreed/no-change year and one unagreed year.  (08-11-2006)
No Change with Adjustment Reports

  1. This section includes procedures for an examination which results in adjustments to taxable income but does not change the taxpayer’s liability.

  2. In cases where the years examined result in adjustments to taxable income but no change to the tax liability, it is important to notify the taxpayer of the adjustments and/or or secure an agreement from them so that such adjustment(s) will be properly reflected in subsequent year returns. A report on Form 4549or Form 4605(with any necessary supporting schedules) should be prepared and given to the taxpayer at the conclusion of the examination.

  3. It is not necessary to secure the taxpayer’s agreement since there is no tax liability.


    Taxpayer’s agreement is recommended on restricted interest cases with no tax liability as the taxpayer can appeal restricted interest, i.e. current year adjustments offset by a NOL carryback.  (08-11-2006)
Issuance of No-Change Reports

  1. Upon completion of a no-change examination of any return in office or field examination, the examiner will provide Letter 3401,No-Change Report Transmittal Letter, and one copy each of the no-change report to the taxpayer(s) and the taxpayer’s representative (if Form 2848, Power of Attorney and Declaration of Representative, authorizes the representative to receive notices and communications). Letter 3401advises the taxpayer that a no-change is proposed but is subject to review. It does not replace Letter 590which is issued after the case is officially closed. Letter 590(undated) should be prepared by the examiner, signed by the Manager and included in the case file when closed from the group.

  2. An RGS no-change report will be generated or a no-change report will be prepared on Form 4549with the following modifications:

    1. Across the space to list the adjustments, "NO-CHANGE – SUBJECT TO AREA DIRECTOR APPROVAL" will be printed.

    2. The "Consent to Assessment and Collection" clause will be deleted.

    3. Form 4549–Amay be used for no-change cases.

  3. On Form 3198,Special Handling Notice, check the blocks for "No Change Letters " and "Letter 590" in the "Letter Instructions" section. Letter 590is issued by Case Processing and notifies the taxpayer that the no-change report has cleared review and will be closed as a no-change.

  4. Formal re-opening procedures do not apply if subsequent changes are needed before issuance of the formal no-change letter.

  5. The "no-change" report may be acceptable documentation for repetitive audit verification in lieu of Letter 590if the transaction code on the transcript collaborates the taxpayer’s no-change report. You may research IDRS using command code IMFOLZ which will display the last two audit results. This command code will show the no change issue codes, disposal codes and any deficiency amount.  (08-11-2006)
No Change Letters

  1. The following form letters are issued as no-change notification letters:

    1. Letter 590- Income, employment, or gift tax returns not involving a claim;

    2. Letter 570- Claim allowed in full;

    3. Letter 992- Partnership or S-Corporation returns not involving TEFRA;

    4. Letter 26842684 - Audit being stopped due to repetitive audit;

    5. Letter 1156- Form 4549,or similar report form, showing the no-change status is given to the taxpayer and the case fits the criteria for disposal code 01;

    6. For TEFRA Partnership or S-Corporation cases:
      Letter 1864- No more than 45 days have elapsed from the date on the Letter 1787or Letter 1855;
      Letter 2062- More than 45 days have elapsed from the beginning of the administrative proceedings for an S-Corporation;
      Letter 2064- More than 45 days have elapsed from the beginning of the administrative proceedings for a partnership; or
      Letter 2621- No Adjustments Letter;

    7. For nonfiler cases closed without an examination report:
      Letter 2769- Delinquent return accepted as filed and the nonfiler did not have reasonable cause for the failure to file; or
      Letter 2778- Delinquent return accepted as filed and no penalty is asserted  (08-11-2006)
No Change Issue and Disposal Codes

  1. No Change issue codes should be entered on the appropriate line of Form 5344,Examination Closing Record . For IMF returns, Publication 1102, Uniform Issue List, provides a list of the necessary codes. The codes may also be found on the AIMS website at " http://sbse.web.irs.gov/AIMS/docs/IMFissuecode.xls" .

  2. Enter the disposal code on the appropriate line of Form 5344as:

    • 01 - No Change with adjustments,

    • 02 - Regular No Change.  (08-11-2006)
Special Situations: Combat Zones

  1. A Combat Zone (CZ) is an area designated in an Executive Order by the President of the United States. Certain taxpayers in a combat zone are provided tax relief and require special processing. Generally, once it is determined that an examination is being conducted on a taxpayer in a combat zone, the case should be no-changed.

  2. Combat Zone information can be found in various locations in the IRM as well as Publication 3, Armed Forces' Tax Guide. Examiners may refer to IRM 25.6.16,Combat Zone for Statute Processing, and IRM Exhibit 4.4.1–14, Combat Zone Procedures, for additional information and references.  (08-11-2006)
Substantiation of Combat Zone

  1. When it is common knowledge or apparent that a taxpayer is in a Combat Zone, oral testimony is acceptable to indicate that the taxpayer is entitled to the Combat Zone special tax treatment.

  2. When it is not common knowledge or apparent that the taxpayer is Combat Zone personnel, written substantiation, such as a copy of the military or civilian orders or a statement issued by the Department of Defense (DOD) attesting that the Combat Zone qualifications are met, is acceptable.

  3. A signed statement secured by the taxpayer or a contact, such as a spouse or attorney, may be acceptable as substantiation when a copy of the military or civilian orders or a DOD statement is not easily accessible.

  4. In addition, the IRS may have previously identified the taxpayer as Combat Zone personnel by entering a "C" freeze on Masterfile. For additional information on Masterfile identification, see also IRM,Combat Zone.  (08-11-2006)
Examination Guidance for Combat Zone Personnel

  1. In accordance with IRC Section 7508,field examiners are instructed not to conduct any examinations on taxpayers who have been deployed to a Combat Zone. Further, ongoing examinations involving any individual identified as Combat Zone personnel should be closed immediately, unless criteria under "Compelling Reasons" (discussed below) are determined to exist.

  2. Cases not started should be surveyed using Disposal Code 31 - survey before assignment. Open cases where the books and records have not been reviewed should be surveyed using Disposal Code 32 - survey after assignment. A letter should be sent to the taxpayer to withdraw the appointment letter/scheduled examination. Attach a copy of the letter to the tax return. The following verbiage will be appropriate:

    "Internal Revenue Code Section 7508 requires us to suspend all activity on your examination. Your examination has been discontinued for the tax year _____."

  3. When books and records have been examined close the case as a no-change using disposal code 02 unless the case has been put into status code 90. Cases should be closed as no-change even if a signed report has been received. Include appropriate workpaper documentation of the application of Combat Zone requirements.

  4. If the 30-day letter has been issued/signed, notify the taxpayer that the report is being withdrawn. Close the case using no-change procedures. Include appropriate workpaper documentation of the application of Combat Zone requirements of IRC Section 7508.

  5. For cases where a statutory notice of deficiency has been issued, a supplemental report should be prepared to reduce the deficiency to zero and a no-change report issued to the taxpayer. Rescission procedures should not be used because that requires the consent of the taxpayer. If " Compelling Reasons" to continue the examination exist (discussed below), the notice must be suspended with the Area Director's or his designee's approval.  (08-11-2006)
Compelling Reason Suspense Procedures

  1. Examiners may use the following criteria to determine when to postpone an examination instead of applying the survey or no-change policy, in an examination involving Combat Zone personnel. This authority should not be delegated below the Territory Manager level.

  2. A compelling reason exists for continuing an examination when one of the following is present:

    • There is evidence of fraud, malfeasance, collusion, concealment or misrepresentation of fact;

    • No-changing/surveying the Combat Zone case would result in the serious criticism of the Service's administration of the tax law;

    • No-changing/surveying the Combat Zone case would establish a precedent that would seriously hamper subsequent attempts by the Service to take corrective action;

    • The "tax determined or determinable" results in an overpayment to the taxpayer in such a situation - issue the refund immediately.

  3. When compelling reasons exist, send a letter to the taxpayer informing them that the examination action will be suspended until after their return from the combat zone. Inform the taxpayer that the deadline for the Service to make an assessment of tax will be extended. Also, inform the taxpayer that his or her deadline for taking certain actions with the Service will also be extended (e.g., filing any return of income, estate, or gift tax; paying any income, estate, or gift tax; filing a claim for credit or refund of any tax).

  4. Generally, the periods are extended for 180 days after the taxpayer's last day in a combat zone/qualified hazardous duty area (or the last day that he or she has qualifying service outside of the combat zone/qualified hazardous duty area). In addition to the 180 days, a deadline is extended by the number of days that were left in any period for taking action when the taxpayer entered the combat zone/qualified hazardous duty area; e.g., the period to file an individual income tax return, which generally runs from January 1 to April 15. See Rev. Rul. 76-425, 1976-2 C.B. 447.

  5. You may refer the taxpayer to Publication 3,Armed Forces' Tax Guide, for details. For internal guidance, see IRM 25.6.16,Combat Zones for Statute Processing.

  6. Request that the taxpayer notify the IRS when they return from combat duty.

  7. These cases should be suspended using AIMS Status Code 38. Refer to IRM suspense procedures.  (08-11-2006)
Regular Agreed Cases

  1. This section contains instructions for the preparation of reports when the taxpayer agrees with the examiner’s proposed liability. Some cases are excepted from the procedures outlined in this section. See IRM

  2. The regular agreed report is designed to cover a three-year period.

  3. Generally, regular agreed report forms require the taxpayer’s signature and include a statement that the report is subject to acceptance by the Area Director.

  4. Be very cautious in accepting waivers where taxpayers have added writing other than their signatures. If possible, a new waiver should be obtained with just the taxpayer’s signature. If this is not possible, all facts will be obtained to determine the taxpayer’s intent. Conditional statements will invalidate a waiver.

  5. Letter 4121 can be used to mail taxpayers a report when they have indicated, to you, an agreement to all adjustments.  (08-11-2006)
Individual and Corporate Cases

  1. Form 4549,Income Tax Examination Changes, is the basic report form for regular agreed individual and corporate cases.

  2. Instructions for preparing Form 4549are outlined below. Sections of the form not discussed are self-explanatory.

  3. Name and Address — enter the correct name and address of the taxpayer. When your case involves a deceased taxpayer, please ensure you have properly entered the name. See IRM

  4. Taxpayer Identification Number — use Social Security Number (SSN) if individual also has an Employer Identification Number (EIN). On joint returns, check master file to determine which SSN was used as the primary number for the year(s) examined.

  5. Person with Whom Examination Changes Were Discussed — enter individual with whom changes were discussed. If a power of attorney or corporate officer, also enter title.

  6. Tax Period — enter the taxable year for which the column applies. For calendar, fiscal, and 52–53 week year, show the year ending date (mm/dd/yyyy). For a short period, show the beginning and ending date.

  7. Adjustments to Income — list adjustments. Place a bracket around the dollar amount if an adjustment is in the taxpayer’s favor. If there are more than sixteen adjustments write, "See page __" on line 1(a) and use Form 4549–B, Income Tax Examination Changes — Adjustment to Income, for listing the adjustments.

  8. Taxable Income Per Return or as Previously Adjusted — enter the final figure computed by the taxpayer on the last processed return or as computed on a prior processed examiner’s report if applicable.

    1. If a math error is discovered at the time of processing and corrected at the campus, then the corrected figure should be input here. Cross-out or add words as needed to identify the figure which you are using.

    More than one return is filed prior to the due date Last return filed constitutes the original return.
    An amended return is filed after the due date and reduces the tax liability but has not been processed The amended return is considered a claim and the original return figures should be used.
    An amended return filed after the due date which increases or decreases the tax liability and the return has been processed and additional tax assessed or a refund issued The amount shown on the amended return should be used.
    Tentative carryback forms (Form 1045 or 1139) have been filed and refunds issued The amount shown on original return, NOT THE TENTATIVE CARRYBACK FORM, should be used.

  9. Corrected Tax Liability — identify how the tax was computed (tax table, tax rate schedule, etc.), the taxpayer’s filing status (complete for individual returns only) and the amount of tax. If additional tax such as Parent’s Election to Report Child’s Interest and Dividends, Tax on Accumulation Distribution of Trusts, Tax on Lump-Sum Distributions, maximum tax, etc., applies, indicate on this line and attach schedule showing the computation of corrected tax figure. Likewise, if the alternative minimum tax (AMT) applies, attach a schedule showing the computation of the AMT.

  10. Less Credits — this line should include only non-refundable credits. Do not include credits such as earned income credits or withholding tax and excess FICA credits.

  11. Other Taxes — include recapture taxes, self-employment tax, etc. Attach the appropriate forms detailing the computations. Do not include alternative minimum tax on this line.

  12. Total Tax Shown on Return or as Previously Adjusted — include tax per return plus any additional tax assessed/abated as reflected on a transcript.

  13. Adjustments — Any changes to special fuels or prepayment credits should be reflected on this line. The calculation of any changes should be attached to the agreed report.

  14. Penalties — IRC Section 6751(a) requires that penalties be identified by the name of the penalty, the IRC section under which the penalty is imposed, and include a computation of each penalty on every notice (report) imposing the penalty. Standard Explanations contained in RGS are required to be used by all examiners imposing a penalty after December 31, 2000. See IRM 4.10.10 - Exhibit 1 and IRM 4.10.10 - Exhibit 2 for a listing of Standard Explanations. If the penalty cannot be currently computed, place an asterisk in the line amount field and describe the process of the calculation in "Other Information Section" of Form 4549.


    IRC Section 6751(b) requires managerial approval for the assessment of most penalties. Refer to IRM,Managerial Approval of Penalties.

  15. Other Information Section - Office Examiners (Tax Compliance Officers, Tax Auditors, and Tax Resolution Representatives) should no longer add the 45 day waiver language to their reports. This language is no longer required.

  16. Form 9984should properly document actions related to report delivery. When reports are issued be sure to include:

    • Date(s) of the notice(s),

    • Method of delivery of notice (i.e., personal delivery, regular mail, certified mail),

    • Person(s) to whom the notice(s) were delivered,

    • Items included in the delivery (i.e., letter, report form, publications, etc.)  (08-11-2006)
Form 4549 Prepared for Information Only

  1. An information only report is a completed Form 4549that does not propose a tax liability. It furnishes information about a taxpayer to the taxpayer or others who need this information. The report should be labeled "FOR INFORMATION ONLY." Information reports are usually submitted in connection with offers in compromise and requests for information from Headquarters and other Area offices.  (08-11-2006)
Regular Agreed Report: Other Information

  1. Statements should be included in the "Other Information " section of the report as needed. Below are examples of statements which should be used to clarify the examination results:

    1. Statement on corrected or revised reports such as "This report supersedes report dated ______;"

    2. References to attachments;

    3. If there is an increase or decrease in personal holding company tax or accumulated earnings tax write "Additional Tax Due" or "Net Overassessment" and the dollar amount under the appropriate column and explain the change in an attachment;

    4. Statements regarding the disposition of claims;

    5. Statement regarding the application of any penalties or additions to tax (or reference to attachments). Include the IRC section, title of the penalty, and the dollar amount;

    6. Statements regarding innocent spouse determination;

    7. Statement regarding the application of IRC § 6404(g) (suspension of interest provisions) and the date on which the notice was provided ( IRM

    8. Statement regarding the applicability of IRC § 6601(d) for restricted interest cases. The statement should state that if the tax imposed by subtitle A is reduced by reason of a carryback of a net operating loss or net capital loss, such reduction in tax shall not affect the computation of interest under this section for the period ending with the filing date for the taxable year in which the net operating loss or net capital loss arises. See IRM  (08-11-2006)
Partnership and S Corporation Cases

  1. Form 4605, Examination Changes Partnerships, Fiduciaries, S Corporations and Interest Charge Domestic International Sales Corporations, is the basic report form for use in these cases. The computer generated version of this report is Form 4605–CGand is prepared using the RGS program.

  2. Form 886–S,Partners’ Shares of Income, Deductions and Credits, and Form 886–X, Shareholders’ Shares of Income, Deductions and Credits, are forms used to identify partner and shareholder level adjustments for each year in which a change is recommended.

  3. Form 886-Z, Partner’s or S Corporation Shareholder’s Shares of Income, should be printed for the case file only. It reflects the percentages of ownership that are not on the Form 886-S or Form 886-X. See IRM 4.31.2, TEFRA Examinations - Field Procedures and IRM 4.31.5, Non-TEFRA Examinations - Field Office Procedures, for procedures in working a TEFRA or non-TEFRA key case and related investors. See IRM 4.31, Flow-Through Entity Handbook for procedures.


    TEFRA procedures do not apply to S corporations for tax years beginning after December 31, 1996. The Small Business Job Protection Act of 1996 removed S corporations from the special audit provisions of TEFRA for tax years beginning after December 31, 1996. All S corporation examinations with tax years beginning after that date must follow non-TEFRA procedures. For S corporations, TEFRA rules only apply to taxable years beginning after 12-31-82, and before 1-1-97. See IRM Although S corporation's TEFRA rules will not apply, it is possible for an S corporation to be an owner of a partnership. The partnership will be TEFRA, so the S corporation can be a party of the TEFRA proceedings.

  4. Form 886–S, Form 886–X,and Form 886–Zshould clearly reflect corrected items of income, separately stated items, and other items to be adjusted at the investor level. See Exhibit 4.10.8-1 for a sample non-TEFRA report. See Exhibit 4.10.8-2 for a sample TEFRA report.

  5. Letter 920,Notification for Agreed Partnership, Fiduciary and S Corporation (Non TEFRA) Cases, is a report transmittal letter for agreed partnership, fiduciary, and S corporation cases not involving TEFRA procedures.  (06-10-2005)
Form 4605

  1. The following instructions are for preparing Form 4605. If a section of the form is not addressed, then it is self-explanatory. This section only applies to Non-TEFRA entity cases.

  2. Name and Address — show current address.

  3. Line 1 — Adjustments to Ordinary, Distributable Net, or Taxable Income — cross out words which do not apply. After "year, " enter the tax period to which the column applies.

  4. Line 1a through 1g — list adjustments. Place a bracket around dollar amount when an adjustment is in the taxpayer’s favor. If there are more than seven adjustments, write "See page __" on line 1a and use Form 4549–B, Income Tax Examination Changes, to list adjustments.

  5. Line 2, 3, and 4 — cross out text which does not apply.

  6. Line 5, Other Adjustments — this section applies to adjustments which do not affect ordinary, distributable net, or taxable income. For example, a change to contributions or capital gains distributed to partners. Identify the items adjusted on lines 5a and 5b. When there are more than two such adjustments, use Explanation of Items, Form 886–Aor "Remarks" section.

  7. Remarks — Include any supplemental information which may be needed to clarify the adjustments and other items contained in the report.  (08-11-2006)
Special Situations: S Corporation Cases

  1. Under certain circumstances, an S-Corporation pays tax on built-in gains and its net passive income. It also may be subject to a minimum tax on capital gains tax-preference items. IRC section 1374,Tax Imposed On Certain Built-In Gains; IRC section 1375,Tax Imposed When Passive Investment Income Of Corporation Having Accumulated Earnings And Profits Exceeds 25 Percent Of Gross Receipts; and IRC section 55, Alternative Minimum Tax Imposed, are taxes that are imposed at the S-Corporation level and do not flow through to the shareholders. This section covers the forms used when a deficiency or overassessment is recommended directly against the S corporation or if a claim is involved.

  2. Deficiency, Overassessment or Claim — These results should be presented on a Form 4549. Refer to See IRM above for instructions to prepare Form 4549.

  3. In certain instances a deficiency (e.g., built-in gains tax), overassessment or claim directly against the S corporation and a change in distribution to shareholders may be present. In this situation both Form 4549 and Form 4605 should be prepared along with Form 886–X.

  4. If an S Corporation is converted to a taxable entity - Two reports are required:

    1. A Form 4549is required to show the taxable income of, and any tax due from the corporation.

    2. The Form 4605and Form 886–Sare required to remove items of income and separately stated items from the shareholders’ returns.

  5. References for S-Corporation Level Tax - Non-TEFRA are as follows:

    • IRM Notification of Appeal Rights,

    • IRM S-Corporations Non-TEFRA,

    • S-Corporation Training Material - Lesson 6 - Built-in Gains Tax and Other Conversion Issues - http://abusiveshelter.web.irs.gov/S-Corp/Training/Training.htm,  (06-10-2005)
Special Situations: Change in Accounting Method

  1. In the case of a change in method of accounting by a partnership or an S corporation, the adjustments required by IRC section 481(a)shall be made on the partnership or S corporation return. However, the limitations on tax under IRC section 481(b) shall apply at the partner/shareholder level. IRC section 481(b)applies to a partner/shareholder whose income is increased by more than $3,000 as a result of a IRC section 481(a)adjustment to the partnership or S corporation’s ordinary income. See Exhibit 4.10.8-3. Also, see IRM 4.11.6, EOG - Change in Accounting Method.  (05-14-1999)
Interest Charge Domestic International Sales Corporations

  1. Form 4605is the basic report form for "regular agreed" Interest Charge Domestic International Sales Corporation ( Form 1120–ICDISCcases.

  2. Form 886–Y,Examination Changes—Shareholder’s Share of Deemed and Actual Domestic International Sales Corporation’s Distributions, is prepared in conjunction with Form 4605for each year in which a change is recommended to show the corrected Schedule of Distributions.  (08-11-2006)
Fiduciary Cases

  1. The basic reports used for fiduciary cases are as follows:

    1. Deficiency, Overassessment or Claim — results should be presented on a Form 4549.

    2. Distributions to Beneficiaries — changes should be reflected on Form 4605.Form 886-W, Beneficiary’s Shares of Income, Deductions, Credits, should be prepared for each year in which a change is recommended. Form 886–Wis used to show the corrected distribution of each beneficiary’s share of fiduciary income and credits.

    3. When both of the situations described in paragraphs (2) and (3) occur, the instructions in both such paragraphs should be followed.  (08-11-2006)
Closing Letters for Agreed Cases

  1. Inform taxpayers that the agreed case is subject to review and once it is accepted, they will receive a Letter 987, Notification Letter - Agreed Income Tax Change Cases, stating the case is closed. Examiners will prepare Letter 987,which is signed by the group manager, and leave it undated and in the case file (with a copy for the file).

  2. Letter 987 contact information can be completed with either the examiner's name or the group manager's name.

  3. Annotate Form 3198,"Issue Letter 987" and Case Processing will be responsible for mailing the letter.  (08-11-2006)
Excepted Agreed Cases

  1. When the taxpayer agrees to proposed adjustments, but the examination results are subject to review or additional processing or some other condition, the taxpayer may waive the statutory restriction upon assessment and collection of the deficiency of tax.

  2. Signing the waiver stops the running of interest 30 days from the date of receipt if the assessment and notice for payment are not made within the 30-day period.

  3. Signing the waiver does not preclude assertion of a further deficiency by the Commissioner or a request for further consideration of the issues by the taxpayer. That is, the case is "excepted" from application of the case reopening criteria.  (06-10-2005)
Cases Requiring Excepted Agreed Reports

  1. Partially agreed corporate and individual cases;

  2. Claims allowed in full or part in a partially agreed case if there are agreed adjustments in addition to the claim;

  3. When an overassessment on one return and a deficiency proposed on a related return is the result of the shifting of income or expenses (whipsaw issues);

  4. "Excepted agreed" fiduciary cases;

  5. Form 1120S,U.S. Income Tax Return, for an S corporation case where small business corporation provisions of the Internal Revenue Code (Subchapter S) are not applicable;

    (Note: Agreed report forms are used in cases involving the conversion of a return from Form 1120Sto Form 1120.)

  6. Cases involving personal holding company deficiency dividends;

  7. Joint Committee Cases;

  8. Transferor—transferee cases;

  9. Unagreed cases requiring a Preliminary (30-day) Letter.  (08-11-2006)
Waivers For Excepted Agreed Cases: Form 870 Series

  1. Forms in the 870 series are used to indicate that the taxpayer is waiving the statutory restriction upon assessment and collection of the deficiency of tax.

  2. FORM 870 — Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, is generally used instead of Form 4549.

  3. FORM 875 — Form 875, Acceptance of Examiner's Findings By a Partnership, Fiduciary, S Corporation, or Interest Charge Domestic International Sales Corporation, may be signed by any principal or general fiduciary or corporate officer authorized to sign binding agreements.

  4. FORM 870–PT/S/LT — TEFRA agreement forms used instead of Form 4605,Examination Changes Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations.  (08-11-2006)
Instructions for Completing Waiver

  1. Instructions for agreement forms in the 870 series:

    1. Date Received — enter the date received.

    2. Name and Address — enter the correct name and address of the taxpayer.

    3. Social Security or Employer Identification Number — use SSN if individual also has an EIN. On joint returns, show the number which corresponds to the first person listed on the return.

    4. Tax Year Ended (enter each on a separate line): Calendar Year — show ending date, Fiscal Year — show ending date, Short Period — show beginning and ending dates, and 52–53 Week Period — show last day of the period.

    5. Tax — enter the amount of additional tax, as agreed, on separate line by years. When prepayment credits are adjusted, the waiver will show the amount of the deficiency before the proposed change in prepayment credits. This is because changes to prepayment credits can be assessed without deficiency procedures. For clarity, an explanation or Form 4549–Ashould accompany the Form 870.

    6. Penalties — enter separately by year and by Code section the penalty or penalties as agreed.

    7. Signature of Taxpayer — see the instructions on the form.  (08-11-2006)
Receipt of Waiver

  1. Stamp or otherwise note on the waiver the date it was received. The date the signed agreement is received should be stamped or otherwise noted on the report as a signed agreement stops the running of interest 30 days from the date of receipt for income tax returns.  (08-11-2006)
Waiver of Assessment for Joint Returns

  1. Reports/waivers of assessment for joint returns will require the signature of both spouses (or authorized power-of-attorney(s), if applicable), unless the deficiency is paid in full. We will continue to follow current procedures where full payment by the taxpayer, other than payment designated as a "6603 deposit", will be considered an agreement to the deficiency. See IRM

  2. When full payment is not received, and only one spouse signs the waiver, unagreed procedures should be followed for the non-signing spouse. Additionally, the account of the agreeing spouse will need to be assessed using MFT 31 procedures. See IRM  (08-11-2006)
Partially Agreed Cases

  1. This section includes general instructions for preparing reports for partially agreed cases. Partially agreed cases are excepted agreed cases as described in See IRM above. After the partially agreed report has been processed, unagreed case procedures apply to the remaining issues. Instructions for reports reflecting the unagreed issues are included in IRM

  2. A partially agreed case contains more than one issue of which at least one issue is agreed and at least one issue is not agreed to by the taxpayer.

  3. Examiners should refer to IRM,Examined Closings, Surveyed Claims, and Partial Assessments for partial assessment procedures including the preparation of Form 5344,Examination Closing Record. The partially agreed package sent to Case Processing includes:

    1. Form 3198,Special Handling Notice, annotated "Partial Assessment Requested" and in the Other Instructions section, "Return via fax when completed. "

    2. Waiver and copy of the report

    3. Form 5344,Examination Closing Record with the results of the partial agreement

    4. Copy of the front page of the tax return with an IMFOLT transcript.  (08-11-2006)
Individuals and Corporations

  1. The reports and forms required to close a partially agreed individual or corporate case are as follows:

  2. Form 4665,Report Transmittal , is used to summarize unagreed report issues and present information of a confidential nature to Appeals. See IRM

  3. Form 4549–Ashould be prepared using only the agreed adjustments. The additional tax computed will be reflected on Form 870.Indicate "Agreed Issues" on the top of the Form 4549–Areport. The Form 4549–Areflecting the agreed issues should be included in the case file as a workpaper to document the calculation of the tax shown on Form 870.

  4. Form 870is used to secure agreements where no S-corporations or TEFRA issues are involved.

  5. A second Form 4549–Ashould be prepared to show both agreed and unagreed adjustments.

    1. An asterisk should be placed in front of the letter for each agreed adjustment.

    2. The "Total Tax Per Return or as Previously Adjusted" line includes the tax on the agreed adjustments.

    3. The "Other Information" section should contain the following statement, "These adjustment(s) have been agreed. The taxpayer is in agreement with the adjustment(s) indicated as agreed, and the applicable deficiency is being assessed and is included in Total Tax as Previously Adjusted."

  6. Lead sheets for all remaining unagreed issues should be attached and procedures for unagreed cases should be followed. See IRM

  7. Form 3198,Special Handling Notice, should be on the outside of the case file specifying "Partial Agreement." Form 870must be processed prior to the issuance of the 30-day letter for the unagreed issues.  (06-10-2005)
Non-TEFRA Partnerships

  1. The procedures for processing a partially agreed Non-TEFRA partnership case are the same as the procedures for individual and corporation cases outlined in See IRM with the following exceptions for different forms:

    1. Form 4605–Ais the basic report for partially agreed partnership cases. See IRM instructions for Form 4605which also apply to Form 4605–A.

    2. Form 886–S,Partner’s Shares of Income, Deductions, and Credits, is prepared for each change year.

    3. Form 875is used for securing agreements in partially agreed Non-TEFRA cases.

  2. See IRM 4.31.5, Non-TEFRA Examinations-Field Office Procedures, for detailed information.  (06-10-2005)
Non-TEFRA S Corporations and Fiduciary Cases

  1. The procedures for processing a partially agreed Non-TEFRA S corporation case are the same as the procedures for individual and corporation cases outlined in IRM, with the following exceptions for different forms.

  2. Form 4605–Ais the basic report for partially agreed S corporation and fiduciary cases. See IRM above for instructions for Form 4605which also apply to Form 4605–A.

  3. Form 886–X,Shareholders’ Shares of Income, Deductions, and Credits, or Form 886–W,Beneficiary’s Shares of Income, Deductions, Credits, is prepared for each change year.

  4. Form 4549–Ais used in partially agreed S corporation or fiduciary cases when a deficiency or overassessment is recommended against the corporation or trust, or if a claim is involved. The tax computation should be shown in the "Other Information " section of Form 4549–Aor on an attached lead sheet.

  5. Form 870and Form 875are used to secure agreements in partially agreed S corporation and Fiduciary cases that are not involved in TEFRA proceedings.  (08-11-2006)
Interest Charge Domestic International Sales Corporations

  1. Forms required to process partially agreed Interest Charge Domestic International Sales Corporation cases are as follows:

    1. Form 4605–Ais the basic report form for partially agreed Interest Charge Domestic International Sales Corporation cases.

    2. Form 886–Y,Examination Changes—Shareholder’s Share of Deemed and Actual Domestic International Sales Corporation’s Distributions, should be prepared.  (08-11-2006)
Cases Excluded from Partial Assessments

  1. Cases excluded from partial assessments are as follows:

    1. Joint Committee cases and cases requiring Chief Counsel review;

    2. Cases for a specific year with both agreed tax-reducing issue(s) and unagreed tax-increasing issues, with an apparent net overall deficiency;

    3. Multiple year cases when a combined net overall deficiency is apparent, even though the agreed result for one or more years would be an overassessment;

    4. Cases docketed in the United States Tax Court.  (08-11-2006)
Partial Overassessments

  1. The allowance of partial overassessments should not be made routinely but only if the facts and circumstances warrant such action. Whether a partial overassessment should be allowed must be a matter of sound judgment and discretion. Group manager approval will be obtained prior to the allowance of a partial overassessment. Group manager concurrence will be documented on Form 9984.

  2. A partial overassessment will be made only if there has been an agreement on the issue(s) resulting in the partial overassessment. These cases generally fall into the following categories:

    1. Cases for a specific year involving two or more tax-reducing issues;

    2. Cases for a specific year involving several issues, both tax-reducing and tax-increasing, provided the overall result, after giving effect to the tax-increasing issues, is a net overassessment;

    3. Cases involving more than one year if the net result is an overassessment.

  3. The following are examples of partial overassessments that could be made for the situations listed above:

    1. Allowing an agreed tax-reducing issue results in an overassessment of $15,000 for the taxable year. A contested tax-reducing issue for the same year, if allowable, would result in an additional overassessment of $10,000. A partial allowance reflecting an overassessment not exceeding $15,000 could be made.

    2. A case for a specific year involves two tax-reducing issues, one of which is contested, and two tax-increasing issues which may or may not be contested. Allowing one of the agreed tax-reducing issues results in a net overassessment of $50,000, after considering the offsetting adjustments for the two tax-increasing issues. A partial overassessment not exceeding $50,000 could be made.

    3. There is an unagreed proposed deficiency of $40,000 for the year 2002, but a complete agreement to an overassessment of $70,000 for the year 2003. A partial overassessment not exceeding $30,000 ($70,000-$40,000) for 2003 could be made.  (08-11-2006)
Multi-Year Examination Cases with At Least One Agreed/No-Change Year and One Unagreed Year

  1. When closing a multi-year case containing at least one agreed/no-change year and one unagreed year:

    1. Examiners should split the case into an agreed/no-change case file and an unagreed case file when closing a multi-year case that contains both agreed/no-change and unagreed years.

        Unagreed Case File Agreed/No-Change Case File
      RAR RAR containing the unagreed adjustment(s) Original agreed RAR signed by the taxpayer(s)
      Returns Returns for the unagreed year(s) Returns for the agreed year(s)
      Form 5344 Completed Form(s) 5344 Completed Form(s) 5344
      Workpapers Original Workpapers and information None required
      Form 3198 Notate in the top margin: Unagreed - Do Not Separate from Agreed Case File Notate in the top margin:
      1. "Agreed - Do Not Separate from Unagreed Case File" and

      Notate in the Other Instructions blank:
      1. "The YYYYMM case file contains the original workpapers"

    2. The agreed and unagreed files should remain together and be sent to Technical Services (TS) in Status 21. All years will be moved on RGS LAN " explained in item c below" using two separate actions to the appropriate RGS group code.


      RGS group codes change periodically and changes are communicated to the field on the RGS web site at: "http://rgs.web.irs.gov/index.htm "


      "Once a multi-year case is split, the split years can no longer be treated as one case within RGS."

    3. The agreed and unagreed years may eventually be split, so examiners must move the unagreed and agreed/no change years to the RGS fileserver in two separate actions as follows:

    • From the top-line menu, click "File" and "Move Case..."

    • The "Move Case(s)" dialog box will appear, listing inventory on the workstation that can be moved to the fileserver

    • Select the unagreed cases. Multiple years may be selected by pressing the "CTRL" button while selecting the various years

    • After the cases are selected, click the arrow on the "Options:" field at the top of the window and select "Fileserver"

    • Click the "Move" button

    • The unagreed cases will be moved to the fileserver and removed from the workstation

    • Repeat these steps for the Agreed/No-Change Years

  2. Partial assessments on individual tax years with both agreed and unagreed issues are still required to be completed by the Field as noted in the direct shipment instructions issued to the Areas as a part of the Centralized Case Processing implementation. Absent the need for a quick or prompt assessment on a case with a short statute (14 days or less remaining on the statute), no other partial assessments will be required by the Field.

  3. If the unagreed year(s) are protested, the case must have 30 days plus the minimum number of days required by the local Appeals office on the statute when it is received in Technical Services.  (08-11-2006)
Claims for Abatement, Audit Reconsiderations, and Supplemental Reports

  1. An amended return ( Form 1040Xor Form 1120Xis not necessarily a formal claim. To be a formal claim the taxpayer must be requesting a refund of tax paid. A claim for abatement pertains to an accounting decrease in tax liability. Claims of this nature, whether filed on Form 1040X,Form 1120Xor Form 843are treated as claims for abatement.

  2. If an examiner is assigned a case in which the taxpayer has requested an audit reconsideration, the examiner should also refer to IRM 4.13.4,Audit Reconsideration, Area Office Examination , for report writing, letters and procedures to be followed.

  3. Supplemental Reports are prepared for abatements (reduction) of previously assessed (but unpaid) tax. These types of reports differ from reports prepared for claims in that the supplemental report reduces tax which has been assessed but not paid. In such cases any overassessment shown on the supplemental examination report will not be refunded to the taxpayer; instead the existing balance due will be reduced or eliminated. This point should be clearly explained to the taxpayer.

  4. When preparing a report for a claim for abatement due to an audit reconsideration, the "Per Return or as Previously Adjusted" amounts for both taxable income and tax are the amounts as shown in the previously assessed report as confirmed with a transcript. It is not necessary to repeat adjustments previously made. Include only adjustment(s) made to the previous report or notice of deficiency based on the additional information received. The "Other Information" section on the report should state "Supplemental Report — Reduction in Previously Assessed Tax. "

  5. A reduction in previously assessed penalties should be clearly explained to minimize confusion. For example, if an accuracy related penalty of $500 was assessed, and the examiner later determines that the correct penalty is $200, the Supplemental Report should show a penalty amount of ($300). The "Other Information" section of the report should explain the reduction as follows:

    Accuracy Related Penalty as Corrected. . . . . . . . . . . $200
    Amount Previously Assessed. . . . . . . . . . . . . . . . . . . . $500
    Adjustment (reduction) in Accuracy Related Penalty .($300)


    A computation should be provided for each penalty that is abated.

  6. Since a taxpayer’s request for abatement of unpaid tax does not constitute a valid claim within the meaning of IRC section 6511;Form 3363, Form 2297and Letter 569cannot be used since the taxpayer has no judicial rights. Instead, the following procedures should be used for claims for abatement:

    1. Letter 693should be used for no change, allowance in part and allowance in full determinations.

    2. Prepare and mail Letter 693to the taxpayer and keep a copy for the case file.


    Abatements due to audit reconsiderations have certain appeal rights and use different letters. See IRM 4.13.4.

  7. Form 3198,Special Handling Notice, should be annotated "Supplemental Report - Reduction of Previously Assessed Tax" if the informal claim is allowed in part or in full. In all cases an annotation should be made indicating the Letter number and date it was issued.  (08-11-2006)
90-Day Pre-Assessment Cases

  1. A Statutory Notice Audit Reconsideration case is one in which the taxpayer received a notice of deficiency (determination) and requests reconsideration of the deficiency (determination). It is a priority case and must be closed back through Technical Services. It does not suspend or extend the 90 or 150 day time period to petition Tax Court.

  2. Because of the time constraints, the taxpayer should be advised that the Statutory Notice period cannot be extended by submitting information or by an audit reconsideration. The taxpayer is solely responsible for filing a petition before the Statutory Notice period expires if he/she does not agree with the adjustments or results of the audit reconsideration. All communication to the taxpayer should include the following statement: "The reconsideration of your case will in no way serve to suspend or extend the 90-Day period in which a petition for a redetermination of the proposed deficiency may be filed with the Tax Court."

  3. Audit reports should be prepared based upon the transcript taxable income and tax per return or as previously adjusted before the statutory notice.

  4. In the Other information of the RAR, make the following remarks: "This report is only a supplement to the Notice of Deficiency. It does not supersede the previous report nor does it serve to extend the 90-Day period for filing a petition to the United States Tax Court. If you do not agree to these adjustments, we may be required to assess the tax shown on the statutory Notice of Deficiency." Also, the "45 day " or the "subject to the Area Director" clauses should be removed on supplemental reports.

  5. Clearly label the top of the revised report as a "Supplement to the Notice of Deficiency (Determination)" . Date the Supplemental RAR with the current date.
    The examiner can obtain signatures on an audit report from the taxpayer at the time of the audit reconsideration interview but should not issue a cover letter. The 90-Day Coordinator/Reviewer is responsible for checking the audit report for accuracy before the Supplemental Notice and appropriate closing letters are mailed to the taxpayer.

    1. If the information results in no deficiency and Technical Services concurs, the taxpayer will be advised by 90-Day Coordinator/Reviewer that there is no need to file a petition with Tax Court.

    2. If the information results in no-change to the Statutory Notice, no report is given the taxpayer and the examiner will respond accordingly to the 90-Day memo from Technical Services. The 90-Day Coordinator/Reviewer will issue the appropriate letter to the taxpayer.

    3. If the information results in a partial decrease, agreement signed and Technical Services concurs, the taxpayer will be advised by 90-Day Coordinator/Reviewer that there is no need to file a petition with Tax Court.


      If only one spouse signs the report, and filing status is Married Filing Joint (MFJ), an MFT 31 assessment will be made on the taxpayer signing the report.

    4. If the information results in an increase to the Statutory Notice deficiency, the deficiency line of the supplemental report should be labeled " Limited to amount on Notice of Deficiency (Determination)." The amount assessed from the revised Notice cannot be larger than the amount on the original Notice. Consideration should be given to issuing an additional notice of deficiency for the increased deficiency if the statute of limitations on assessment is still open and a petition has not been filed with the Tax Court.  (06-10-2005)
Reports For Cases Reopened By Examination

  1. A report of re-examination is used when a taxpayer’s books and records are re-examined as the result of the Service initiating the action using the case reopening criteria set forth in Policy Statement P-4-3 see IRM Rev. Proc. 2005–32.

  2. When a contact falls under reopening criteria, prior approval must be obtained using Form 4505before starting the examination.

  3. Use the appropriate forms for the entity and type of closing. Once prepared, write "Reopening" in capital letters on the top of the report.

  4. Prepare the report as you would a supplemental report. In the Other information section state "This report supplements the report dated mm/dd/yyyy."

  5. Re-examination reports require special processing. Form 3198,Special Handling Notice, should be annotated "Reopening Case."

  6. A re-examination report should not be used for a closed deficiency assessment reconsidered at the taxpayer’s request (audit reconsideration). See IRM  (08-11-2006)

  1. Claims may relate to any item of income, loss, exclusion, deduction, or credit involving a refund of tax. Claims may be filed by use of the following forms:

    1. Claim for Refund and Request for Abatement, Form 843,

    2. An amended return (specified on the tax return),

    3. Amended U.S. Individual Income Tax Return, Form 1040X,or

    4. Amended U.S. Corporation Income Tax Return, Form 1120X.

  2. An "informal claim" is one that is submitted by the taxpayer either on a non-standard form (written request) or by some other means if the required elements are identified, i.e. tax year, identification number, refund requested and reason. A claim for abatement is NOT an informal claim. Examples of informal claims are signed Form 870or Form 4549for an overassessment, letter sent by the taxpayer requesting a refund, or oral statements made to an examiner or other service representative.

  3. There are four possible results when a claim is examined. The claim may be:

    1. Allowed in full,

    2. Disallowed in full,

    3. Partially allowed, or

    4. Offset by other adjustments.  (05-14-1999)
Transcript of Account

  1. Before preparing a report on a case involving a claim, examiners must have a current transcript of the taxpayer’s account.

  2. If the claim is the result of a prior audit or assessment, TC 300 or TC 290 with a dollar amount will be posted. The "as adjusted " figures shown on the original report will be used as the starting point.

  3. If the claim has already been allowed by the service center, TC 291 with a dollar amount will be posted.  (06-10-2005)
Claims Allowed in Full

  1. If the claim is allowed in full, Letter 570 (DO/SC/IN/PR) will be prepared to notify the taxpayer of the findings. Since receipt of Letter 570by the taxpayer constitutes a closed case (subject to the case reopening criteria), the letter generally should not be furnished to the taxpayer until the entire case is ready to close.

  2. If the amount claimed has already been refunded to the taxpayer by the campus, the examiner will close the case as a regular no change case.

  3. Even though the issues stated in a claim are allowed in full, if offsetting adjustments are proposed which reduce the amount refundable, the claim will be treated as a partially or wholly disallowed claim. The procedures for claims disallowed in full or in part will be followed.  (06-10-2005)
Claims Disallowed in Full or Part

  1. When a claim is disallowed in full or in part the examiner will prepare the following:

    1. Letter 569,Combination 15 and 30 day letter;

    2. Form 2297,Waiver of Statutory Notification of Claim Disallowance; and

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

  2. An examination report, Form 4549will be prepared if additional tax is due or if there is a partial disallowance.  (05-14-1999)
"No - Show" Claim Disallowance

  1. When a claim is disallowed because the taxpayer failed to appear for an interview or to provide substantiation, the following explanation will be shown at the end of Letter 569;
    "No basis for the allowance of the claim has been submitted."  (06-10-2005)
Form 2297, Waiver of Statutory Notice of Claim Disallowance

  1. Form 2297,Waiver of Statutory Notice of Claim Disallowance, is applicable in all cases where there is a complete or partial disallowance of a formal claim.

  2. IRC section 532(a)(3) provides that a taxpayer may file a written waiver of the requirement that a notice of disallowance of a claim in whole or in part be sent by certified or registered mail. The effect of such waiver is to start the running of the two year period for filing suit on the claim from the date the waiver is filed. Thus, Form 2297accomplishes the same purpose as a notice of the disallowance of a claim by certified or registered mail, except that it does not affect the six month waiting period required by IRC section 6532(a) before filing a refund suit [Treas. Reg. 301.6532–1(c) - Periods of limitation on suits by taxpayers].

  3. Since Form 2297constitutes a waiver of only the statutory notice being sent by certified or registered mail, a waiver form (Form 870, 4549, or 3363) is required in addition to Form 2297,if there is a partial overassessment or if additional tax is assessed.

  4. Form 2297should be enclosed in the case folder in the same manner as other waiver and acceptance forms. Where claims for multiple years are disallowed, Form 2297 covering all years should be associated with the claim or amended return covering the most recent year.

  5. Since Form 1045,Application for Tentative Refund, and Form 1139,Corporation Application for Tentative Refund, are not considered "Claims," it is not necessary to use Form 2297where the tax previously refunded is recouped.


    If it is determined the tentative refund was unwarranted or excessive, the Service has three options:

    1. Treat the excess refund as a mathematical error and immediately assess and collect it under the authority of IRC § 6213(b)(3),

    2. Issue a Notice of Deficiency pursuant to IRC § 6501(h), or

    3. File suit against the taxpayer to collect the erroneous refund pursuant to IRC § 7405(b).

  6. Form 2297should not be secured in cases that require review by the Joint Committee. See IRM  (08-11-2006)
Instructions for Completing Form 2297

  1. Name and Address — write or type the name and address of the taxpayer; include the SSN or EIN.

  2. Taxable period ended — list each year for which a claim has been filed and disallowed in part or in full on separate lines as follows:

    • Calendar Year — Show ending date (12/31/01)

    • Fiscal Year — Show ending date (6/30/01)

    • Short period — Show beginning and ending date (1/1/01 – 9/30/01)

    • 52–53 Week Year — Show last day of year (5/25/01)

  3. Kind of Tax — show the type of tax covered by the return under examination such as income, estate, gift, or employment tax. It is not necessary to show the form number of the return under examination or to identify the type of income, such as individual income or corporate income.

  4. Amount of Claim information should be entered as follows:

    1. Where a Form 843, 1040X, 1120X, or an informal claim states a definite dollar amount, enter the amount in the "amount of claim" space.

    2. Where an amended return shows the computation of the corrected tax, enter the difference between the corrected amount as computed by the taxpayer and the tax as shown on the original return in the " amount of claim" space.

    3. Where a claim is filed for "$1 or more" and no details are shown as to the amount of reduction in income, enter $1 as "amount of claim." When details are shown as to the amount of reduction in income but computation of the amount of tax refund is not shown on the claim, compute the amount of the claim based upon reduction of income shown by the taxpayer and enter this figure as " amount of claim."


      1. A taxpayer is required to provide a realistic claim amount by Treas. Reg. § 301.6402–3(a)(5), which provides, "A return or amended return shall constitute a claim for refund or credit if it contains a statement setting forth the amount determined as an overpayment and advising whether such amount shall be refunded to the taxpayers or shall be applied as a credit against the taxpayers’ estimated income tax for the taxable year immediately succeeding the taxable year for which the return (or amended return) is filed."


      2. A $1 claim amount may be acceptable for "protective claims." The concept of a "protective claim" is well established although this term is not used in the statute or regulations. Protective claims are often filed to preserve the taxpayer’s right to claim a refund when the taxpayer’s right to the refund is contingent on future events and may not be determinable until after the statute of limitations expires. See IRM, Protective Claims, which indicates that a protective claim is based on an expected change in the tax law, other legislation, regulations, or case law. A general claim should not be viewed as a valid protective claim for Service processing purposes merely because the taxpayer labels it as such. See Nucorp, Inc. v. U.S. 23 Cl. Ct. 234, 67 A.F.T.R.2d 91-1256, 91-1 USTC P 50,235.


      3. In general, a valid protective claim must (1) identify the contingency affecting the claim; (2) be sufficiently clear and definite to alert the Service as to the essential nature of the claim; and (3) identify a specific year or years for which the refund is sought. The claim may be a valid protective claim even though it does not state all the facts necessary to establish that the taxpayer is entitled to a refund. The Service has discretion in deciding how to process protective claims. In general, it is in the interests of the Service and taxpayers to delay action on protective claims until the pending litigation or other contingency is resolved. Once the contingency is resolved, the Service may obtain any additional information necessary in processing the claim and then reject or allow the claim.

    4. Where a claim is filed for "entire amount of tax paid," enter the entire amount of tax shown on the return.

    5. Where a claim is filed for "such amount as may be due" and no details are shown and a computation cannot be made, enter "indeterminable" in the "amount of claim" space and explain in the "Other Information " section of Form 4549. When details are shown and a computation of the tax refund can be made, enter the computed figure.

  5. Amount of Claim Disallowed — See Exhibit 4.10.8-4.

    Claim Amount $2100
    Allowed in Full but Offset by Other Adjustments  
    Line 16 of Form 4549 ($ 892)
    Amount of Claim Disallowed $1208

  6. Signature — see instructions at the bottom of the form.  (06-10-2005)
Agreed Cases: Acceptance of Proposed Disallowance of Claim for Refund or Credit (Form 3363)

  1. Form 3363is to be used in " agreed cases" where a Form 843or an amended return is disallowed in full or part and no other adjustments to the tax liability are necessary.

  2. In an agreed case where the claim is being disallowed in full or part with additional adjustments to the tax liability, both Form 3363and an examination report should be secured. See IRM for information to be included in the remarks section of the report.

  3. Forms 1045 and 1139 are not considered claims. Form 3363is not used to reflect any recoupment of the tax previously refunded.  (06-10-2005)
Instructions for Completing Form 3363

  1. Name and Address — write or type the name or address of the taxpayer; include the SSN and EIN.

  2. Year or Period — List each year for which a claim has been filed on separate years as follows:

    • Calendar Year — show ending date (12/31/01),

    • Fiscal Year — show ending date (6/30/01),

    • Short Period — show beginning and ending date (1/1/01 – 9/30/01),

    • 52–53 Week Year — show last day of year (5/25/01).

  3. Date Claim Filed — enter date Form 843 or amended return was filed.

  4. Kind of Tax — enter the type of tax covered by the return under examination, such as income, estate, gift, or employment tax. It is not necessary to show the form number of the return under examination or to identify the type of income, such as individual income or corporate income.

  5. Amount of Claim — enter the amount of refund requested in the claim (Form 843, 1040X, 1120X, amended return or informal claim) filed by the taxpayer.

  6. Amount of Claim Disallowed — enter the amount of claim disallowed per RAR.

  7. Amount of Claim Allowed — enter the amount of claim allowed per the RAR.

  8. Signature — see instructions on the form.  (06-10-2005)
Unagreed Cases: Reports

  1. When a claim is disallowed in full or in part in an " unagreed" case and there are no other adjustments, complete the top portion of the report for unagreed cases. See IRM An appropriate statement regarding the disallowance of the claim is to be included in the "Other Information" section. See IRM

  2. When a claim is allowed in full or in part in a partially agreed case with other adjustments, complete Form 4549–A. A statement, regarding the disposition of the claim, is to be included in the "Other Information" section.

  3. When a claim is allowed in full in an unagreed case with proposed deficiencies, complete Form 4549–AA statement, regarding the allowance of the claim, is to be included in the "Other Information" section.  (08-11-2006)
Form 4549–A "Other Information" Section: Statements Regarding Disposition of Claims

  1. Claim Allowed in Full:
    "On (date) you filed Form 843, 1040X, 1120X, or an informal claim for a refund of $ (amount) for (year). As the result of our examination, we allowed your claim in full, as shown in this report."

  2. Claim Allowed in Full but Offset by Other Adjustments:
    " On (date) you filed Form 843, 1040X, 1120X, or an informal claim for refund of $ (amount) for (year) . As the result of our examination, we allowed your claim in full. The total amount of the refund is, however, increased or decreased by other adjustments shown in this report."

  3. Claim Allowed in Part:
    "On (date) you filed Form 843, 1040X 1120X, or an informal claim for a refund of $ (amount)for (year). As the result of our examination, we allowed your claim in part, as shown in this report."

  4. Claim Rejection:
    "On (date) you filed Form 843, 1040X, 1120X, or an informal claim for refund of $ (amount) for (year)."

    1. Each claim rejection statement should have a concise statement of the issue, and the authority for rejecting the claim. For example:
      "As the result of our examination, we have disallowed your claim. Expenses for education not needed in your present employment are considered personal and, therefore, are not deductible as a business expense. See Treas. Reg. § 1.162–5."

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