4.19.11  Examination Classification of Work

4.19.11.1  (11-09-2007)
Examination Classification of Work

  1. This section provides information on the classification and screening processes. It contains instructions to assist classifiers/screeners.

  2. Returns that require classification (automatics, specials, and DIF orders) will be shipped to the Campus with the BOD compliance that is mapped to the home state of the filer.

4.19.11.1.1  (11-09-2007)
Audit Reconsideration Program

  1. For procedures for working IMF audit reconsiderations see IRM 4.13, Audit Reconsideration.

  2. Audit Reconsiderations for BMF are sent to BMF Classification for determination.

4.19.11.1.2  (11-09-2007)
What is Classification?

  1. Classification is the process of determining:

    1. whether a return should be selected for examination,

    2. what issues should be examined, and

    3. how the examination should be conducted.

  2. According to Policy Statement P-4-21, the primary objective in identifying tax returns for examination is to promote the highest degree of voluntary compliance.

  3. Due to limited resources, the IRS can examine only a small percentage of the returns filed. The classifier’s role is to ensure that these resources are used effectively.

  4. The classifier must decide which returns are most in need of examination. Thorough examination promotes the highest degree of voluntary compliance. See Exhibit 4.19.11-1 for an overview flowchart of the Campus Examination Operations.

  5. Classification should be conducted by the most technically proficient experienced examiners, who have received appropriate tax law training.

  6. The Operations Manager, Examination, ensures that each employee assigned to Classification is able to recognize and identify a tax return that has an early statute expiration, and is aware of the statute control procedures.

  7. The examiner should be familiar with the Classification Handbook.

4.19.11.1.3  (11-09-2007)
Procedures for Screening Individual Returns

  1. Once you determine that the return will not be accepted as filed, decide if the examination should be conducted by a:

    • Revenue Agent,

    • Tax Auditor, or

    • Tax Examiner.

  2. This determination is based upon:

    • the complexity of issues involved,

    • the degree of accounting and auditing skills required to perform the examination, and

    • whether it can be effectively done by correspondence

  3. Do not exclude substantial issues to convert what would be a Revenue Agent examination to a Tax Auditor examination.

  4. Do not exclude substantial items from the checksheet to convert what might be an interview examination to a correspondence examination.

  5. The number of issues, standing alone, do not determine whether or not the return is to be examined by a Revenue Agent or a Tax Auditor.

  6. Examples of items which generally cause the return to be identified for field examination:

    1. Returns which require an in-depth knowledge of accounting principles.

    2. Issues which require on site inspection of the taxpayer books, records or assets and/or visitation of the taxpayer place of business.

    3. Complex Schedule D transactions.

    4. Returns with unusually complex rental income and expenses.

    5. Tax shelter returns.

    6. Donations of real property which would involve an engineering specialist.

    7. Alimony - if it appears there is a property settlement involving business property (accounts receivable, etc.).

    8. Returns which would most likely have voluminous records.

    9. Extensive time frame required to complete the examination.

    10. Inventories are substantial and material.

    11. Termination of business before the end of the taxable year.

    12. Unusual issues that appear to be complex and time consuming to develop (Complex oil or mineral explorations, unstated interest (IRC Sec. 483), nontaxable transfers, etc.).

    13. Size of a business (high gross receipts, etc.).

    14. Businesses not adaptable to office examination, such as manufacturers, auto dealers, and funeral parlors.

    15. Individual returns requiring the full accounting skills of a Revenue Agent, if a Tax Compliance Officer is not available in the geographical location of the taxpayer

  7. Training Returns—Selected returns meeting training criteria are identified during each classification detail. Corporate returns with Activity Code 219 or higher may be classified for single issues for LMSB Remote Examinations.

  8. Single issues should generally not be examined. Experience has shown that when other questionable items are not present on the return, these examinations frequently result in insignificant or no tax change.

  9. Considerations which should cause a return to be selected for Correspondence Examination:

    Appropriate for Correspondence Exam W&I and SB/SE Not Appropriate for Correspondence Exam
    All the questioned items are susceptible to direct verification from records that could be easily submitted by mail. Simple Travel and entertainment, EBE, Schedule C, E, F, Form 2106 can be selected for Corr Exam.
    • Complex books and records for deduction for travel and entertainment and EBE.

    • Complex books and records for Sch. C, E, F and Form 2106

    Inspection of the previous or subsequent year returns is not necessary.
    • Returns in which the classifier feels an office interview is needed to ensure the taxpayer’s rights under the law, or

    • The appearance of the return (writing, grammar, neatness, etc.), indicates that the taxpayer may not be able to communicate effectively in writing.

  10. The following are general guidelines. Some program objectives may overlap between:

    • Correspondence work and field work, and

    • Between W&I and SB/SE BODs.

      Note:

      If the selected case for correspondence examination has documentation submitted by the taxpayer that indicates that the case is no longer conducive to be worked in correspondence exam, then the case may be transferred to the field.

    EXAMPLES OF ISSUES THAT ARE CONDUCIVE TO:
    Wage and Investment (W&I) Correspondence Exam Small Business/Self Employed (SBSE) Field Assistance Small Business/Self Employed (SBSE) Correspondence Exam
    Filing Status/Exemption Issues
    • Dependent exemptions

    • Credits related to them (EITC, Child Tax Credit, Child Care Credit, Adoption Credit etc.)

    • Education Credits (Hope Credit and Life Time Learning Credit)

     

    Note:

    Issues that are conducive to W&I are also conducive to SB/SE.

    Income Issues
    • Wages

    • Interest

    • Dividends

    • Taxable refunds

    • Alimony

    • Unemployment compensation

    • Social Security income received

    • Income exclusions such as
      personal injury,
      sick pay,
      disability pay issues can be worked.

    • IRA/Pension distributions

    • Other Income received - if Self Employment tax is not an issue.

    Any income issue that is beyond the scope of the correspondence examination, should be selected for Field Assistance, such as:
    • Forgiveness of debt,

    • Deferred compensation

    • Schedule D issues that require Examination of capital gains/losses Form 4797

    • Schedule C - income/expenses issues

    • Schedule E - Rental real estate, royalties, etc.

    • Schedule F - Farm income/loss,

    • Other Income received and

    • Needs to be characterized as Self Employment income.

    Adjustment to Income Issues:
    • IRA Deductions

    • Moving expenses

    • Alimony paid

      One-half of the
    • self-employment tax,

    • Self-Employment health Insurance deduction

    • Self-employed SEP, SIMPLE

    Itemized Deductions versus Standard Deductions
    • Medical and Dental Expenses

    • Real Estate Taxes

    • State Taxes Paid

    • Home Mortgage Interest

    • Points paid

    • Charitable contributions such ascash contributions,

    • Can consider working cases with Non-cash, contributions, such as:
      clothing,
      furniture,
      car, etc.,

    • Donated properties that do not require appraisal or engineering referral

    • Casualty or theft loss that are verifiable through correspondence audit

    • Miscellaneous Deductions such as:
      union dues,
      job education
      expenses,

      work clothes,
      etc.

    Items that should be selected for Field's Assistance:
    • Investment Interest Expense

    • Non-cash charitable contributions such as:
      donation of property such as art work, or
      item that requires appraisal or engineering

    • Contribution payments that are carried over from prior year

    • Complex casualty theft/loss that require research and verification of records

    • Miscellaneous deductions such as:
      investment expenses,
      attorney fees,
      gambling
      losses,
      transportation expenses

    • Employee Business Expenses - Form 2106

    • Office in Home deductions

    • Casualty theft/loss that does not require field work

    Tax
    • Alternative Minimum Tax

    • 10% Tax on IRA early withdrawal

    • Alternative Minimum Tax

    • Alternative Minimum Tax

    • Self-Employment tax

    • Household employment tax

    Credits
    • Education Credits (Hope Credit and Life Time Learning Credit)

    • Mortgage Interest Credit (Also, The District of Columbia First Time Homebuyers Credit)

    • Health Coverage Tax Credit

    • alternative Minimum Tax Credit (Form 8801)

       

  11. Pre-Contact Analysis - Returns may contain issues which, based on the classifier's judgement and experience, require examination planning and analysis by a Tax Auditor before contacting the taxpayer.

    Note:

    Local instructions (as provided by the area office(s) (AO)) will be followed in selecting a return for pre-contact analysis. These type returns must be kept to a minimum to utilize Centralized Files and Scheduling efficiently.

  12. Examples of types of returns which may be subject to pre-contact analysis:

    1. Returns with complex issues requiring research before contacting the taxpayer for examination.

    2. Returns with income low in relation to the taxpayers financial responsibilities and the audit technique may involve a net worth statement, gross profit reconstruction, or statement of application of funds (indirect methods).

    3. Returns exhibiting factors which indicate a need for visual inspection of the taxpayers place of business or residence.

    4. Any return (business or non-business) selected for 13 or more issues.

    5. Any return selected for examination having an indication that a Power of Attorney is on file.

    6. Business returns that contain more than one business schedule, either C or F, and both schedules should be examined in depth.

    7. Any return selected for Area Office or Campus Examination identified as an employee return. These returns should set the audit scope through use of the Classification Check sheet, Form 6754.

    8. A return selected with no issues identified.

    9. Returns where the Form 5546 contains the literal PDT for a potentially dangerous taxpayer.

    10. An Accounts Receivable Dollar Inventory (ARDI) Collectibility Indicator Code of B, N, or C, appears on Form 5546.

4.19.11.1.3.1  (05-21-2010)
Non-Business Issue Conducive to Correspondence Examination

  1. Following are suggested guidelines to assist examiners in identifying issues on the classification checksheet.

  2. Unique issues will arise. Classifiers selected should have broad experience and current knowledge of tax laws/regulations and IRS procedures.

  3. The classifier should consider all issues reflected on the return and use judgment in selecting the return with the highest potential for audit. IRM 4.19.11.1.5.2., Review of the Entire DIF Return. IRM 4.19.11.1.3.2. ,What are Significant Items.

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. Classifiers will not classify the same returns they will examine. If they receive returns to classify that they may be required to examine, they will return them to the manager for reassignment.

  6. Itemized Deductions: Consider overall potential based on the amount by which the itemized deductions exceed the standard deduction.

    1. Do not choose this issue if the potential for change is minimal because the taxpayer is entitled to standard deduction.

    2. Also verify that the itemized deductions are not claimed elsewhere on the return when standard deduction has been elected.

    3. See below for other specific itemized deduction items expenses.

    • A taxpayer claiming a dependent exemption who was claimed by another taxpayer, possibly by the non-custodial parent,

    • A taxpayer claiming himself as a dependent,

    • A taxpayer reporting married filing separate on the return, may not have made the same election for standard, or itemized deductions as the other spouse.

      Note:

      If the dependent children are claimed, the other spouse may also be claiming the same dependent exemptions.

  7. Medical Expenses: Classifier must consider overall medical, dental etc., expense in relation to the AGI.

    • Issues relating to medical expenditures for a capital asset that are not workable in correspondence examination can be selected for Field Assistance to work

    • High medical expenses for large families, deceased taxpayers, or older taxpayers are usually not productive. See IRM 4.19.15, Discretionary Programs.

  8. Taxes: For Real Estate Taxes, consider changes in address i.e., W-2, 1040). See IRM 4.19.15.23.2, Taxes Paid, for items that are not allowable.

  9. Interest Expenses:

    1. Productive issues could come from payments to individuals, and closing costs on real estate transactions.

    2. Home mortgage interest usually is unproductive unless the payments were made to an individual.

    3. Check for payments deducted as personal interest.

    4. Compare amounts reported on the IRP document, if applicable.

    5. See IRM 4.19.15.23.3, Home Mortgage Interest Deduction , for additional information.

  10. Charitable Contributions:

    1. Check for large donations made to any charitable organization.

    2. Check for payments that may represent tuition.

    3. Check for large donations of property, other than cash.

    4. Limit the scope of the Correspondence examination to cash contributions issue.

    5. Contribution in the form of donated clothing articles, furniture or car can be worked by Correspondence Exam. However, if the issue selected involves obtaining appraisals or engineering reports or are complex in nature, it should be classified for Field Assistance to work.

    6. Consider the ratio of the contribution to the taxpayer’s total positive income. See IRM 4.19.15.24.4.4, Charitable Contribution Rules , for more information

  11. Casualty or Theft Loss:

    1. Select cases that show no insurance reimbursement.

    2. Watch for business assets, valuation methods and statutory limitations.

    3. See IRM 4.19.15.25, Casualty and Theft Losses, for additional information on what documentation is acceptable.

    4. If the casualty/theft loss selected is not conducive for Correspondence Examination, it can be selected for Field Assistance to work.

  12. Miscellaneous Deductions:

    1. Scrutinize large, unusual or questionable items that do not correspond to the taxpayer’s occupation or income level.

    2. Classifier can select issues that are verifiable in a correspondence audit, such as union dues paid, work clothes etc.

    3. See IRM 4.19.15.27, Miscellaneous Deductions, for a list of items that are not allowed under this category.

    4. Select for field audit issues that will require a face to face interview.

  13. Pension and/or Annuity:

    1. Check whether the taxpayer received a premature distribution from a pension/profit sharing plan.

    2. Check to ensure that the amounts are not reported elsewhere on the return.

    3. Check whether the distribution qualified as a lump sum distribution.

    4. Program guidelines will be forthcoming for the 10% IRA penalty.

  14. Unreported Income:

    1. Consider if the income reported on the return is sufficient to support the exemptions and deductions claimed.

    2. Consider the sources of income and any omission of income.

    3. Compare income on return to the IRP documents, if available

    4. If the taxpayer lists his/her occupation as waiter, cab driver, porter, beautician, etc., tip income is a productive issue.

      Note:

      Amounts excluded that should also be considered, such as injury or sick pay, forgiveness of debt, disability pay from income.

    5. If the issues appear complex, it should be selected for the Field Examination.

  15. Moving Expenses:

    1. Check to see if the taxpayer actually moved via IDRS research on addresses.

    2. Check for employer reimbursement.

    3. Also consider sale of the residence.

  16. Alimony Deductions:

    1. Check to see if the social security number is a valid number.

    2. Check to see if the recipient has included this income.

    3. Consider whether the amounts shown are part of child support expenses or property settlement

  17. Credits: Consider the various credits found on the return jointly with other issues selected on the return. Credits include:

    • EITC,

    • Dependents,

    • Child Tax Credit,

    • Child and Dependent Care Credit,

    • Education Tax Credits - Hope and Lifetime Learning

    • Telephone Excise Tax, and

    • Qualified Adoption Expenses.

    See IRM 4.19.14.1.3.10 through 4.19.14.1.3.13.

4.19.11.1.3.2  (11-09-2007)
What are Significant Items?

  1. Invariably, the definition of significant will depend on your perception of the return as a whole and the separate items that comprise the return. However, there are several factors to consider when determining whether an item is significant:

    1. Comparative size of the item—A questionable expense item of $6,000 with total expenses of $30,000 would be significant; however, if total expenses are $300,000, ordinarily the item would not be significant.

    2. Inherent character of the item—Although the amount of an item may be insignificant, the nature of the item may be significant; i.e., airplane expenses claimed on a plumbers Schedule C.

    3. Evidence of intent to mislead—This may include missing, misleading, or incomplete schedules or incorrectly showing an item on the return.

    4. Beneficial effect of the manner in which an item is reported—Expenses claimed on a business schedule rather than claimed as an itemized deduction may be significant.

    5. Relationship to/with other item(s) on a return—Business expenses with corresponding income.

    6. Similarly, the lack of dividends reported when Schedule D shows sales of stocks.

      Note:

      For an in-depth discussion of materiality, see IRM 4.51.3.3.5, Key Principles of Materiality and Other Considerations.

4.19.11.1.3.3  (11-09-2007)
Classification and Screening of High DIF Score Correspondence Examination Issues

  1. High Discriminant Index Function (DIF) score returns selected for Correspondence Examination are screened for other issues.

    1. Selected returns must be reviewed promptly.

    2. Use the most technically qualified people with DIF screening experience to perform the reviews.

    IF THEN
    Filed returns for previous tax year are ordered before cycle 27 Screen for other issues.
    Returns are ordered after cycle 26 Screen only for issues with adverse impact to tax administration.
    Return is Form 706, United States Estate Tax Return, in a Math/Clerical Abatement program Screen for other issues.
    Return is Form 709, United States Gift Tax return, in a Math/Clerical Abatement program Screen other issues score.
    Return is Form 1120, U.S. Corporate Income Tax Return, received in a Math/Clerical Abatement program

    Note:

    If Activity Code 219 or higher, transfer to LMSB PSP analyst.

    Screen for high DIF score.
    Criteria for correspondence examination becomes invalid Transfer to Area Office Examination function.
    Returns selected for more than one correspondence program Convert to source code 06 using Form 5349, Examination Correction Request.
    Return involves a frozen refund being converted to DIF CORR Submit Form 3177, Notice of Action for Entry on Master File, to release refunds.
    Contact has been made with the taxpayer on an unallowable return and is identified as an abatement issue. Expedite completion due to frozen refund.
    Returns are selected and ready for initial contact Send to support or clerical areas to put in folders.
    An abatement of a Math/Clerical error is found
    1. Copy and suspense until original case is returned;

    2. Send to adjustments for abatement, and

    3. Follow up in 5 weeks if not returned.

    Error Copy of Form 3354, Adjustment Assessment Document, is received with amended return and any taxpayer correspondence Forward case to Campus Examination to include adjustment in examination report.
    Case is not examined (mis- coded Unallowable)
    1. Close out original return as non-examined;

    2. Send amended to adjustments on Form 1725, Routing Slip and note: "tax on amended return must be assessed, release Transaction Code (TC) 570 or 576 with TC 571 to expedite reversal."

    • Amended return is an over assessment and

    • Master File shows original return in Examination

    Send amended to Correspondence Exam for consideration of the claim.
    • Amended return is an over assessment and

    • It will not be examined .

    Allow the claim
    Amended and original return are a closed examination Return claim or amended to adjustments with Form 1725, Routing Slip and note, "amended must be assessed or allowed, examination is closed, release any TC 577 or 570" .
    • Taxable amended received with open TC576 or TC 570 on Master File and

    • A Form 5101, Examination Referral Slip noting amended is not assessed and

    • The reason for referral is a TC 576 or TC 570

    Forward to Correspondence Exam if original return is under examination to incorporate in report and tax will be assessed.

  2. Classification will not receive tax returns from the Research Branch when the return is missing from the block. For a missing return:

    IF THEN
    Not found after extensive research (two requests for the document after checking Master File)
    1. Obtain manager approval to close the case.

    2. Close on Form 5351, Examination Non-Examined Closing, using disposal code 29.

4.19.11.1.4  (11-09-2007)
Sources of Returns for Classification

  1. DIF and Non-DIF tax returns are selected for examination:

    • By computer, or

    • By manual identification.

    DIF Returns Non-DIF Returns
    Discriminate Index Function (DIF) returns are scored and selected for examination by computer
    • Returns with the highest scores are delivered for screening by technicians.

    • Generally, the higher the score, the greater the probability of significant tax change.

    • Scores for returns of different examination classes are not comparable.

    • DIF scores indicate examination potential of the return as a whole including unreported income.

    • However, it is necessary to manually screen most returns received to identify the issues in need of examination and to eliminate those returns not warranting examination.

    Non-DIF returns are manually classified to select returns that:
    • Contain significant issues likely to result in tax changes, or

    • Requires examination to achieve voluntary compliance by an identifiable group of taxpayers.

4.19.11.1.5  (11-09-2007)
Computer Identification of DIF

  1. The DIF system is used to evaluate the examination potential of:

    • All individual returns

    • All Form 1120 returns for those corporations with assets of less than $10 million

    • S Corporations

    • Partnership returns where there are 10 partners or less

  2. In addition, returns possessing certain features are characterized as automatic or special feature returns. They are routed directly to Examination Classification function for manual screening for exam potential.

4.19.11.1.5.1  (11-09-2007)
How DIF Works

  1. DIF is a mathematical technique used to score income tax returns as to examination potential.

  2. Under this concept, mathematical formulas are developed based on available TCMP data and are programmed into the computer.

  3. The computer identifies returns by assigning weights to certain basic return characteristics.

  4. These weights are added together to obtain a systemic composite score for each return processed.

  5. This score is used to systemically rank the returns in numerical sequence (highest to lowest).

  6. Generally, the higher the score the greater is the probability of significant tax change.

  7. The highest scored returns are made available to Examination upon request.

  8. DIF mathematical formulas are confidential in nature and are distributed to IRS personnel only on a need-to-know basis.

  9. DIF formulas are for official use only and will not be discussed with unauthorized personnel.

  10. Furthermore, the DIF score assigned to a return should not be disclosed.

  11. Many returns, both individual and corporate, that are examined each year are DIF returns.

4.19.11.1.5.2  (11-09-2007)
Review of the Entire DIF Return

  1. Regardless of the type or class of return being classified/screened, you must first review the return in its entirety. This is important in that it:

    1. Quickly gives a complete overview of the total return.

    2. Establishes the interrelationship of the various income, expense, and credit items on the return.

    3. Puts you in a position to evaluate each item as to its significance.

    4. Provides an opportunity to quickly eliminate items or areas of the return with minimum or no examination potential.

  2. Remember that the DIF score indicates the overall tax change potential of the return as a whole.

    • Do not assume that any single item on a return caused the return to receive a high DIF score.

    • The absence of an item(s) may have been equally important in the scoring process.

    • In other words, the significant items that the classifier identifies may or may not have been scored.

  3. Give equal consideration to items that would result in potential over assessments.

  4. Classifiers need to be aware of the potential issues affecting the selection or acceptance of the return:

    IF THEN
    You identify a relationship with the taxpayer which may create a potential conflict of interest Immediately bring it to the attention of your manager.
    The type of return, or industry, or potential issues are unfamiliar to you Bring it to the attention of your manager.
    Frivolous filings are identified (See IRM 4.10.12, Frivolous Return Program)
    • Refer to Ogden, Attn: FRP M/S 4450, 1973 N Rulon White Blvd., Ogden, UT 84404, or

    • Coordinate with the FRP Technical Advisor. See LEM 4.19.1.

    Questionable returns which indicate fraudulent refund schemes are identified Report them to:
    • QRDT (Questionable Refund Detection Team) at the Campus and

    • The Area Office Examination Territory Managers.

      Note:

      See IRM 4.19.10.1.11.1, Questionable Refunds, for additional information.

    A preparer project return is identified See IRM 4.19.10.1.11, Return Preparer Penalties, for additional information.
    The return is reviewed for international issues and the issue is present Refer to an international examiner.

  5. All returns are identified for assignment to:

    • A Revenue Agent,

    • A Tax Auditor, or

    • A Tax Examiner.

  6. Assignment is based upon:

    • The complexity of the issues involved,

    • The degree of accounting and auditing skills required to conduct a quality examination,

    • The degree of tax law knowledge required, and

    • Whether the issue can effectively be examined by correspondence.

  7. Give priority treatment to early expiration returns.

    • These are returns with 120 days or less remaining on the assessment statute that are received in Classification.

    • The returns are immediately classified.

    • If a return is selected for examination, it must be enclosed in a red file folder and Form 895, Notice of Statute Expiration, prepared.

  8. During the classification process:

    • The scope of the examination is determined for all Tax Auditor and Tax Examiner returns (except for pre-contact analysis returns), and

    • For designated Revenue Agent returns.

  9. Each Area Office prepares local classification instructions, to assist the Campuses when classifying returns for the Area Office(s). These instructions cover the following topics:

    1. Local issues (productive and nonproductive issues, and specialized issues.)

    2. Questionable practitioners.

    3. Criteria for office examination extended time slot cases.

    4. Criteria for determining whether individual returns should be examined by Tax Auditors or Revenue Agents.

    5. Training return guidelines.

    6. Area Office policy on identifying returns for pre-contact analysis.

4.19.11.1.6  (05-21-2010)
Form 1040 Individual Returns Scored by DIF System (Audit Code Definitions)

  1. All individual returns are computer scored under the DIF system.

  2. Some returns are identified as Specials.

    • These are determined via Audit Codes placed on the return during processing because special features are on the return.

    • They are normally delivered automatically, but in some cases they must be ordered.

    Order them as noted below:

    Audit Code Definition
    Audit Code B
    1. Returns with a missing Schedule C, D, E, or F, or Form 4797 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ for which no reply was received from the taxpayer when the IRS corresponded to get the schedule/form. See IRM 4.19.11.1.5, Computer Identification of DIF.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Form 8829 is not attached.

    Large Dollar Deductions (Previously Audit Code C) Computer Identification of DIF≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ claimed on Schedule A.
    Audit Code D High Income non-filer identified by Collection. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .
    Audit Code H International:
    1. Form 1116 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Form 926, 3520, 3520A, 3646, or 5713 attached to return.

    3. Foreign Trust Account.

    Audit Code K Preparer identified≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .
    Audit Code L
    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Audit Code N Returns reflecting income which may be subject to Self-Employment Tax.
    Audit Code P AMT: Missing Form 6251, individual returns (W&I or SB/SE) with SC 26. Returns are sent to the Campus as automatics.
    Audit Code Q Form 8082, Notice of Inconsistent Treatment or Amended Return (Administrative Adjustment Request).
    Audit Code T International: Form 5471 is attached.
    Audit Code W Alternative Minimum Tax: Form 6251 filed. These returns may be ordered. Criteria defined as: AMT with Depreciation over $250,000 other then straight line.

  3. Below are specific actions needed on some returns delivered as Specials:

    Audit Code or Type Action Needed
    Audit Code B
    1. Cases selected for field examination should be sent directly to the Area Office PSP.

    2. Cases selected for office examination should be established on the Centralized Files and Scheduling data base, using a priority code, as established by local procedures.

      Note:

      Generally, Audit Code B cases have such a low DIF score that they will be excess surveyed unless a priority code is used to elevate the examination potential.

    3. Cases not selected for field or office examination should be considered for correspondence examination to disallow the loss item not supported by appropriate schedules.

    Large Dollar Deductions (previously Audit Code C)
    1. For non-cash contributions other than publicly traded securities, an appraisal must be attached to the return.

    2. Items to consider include:

    1. Is the Form 8283 properly completed?

    2. Was the appraisal made within 60 days of the donation?

    3. Does review of the appraisal raise questions regarding the authenticity, or judgements made by the appraiser; i.e., does the appraisal indicate the appraiser never personally inspected the property, or make other qualifying statements?

    4. If the donee organization has sent an acknowledgment letter, rather than signing the 8283, is information given indicating the value by the appraiser suspect; i.e., a boat donated to a conservation agency valued at a large amount of money, and the agency states the boat was sunk for an artificial reef.

    5. Returns selected for examination should be flagged, via Special Handling Notice, or other method to alert the Area Office for potential assignment to an issue specialist, and

    6. Should be forwarded directly to the Area Office PSP.

    Audit Code D
    1. These returns are for high income non-filers who did not file tax returns until contacted by the IRS. ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The Information Returns Master File (IRMF) Transcript should be generated automatically, and be distinguished by the literal "Audit Code D" in the top line of the IRMF.

    2. These returns should be closely screened for indications of unreported income.

    3. Strong consideration should be given to obtaining a three-year MACS comparison for these taxpayers, to assist in the classification

    4. Selected returns for Area Office examination should be sent directly to the Area Office PSP.

      Note:

      Do not put in Centralized Files at the campus.

    5. Returns selected for correspondence examination should be assigned immediately≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    Audit Code Q
    1. These returns should be screened for the significance of the inconsistency.

    2. Large discrepancies should be selected and sent directly to the Area Office for examination or adjustment.

  4. Certain individual low and medium non-business returns are conducive to correspondence-type examination.

  5. These returns are scored using the same DIF formulas as other returns within those Examination Classes but are computer identified as "DIF CORR" returns.

  6. CORR returns are intended to be used for the Campus Examination Program.

  7. Returns identified as "DIF CORR" can be ordered by SB/SE Area Offices with prior written approval from the Compliance Director.

4.19.11.1.7  (11-09-2007)
Form 1120, U.S. Corporation Income Tax Return

  1. Corporation returns are either computer scored under the DIF system or manually classified.

  2. The Corporation DIF system, available for ordering in bulk, includes:

    1. High Asset returns (assets $10,000,000 and above, activity codes 219 through 225) are not DIF scored and are delivered automatically to Classification at the Ogden Compliance Campus.

    2. Miscellaneous corporate returns are not DIF scored.

  3. These returns are computer identified and maintained on the Master File, and should have a sample ordered via the DIF ordering system.

  4. An optional procedure would be to classify these returns pulled by the Statistics of Income Division (SOI) before shipment to SOI:

    TYPE DEFINITION
    1120 PHC - LA 1120 Personal Holding Company - Low Asset.
    1120L U.S. Life Insurance Company Income Tax Return.
    1120PC U.S. Property and Casualty Insurance Company Income Tax Return.
    1120S - LA 1120S - Low Asset.
    1120 Inac - LA 1120 Inactive - Low Asset.
    1120H U.S. Income Tax Return for Homeowner Associations.
    1120SF U.S. Income Tax Return for Settlement Funds.
    1120 REIT U.S. Income Tax Return for Real Estate Investment Trusts.
    1120 RIC U.S. Income Tax Return for Regulated Investment Companies.
    1120ND Return for Nuclear Decommissioning Funds and Certain Related Persons.

  5. Certain corporation returns are identified as Specials based on specific conditions.

  6. These returns are automatically delivered to Examination for screening without a return order and are listed below:

    AUDIT CODE DEFINITION
    Audit Code 1 Disclosure Statement or Notice of Inconsistent Treatment attached.
    Audit Code 2 International Issues (Non-Automatic):
    1. Form 1120, Page 2, Schedule C (See LEM 4.19.1),

    2. Form 926 is attached,

    3. Form 1116 is attached and (See LEM 4.19.1),

    4. Form 1118 is attached and (See LEM 4.19.1),

    5. Form 1120, Schedule M-3 is attached and (See LEM 4.19.1),

    6. Form 1120, Schedule N is attached and (See LEM 4.19.1),

    7. Forms 3520/3520A,

    8. Form 5471 is attached,

    9. Form 5472 is attached,

    10. Form 5713 is attached and (See LEM 4.19.1),

    11. Form 8621 is attached and (See LEM 4.19.1),

    12. Form 8832 is attached and (See LEM 4.19.1),

    13. Form 8833 is attached,

    14. Form 8858 is attached,

    15. Form 8865 is attached, or

    16. Form 8902 is attached.

    Audit Code 3 Miscellaneous.
    Audit Code 4
    • Joint Committee or

    • Form 1120S converted to Form 1120 by Returns Processing.

    Audit Code 5 Foreign Ownership
    Audit Code 6 Foreign Bank Account
    Audit Code 7 International Issues (Non-Automatic):Is present if any of these conditions are present:
    1. Form 1120 Page 2, Schedule C is attached and (See LEM 4.19.1),

    2. Form 1116 is attached and (See LEM 4.19.1),

    3. Form 1118 is attached and (See LEM 4.19.1),

    4. Form 1120, Schedule M-3 is attached and (See LEM 4.19.1),

    5. Form 1120, Schedule N is attached and (See LEM 4.19.1),

    6. Form 5713 is attached and (See LEM 4.19.1),

    7. Form 8621 is attached and (See LEM 4.19.1).

    Audit Code 8 International: Form 5472.

  7. When there are multiple audit codes use the following priority:

    1. Audit Code 1 - Disclosure Statement or Inconsistent Treatment.

    2. Audit Code 2 - International - not automatic.

    3. Audit Code 4 - Joint Committee/Invalid Election.

    4. Audit Code 3 - Accounting Issues.

    5. Audit Code 7 - International Issues - not automatic.

  8. Corporation returns claiming credits which are not provided for in the ADP Handbook used by Code and Edit operation at the campuses, will be sent to the appropriate Submission Processing Campus Examination.

  9. Campus Examination will determine if the credits warrant examination and send the return back to Code and Edit advising them accordingly.

  10. If the return warrants examination, it will be processed as a special return, Audit Code 3 (Miscellaneous).

4.19.11.1.8  (05-21-2010)
Form 1120S, U.S. Small Business Corporation Income Tax Return

  1. S Corporation returns are either computer scored under the DIF system or manually classified. The S Corporation DIF system, available for ordering in bulk, includes:

    • Activity Code 288 - ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Activity Code 289 - ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. High Asset 1120S returns, Activity Code 290 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ are:

    • Not DIF scored and

    • Are delivered automatically to Classification at the Ogden Compliance Campus.

  3. Certain S Corporation returns are identified as Specials based on specific conditions.

    • These returns are delivered automatically to Examination for screening without a return order:

    Audit Code Definition
    Audit Code 1 Notice of Inconsistent Treatment or Disclosure Statement attached.
    Audit Code 2 International Issues (Non-Automatic):
    1. 1120S Schedule K, Line 14(1) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Form 926 is attached,

    3. 1120 Schedule N, Line 14(1) is attached ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ,

    4. Form 5471 is attached,

    5. Form 5472 is attached,

    6. Form 5713 is attached ,

    7. Form 8621 is attached ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ,

    8. Form 8832 is attached ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ,

    9. Form 8833 is attached,

    10. Form 8858 is attached,

    11. Form 8865 is attached,

    12. Form 8902 is attached, or

    13. Other foreign indicators are present

    14. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ "

    Audit Code 3
    • Form 8824 criteria, Change of Accounting Period, or

    • Section 444 election terminated.

    Audit Code 4 Form 1120S converted to Form 1120 by Returns Processing.
    Audit Code 5
    • Form 8283, Non-Cash Charitable Contribution,

    • Form 8586, Low Income Housing Credit, or

    • Form 8609, Low Income Housing Credit Allocation Credit attached.

    Audit Code 6 Foreign Indicator.
    Audit Code 7 International Issues (Non-Automatic):
    1. 1120S Schedule K, Line 14(1)≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Form 1120S, Schedule N≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. Form 5713, or

    4. Form 8621≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. When there are multiple audit codes use the following priority:

    1. Audit Code 1 - Disclosure Statement or Inconsistent Treatment.

    2. Audit Code 2 - International - not automatic.

    3. Audit Code 4 - Invalid Election.

    4. Audit Code 9 - First year S filer.

    5. Audit Code 3 - Accounting Issues.

    6. Audit Code 7 - International Issues - not automatic.

4.19.11.1.9  (05-21-2010)
Form 1065, U.S. Partnership Return of Income

  1. All partnership returns are identified under the DIF system and are available for bulk ordering. They will fall into one of the following Audit Classes:

    • Activity Code 481 - 10 or fewer partners, with Gross Receipts under $100,000

    • Activity Code 482 - 10 or fewer partners, with Gross Receipts $100,000 or more (send to Ogden CCP)

    • Activity Code 483 - 11 or more partners

  2. Certain partnership returns are identified as Specials based on specific conditions.

    • These returns are delivered to Examination without a return order being placed.

    • Any Partnership return identified with assets over $10 million should be sent to the Ogden Campus for LMSB classification.

    • These returns will be identified as follows:

    AUDIT CODE DEFINITION
    Audit Code 1
    • Form 8082, or

    • Form 8275, or

    • Form 8275R, or

    • Form 5471, or

    • Form 8865, or

    • Form 8621 is attached,

    • AND 761(a) election cases.

    Audit Code 2 International Issues - Non-Automatic - These types of cases contain the following types of issues.
    1. 1065 page 2, Schedule B has Box 1(e) checked and questions 3,6, and 10 (foreign indicators) are answered "yes" OR the number of FDEs at question 12 is greater than zero.

    2. 1065 Page 3, Schedule K has line item 17(1), Total Foreign Taxes,≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. One of the following forms is attached:

    1. Form 1042,

    2. Form 5471,

    3. Form 5472,

    4. Form 5713 ),

    5. Form 8621 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ,

    6. Form 8804,

    7. Form 8805,

    8. Form 8813,

    9. Form 8832 (See LEM 4.19.1),

    10. Form 8833 ,

    11. Form 8858,

    12. Form 8865, or

    13. Form 8902.

    Audit Code 3 Foreign Bank Account.
    Audit Code 5
    • Low Income Housing Credit or

    • Non-Cash Charitable Contributions.

    Audit Code 7 International Issues - Non-Automatic
    This audit code is present if any of the following conditions are present.
    1. 1065 page 2, Schedule B, Question 9 is answered "yes" .

    2. 1065 page 3, Schedule K line 17(1) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ,

    3. If one of the following forms is attached :

    1. Form 5713, and either one or both of the questions in 7(f) are not answered "yes" .

    2. Form 8621, is attached and

  3. When there are multiple audit codes use the following priority:

    1. Audit Code 1 - Disclosure Statement or Inconsistent Treatment.

    2. Audit Code 2 - International - not automatic.

    3. Audit Code 5 - Non-cash Charitable Contribution.

    4. Audit Code 3 - Distributions.

    5. Audit Code 7 - International Issues - not automatic.

4.19.11.1.10  (11-09-2007)
Form 1041, U.S. Fiduciary Income Tax Return

  1. The document specific area will assign an indicator (DIF-1041-CD) that will post to the Master File. It will identify the presence of certain line items checked on the original return. One of six values (01 through 06) will be assigned and will help in determining which audit selection category code should be used.

  2. AIMS will use the audit selection category codes to determine in which activity code to open a case (496, 497, or 498). All three activity codes can either be processed automatically or be placed on the 1041 DIF inventory. Placement will be determined by the DIF-1041-CD and the possible presence of any audit codes on the returns. Below is a list of valid 1041 audit codes:

    AUDIT CODE DEFINITION
    Audit Code 1 International
    Audit Code 2 Reserved
    Audit Code 3 Inconsistent Treatment
    Audit Code 4 Prompt Assessment Request
    Audit Code 5 Tax Exempt Trust
    Audit Code 6 Nonexempt Charitable and Split-Interest Trusts
    Audit Code 7 Reserved
    Audit Code 8 Form 1041-N
    Audit Code 9 Reserved

4.19.11.1.11  (11-09-2007)
U.S. Real Estate Conduit Returns (REMIC For 1066)

  1. All REMIC returns should be ordered ratably through the entire file year.

  2. This will ensure that sufficient returns in each class are available to accomplish the Area Offices’ classification plan, if applicable.

  3. All REMIC returns should be sent to Ogden for classification.

  4. The Area Office selection rate in prior years should be considered when ordering returns.

4.19.11.1.12  (11-09-2007)
Amended Returns Inventory — Category B

  1. The Amended Returns Inventory contains Category B (paid) claims.

  2. Each of the following categories represents a separate inventory of amended returns which may be ordered by using Form 8199, Amended Returns

    • Adjustments to Income

    • Filing Status and Exemptions

    • Tax Computations

    • Credits

    • Itemized Deductions

    • Schedule C or F

    • Schedule D and Form 4797

    • Schedule E

    • Other Taxes

    • Multiples (any combination of the above categories)

    • Other (reasons not covered in above categories)

  3. Category B claims are added to each of the inventories based on the taxpayer explanations for filing claims.

  4. The Category B claims are inventoried by, and must be ordered by, the year the claims were filed, not by the tax year of the returns for which the claims apply.

  5. The highest dollar claims will be delivered first.

4.19.11.1.13  (11-09-2007)
International Returns

  1. Identify all returns with international characteristics. SBSE International Program has been or will be absorbed by LMSB International. All International Returns should be sent to Ogden for classification.

  2. These returns may be:

    • Manually classified by international examiners at the Campus or,

    • In some instances, shipped to Area Offices to be manually classified by international examiners.

  3. Classified returns that are accepted for international issues, are then to be classified for domestic issues.

    Note:

    Some campuses classify the domestic issues first.

  4. The international examiner, subject to Area Office instructions to the contrary, will not screen returns for domestic issues.

  5. Classification stamps are provided for use by international examiners to identify selected and accepted international returns. Procedures are as follows:

    IF THEN AND
    Return does not have international potential Stamp return "International-Accepted as Filed Referral Not Mandatory"
    1. Affix AIMS Status Update Labels to Form 5351, Non- examined Closing.

    2. Indicate in lower left hand corner of label if return has Form 5713 attached by entering a red B for Form 5713

    .
    Return has international potential or meets mandatory select Stamp return "International- Selected Status"
    1. Affix AIMS Status Update Label to Form 5348, Examination Update.

    2. Returns that have tax haven issues or Form 5713 attached will be identified by a red T for Tax Haven and/or red B for Form 5713 by entering either or both in the lower left hand corner of AIMS Status Update label.

    3. For FCC (Foreign Controlled Corporation) returns, Update Labels will be marked in red with 009 (011 if the market segment is Manufacturing, Wholesale Trade, or Financial Institution)

  6. Specialized check sheets available for use for international classification:

    • Form 8419 (International Classification Check sheet), for use on Form 1040 with Form 2555 (Foreign Earned Income)

    • Form 8418 (International Classification Check sheet), for use on Form 1120F (U.S. Income Tax Return of a Foreign Corporation)

  7. Ensure that:

    1. Copies of Forms 5348 and 5351 are forwarded to Area Program Managers and Key Area Office Program Managers.

    2. Returns selected for international features are routed to the Chief, PSP in the Area Office.

    3. Selected cases, except returns with tax havens, are updated to Project Code 090.

    4. Selected Foreign Controlled Corporations, if the market segment is Manufacturing, Wholesale Trade, or Financial Institution, are updated to Project Code 011.

    5. All other selected FCCs are updated to Project Code 009.

    6. Selected Form 1120F returns and 1040 returns with Form 2555, Exemption of, or Deduction from Income Earned Abroad, are updated to Project Code 162.

    7. International Referrals are updated to Project Code 166.

    8. International Limited Scope are updated to Project Code 167.

    9. The transmittal Form 3210 to the Area Office, Chief PSP states that the returns were selected for International, along with any special instructions. For examples: 1. "Form 1120 (IC-DISC) should be associated with related return of another Area Office" , or 2. "Return is part of a national coordinated examination" .

  8. All international returns that meet the criteria for Large/Mid-Size Business (LMSB) will be separated by:

    • Area Office, and

    • Industry code, and

    • Stored at the Ogden Compliance Campus for classification.

4.19.11.1.14  (11-09-2007)
Form 1120F, U.S. Income Tax Return of a Foreign Corporation

  1. Every foreign corporation, whether a resident or nonresident, which is subject to tax under Subtitle A of the Internal Revenue Code must file a Form 1120F (U.S. Income Tax Return of a Foreign Corporation ). However, a foreign corporation which at no time during the taxable year is engaged in a trade or business in the United Stated:

    • is not required to make a return for the taxable year if its tax liability for the taxable year is fully satisfied by the withholding of taxed source under chapter 3 of the Code.

  2. If required to file a return, a foreign corporation that has no gross income for the taxable year is not required to complete the return schedules but:

    • must attach a statement to the return indicating the nature of any exclusions claimed, and

    • the amount of such exclusions to the extent such amounts are readily determinable.

  3. A Form 1120F is similar to Form 1120 filed by a U.S. corporation.

  4. The major difference is an additional section on Form 1120F for U.S. source income not effectively connected with a U.S. trade or business.

  5. Unlike a U.S. corporation, which is required to include worldwide gross income on Form 1120, a foreign corporation only includes on Form 1120F:

    1. U.S. source income not effectively connected with a U.S. trade or business (IRC Sec. 881), and

    2. Gross income effectively connected with a U.S. trade or business, regardless of source (IRC Sec. 882).

  6. 1120F returns are filed at the Philadelphia Campus.

  7. Those companies with primary books and records located in an Area Office will be transferred to the Campus servicing that Area Office.

  8. The location of the books and records is determined from the address in Question D, page 1 of the 1120F return.

  9. All returns with foreign addresses in Question D of the 1120F are processed for classification at the Philadelphia Campus.

  10. Philadelphia Campus transmits domestic address (Question D, page 1) returns to the respective Campuses on Form 3210, indicating: "Expedite: Forms 1120F - International returns to be classified." However, these returns should be forwarded to the Ogden campus for classification.

4.19.11.1.15  (11-09-2007)
Form 1120FSC, U.S. Income Tax Return of a Foreign Sales Corporation

  1. Forms 1120FSC, U.S. Income Tax Return of a Foreign Sales Corporation, are filed at the Philadelphia Campus.

  2. Philadelphia Campus transfers the returns to the service/customer Campus which services the Area Office where the taxpayers primary books and records are located (domestic address on the return.) However, these returns should be forwarded to the Ogden campus for classification.

  3. These returns are transmitted on Form 3210, indicating: Expedite: "Forms 1120FSC - International returns to be classified. "

4.19.11.1.16  (11-09-2007)
Form 1120 IC-DISC, Interest Charge Domestic International Sales Corporation

  1. Although the FSC provisions were repealed effective October 1, 2002, the Interest Charge Domestic International Sales Corporation (IC-DISC) provisions remain in effect.

  2. IC-DISC file Form 1120 IC-DISC.

  3. Generally IC-DISC are not subject to tax.

  4. However, the shareholders of an IC-DISC are:

    • Taxed on distributions from the DISC, and

    • Pay an interest charge with respect to any such tax that is deferred.

  5. However, these returns should be forwarded to the Ogden campus for classification.

4.19.11.1.17  (11-09-2007)
Form 1040 Returns with Form 2555

  1. All 1040 returns with Form 2555 are first screened by Director, International, Office of Compliance-Examination LM:I:C:E auditors.

    • Those returns (with Form 2555 or Form 2555EZ) whose principal books and records are not located within the United States remain in the jurisdiction of Director, International, Office of International Area Office Operations, LM:IN:D.

    • Those returns identified for field examination with domestic addresses are transferred to the respective service/customer campuses by Austin Campus.

  2. Austin Campus will transmit domestic address returns on Form 3210, indicating: "Expedite: Form 1040 with Form 2555-International returns to be classified" to:
    Internal Revenue Service
    ATTN: Centralized Files and Support
    Drop Point 608S
    P.O. Box 331
    Bensalem, PA 19020

4.19.11.1.18  (11-09-2007)
Form 3520, U.S. Information Return: Creation of or Transfer to Certain Foreign Trusts

  1. Every U.S. person who either creates a foreign trust or transfers property (including money) to a foreign trust’s must file a Form 3520, U.S. Information Return, Creation of or Transfer to Certain Foreign Trusts, on or before the due date of the U.S. persons income tax returns including extensions.

  2. Additionally, if the foreign trust has one or more U.S. Owner/beneficiaries, the U.S. person must file a Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner ,by the 15th day of the 3rd month following the end of the trusts tax year.

  3. The Form 3520, and the Form 3520-A are filed at the Ogden Submission Processing Campus (OSPC).

  4. The Form 3520 received at OSPC is processed into the Business Master File (BMF) under MFT 68.

  5. Form 3520-A is processed on the BMF under MFT 42.

  6. If the related return is already open, the copy of the Form 3520-A will be forwarded for association, if requested.

  7. The related returns are kept separate from the Forms 3520 and 3520-A.

  8. However, once the related return is examined, the International Examiner must request the Forms 3520 and 3520-A from the OIRSC.

  9. The DLN for a:

    • Form 3520 begins as 29383-ddd-nnnnn-n, and

    • Form 3520-A begins 60342-ddd-nnnnn-n.

  10. Due to their potential use in classifying Forms 706NA estates of nonresidents and Form 1040NR filed by foreign trusts, copies of those Forms 926 which have indicated in the Foreign Transferee Information (Part I) that the transferee is either an Estate or Trust should be forwarded to the Director International at the following address:

    Internal Revenue Service
    950 L’Enfant Plaza South, S.W.
    Washington, DC 20024
    Att: Chief, Support and Services Branch LM:IN:D:C:55

4.19.11.1.19  (11-09-2007)
Form 926, Return by a U.S. Transferrer of Property to a Foreign Corporation

  1. Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, filed for transfers made after August 4,1997:

    • Are considered information returns, and

    • Must be filed with the U.S. Transferor’s annual tax return for the tax year that includes the date of transfer.

  2. BMF returns with Form 926 attached will contain Audit Code 2.

  3. IMF returns with Form 926 attached will contain Audit Code H.

  4. Returns are sent to the Classification Department where they will be classified by an international examiner.

  5. Forms 926 filed prior to August 4, 1997 are to be forwarded to the Ogden Campus Classification Department where the transferor files their return, after processing.

  6. The transferors' return and Form 926 are associated prior to classification.

  7. All Forms 926 are classified by an international examiner.

4.19.11.1.20  (11-09-2007)
Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships

  1. Form 8865 is an information return required to be filed to report:

    • Section 6038 (reporting with respect to controlled foreign partnerships), and

    • Section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests) income activity.

  2. Form 8865 is filed as an attachment to the taxpayers income tax return. It can be attached to any one of the following Forms:

    • 1120,

    • 1120A,

    • 1120F,

    • 1120-H,

    • 1120-IC-DISC,

    • 1120L,

    • 1120M,

    • 1120-ND,

    • 1120PC,

    • 1120REIT,

    • 1120RIC,

    • 1120S,

    • 1120X,

    • 1040,

    • 1040A,

    • 1040-C,

    • 1040EZ,

    • 1040X,

    • 1065,

    • 1065B,

    • 1041,

    • 1041S,

    • 1120C,

    • 990T, and

    • 1066.

  3. However, consideration should be made to determine if these returns should be forwarded to the Ogden campus for classification.

4.19.11.1.21  (11-09-2007)
Foreign Information Return Program (FIRP)

  1. Income tax treaties to which the United States is a party generally provide for the routine exchange of information relating to payments made to residents of the other country (Foreign Information Documents). These documents reflect payments of such items as:

    • dividends,

    • interest,

    • royalties,

    • commissions and

    • tax refunds.

  2. The documents are received from approximately 15 treaty countries in numerous formats. Since 1973, the documents have been received by and stored at the Philadelphia Campus.

  3. Foreign Information Documents showing individual taxpayers (IMF) as recipients will be processed according to Information Returns Program in the IRM.

  4. Foreign Information Return Program (FIRP) documents, are processed by the Chief, Planning and Special Programs Section, Philadelphia Campus. They will sort the FIRP documents and forward them to the appropriate payee campuses, Attention: Department Manager, Classification.

  5. FIRP documents received by the Chief, Planning and Special Programs Section, Philadelphia Campus, which are unusable (having incomplete taxpayer information), will be forwarded to the Director International Attn.: Chief, Tax Treaty, for return to the submitting country.

  6. When the FIRP documents are received at the payee campuses the Classification Department Manager will "TIN perfect" those documents without TINs. See IRM 3.12.23.1.12, Unprocessable Returns. A cross reference search of the spouses TIN should also be performed.

  7. After TIN perfection of the FIRP documents, the Department Manager, Classification, will forward the FIRP documents to the Chief, PSP, in the appropriate payee Area Office.

  8. These documents are deemed sensitive under the Exchange of Information provisions of the various tax treaties and are not to be made available except for Federal Tax Administration purposes under any disclosure provisions.

  9. All inquiries concerning the disclosure of this information should be addressed to the Director, Office of Disclosure, Headquarters.

4.19.11.1.21.1  (11-09-2007)
FIRP Referrals to Collection

  1. Foreign Information (FIRP) Documents with TINs for which no TC 150 has posted on the taxpayers account will be referred to the Campus Collection Branch.

  2. A cross reference on the Spouse's TIN must be performed prior to forwarding any FIRP document to Collection. All other research done on the FIRP Document should be forwarded with the referral.

  3. FIRP Documents forwarded to the controlling campuses which are then determined to warrant referral to Collection, must be returned to the Classification Department Manager, Philadelphia Campus (PSC).

  4. The Classification Department Manager, PSC, will forward these returned documents to the Collection Operations, PSC.

  5. All referrals of FIRP Documents to the Collection Branch, are forwarded by use of Form 3210, Document Transmittal.

    • FIRP Documents should be itemized on the Form 3210 and

    • Identified as Foreign Information Documents.

  6. Substitute for Returns—If it is determined by the Collection function that a substitute for return is required:

    • The information is forwarded to the Chief, Planning and Special Programs,

    • By use of Form 3449, Referral Report.

    • Procedures contained in the IRM should be followed.

4.19.11.1.22  (11-09-2007)
Form 5074, Allocation of Individual Income Tax to Guam or Northern Marianas Islands

  1. Form 1040, with Form 5074 attached, is filed with the Austin Campus.

  2. These returns are processed, coded, and delivered to Examination as prompt examination returns

  3. Campus Classification Department will:

    • Complete page 2 of Form 5074 and

    • Provide a copy to the Campus Accounting Operation.

  4. Classify the return.

4.19.11.1.23  (11-09-2007)
Form 1120S with No Valid Elections

  1. Forms 1120S, U.S. Income Tax Return for an S Corporation:

    • for which there is no Form 2553, Election by a Small Business Corporation, on file, and

    • for which the taxpayer has not responded to the queries from the Campus,

    are forwarded to Examination for technical assistance.

  2. When received in Classification, follow the procedures set forth in the identifying Issues on Corporation Returns Section.

4.19.11.1.24  (11-09-2007)
Section 761(a) Partnership Returns

  1. An unincorporated organization which qualifies under IRC Sec. 761(a) as:

    • an investing partnership, or

    • as participating in the joint production, extraction, or use of property under an operating agreement,

    may elect under IRC Sec. 761(a) to be excluded from treatment as a partnership. (See Regulation 1.761-2.)

  2. For the first year for which it wants the exclusion, the unincorporated organization should make the election in a statement attached to the Form 1065, U.S. Partnership Return of Income.

  3. The Returns Processing and Accounting Division suspends processing IRC Sec. 761(a) elections until a review is made by the Classification Department .

  4. The Classification Department Manager is responsible for sending classifiers to the Returns Processing and Accounting Division to determine if IRC Sec. 761(a) elections will be accepted or rejected before processing is completed.

  5. The Classification Department Manager is responsible for reviewing Letter 1932(C) or Letter 1932(SC), Missing information—761(a) Election, taxpayer responses.

  6. Phone inquiries and technical responses by taxpayers on the aforementioned letters are also directed to the Operations Manager, Examinations.

  7. Classifiers of IRC Sec. 761(a) elections should have experience in tax shelters.

  8. Classifiers reject elections that are determined to be invalid. Valid elections are accepted as filed.

  9. After a determination is made on an IRC Sec. 761(a) election, the Returns Processing and Accounting Division processes the returns as follows:

    1. Elections accepted are handled as a short record return.

    2. Elections rejected are processed as regular returns with an Audit Code 1 being used to generate the returns to Classification.

    3. Referrals determined not to be intended as a 761(a) election are processed as a regular Form 1065.

  10. Returns selected for examination are forwarded to their respective Area Offices.

4.19.11.1.25  (11-09-2007)
Order Placement for Classification

  1. The Chief, PSP in the Area Offices and the Classification Department Manager in the Campuses are responsible for submitting orders for returns to be classified for their respective examination functions.

  2. Orders initiated by both Area Office and Campus chiefs are processed by the Campus via tape/disc to Enterprise Computing Center - Martinsburg (ECC-Martinsburg).

  3. Orders must be submitted to the Campus, Attention Classification Department Manager or designee to ensure they are received no later than Friday two cycles before the earliest processing cycle on the order form.

  4. Campus must process order by tape/disc to ECC-Martinsburg by the Thursday prior to the MCC Posting Cycle.

    Order Due to SC Order Date Cycle Available to Classify
    January 5 January 19 9704 April 13

4.19.11.1.25.1  (11-09-2007)
Order Forms for Returns

  1. Use the following forms to order returns

    • Form 5337 — Fiduciary

    • Form 6162 — Partnership

    • Form 6356 — Individual

    • Form 6897 — Corporation

    • Form 8199 — Amended Returns

    • Form 8757 — Real Estate Mortgage Investment Conduit.

  2. Order forms are prepared for specific file years, and separate order forms must be filed for each file year for which returns are ordered.

  3. Instructions for completing order forms are contained on the back of each respective order form.

4.19.11.1.25.2  (11-09-2007)
Order Form 6356 Individual

  1. Use Form 6356, Individual DIF Return Order in both Area Office and Campus functions to order individual returns for classification/examination.

  2. Indicator Codes are entered on the order form(s) to identify the kind of returns ordered. The following are used for Area Offices:

    • Indicator W — Alternative Minimum Tax

    • Blank — All returns excluding those with indicator code shown above

  3. The following are used for Campuses:

    • Indicator Code C — Correspondence Returns from Examination Classes 531, 532 and 533

    • Indicator Code SE — Use of SE on Form 6356 will order self employment returns

4.19.11.1.25.3  (11-09-2007)
Order Form 6897

  1. Form 6897, Corporation Returns Order, is separated into two sections; Corporation DIF Returns, and Miscellaneous Corporation Returns Order.

  2. Enter indicator Codes on Form 6897 to designate the type of return ordered as follows:

    1. Indicator Code 0 (zero) — The highest scored returns in inventory will be delivered. Indicator Code 0 (zero) is valid for all types of returns.

    2. Indicator Code 1 — Reserved.

    3. Indicator Code 2 — Taxable Inventory Returns. Valid only for return Forms 1120L, 1120PC, 1120PHC (low asset).

    4. Indicator Code 3 — Non taxable Income Inventory Returns. Valid only for the following returns; 1120L; 1120PC; 1120 Inactive (low asset); 1120 PHC (low asset).

    5. Indicator Code 5 — To order corporation returns of the current file year prior to cycle 27, Indicator Code Number 5 must be used. This code will act as an override primarily for ordering SAT (Systems Acceptability Tests) returns.

  3. Orders of miscellaneous returns in the taxable income category are filled from the top of the file (highest income to zero).

  4. Orders of miscellaneous returns in the non taxable income category are filled from the top of the file (greatest loss to zero).

  5. Only one indicator code may be used for returns in each examination class in the same cycle. However, different indicator codes may be used for different examination classes in the same cycle.

4.19.11.1.25.4  (11-09-2007)
Order Form 6162 Partnership

  1. Forms 6162, Partnership Returns Order, are used to order DIF partnership returns.

  2. Enter indicator Code 0 (zero) on all orders for Forms 1065.

    Note:

    There is one exception. Indicator Code 5 will be used when ordering partnership returns of the current file year prior to cycle 27. This code will act as an override code and will be used primarily for ordering returns for System Acceptability Tests (SAT).

4.19.11.1.25.5  (11-09-2007)
Order Form 5337 Fiduciary

  1. Form 5337, Fiduciary Return Order, is used to order all fiduciary returns listed on the inventory and delivery report. Enter Indicator Codes on the order form to identify the kind of returns as follows:

    1. Indicator Codes. (Reserved) Regular entry code must be zero. If a specific type of return is desired, enter the appropriate indicator code. Only one indicator code may be used for the same examination class in the same cycle.

    2. Indicator Code 5 — To order Fiduciary returns of the current file year prior to cycle 27, Indicator Code 5 must be used. This code will act as an override code and is used primarily in ordering returns for Systems Acceptability Tests (SAT).

  2. Order returns only on an Area Office basis. No capability is provided for ordering returns for specific POD.

4.19.11.1.25.6  (11-09-2007)
Order Form 8199 Amended

  1. Amended Returns Inventory contains Category B (paid) claims, as defined in the IRM 21.5.3.4.12,Category B Criteria (BMF Only).

  2. Each of the following categories represents a separate inventory of amended returns which are ordered by using Form 8199, Amended Returns Order:

    • Adjustments to Income

    • Filing Status and Exemptions

    • Tax Computations

    • Credits

    • Itemized Deductions

    • Schedule C or F

    • Schedule D and Form 4797 Schedule E

    • Other Taxes

    • Multiples (any combination of above categories)

    • Other (reasons not covered in above categories)

  3. Category B claims are added to each of the inventories based upon the taxpayers explanation for filing the claims. The highest dollar claims are delivered first.

    Note:

    These claims are inventoried by and must be ordered by the year the claims were filed, not by the tax year of the returns for which the claims apply.

4.19.11.1.25.7  (11-09-2007)
Order Form 8757 REMIC

  1. Form 8757, U.S. Real Estate Mortgage Investment Conduit Tax Return Order, is used to order REMIC returns.

  2. Orders can be placed monthly.

4.19.11.1.25.8  (11-09-2007)
Order Cycles

  1. The Campus must process return orders to MCC on a cycle basis. The cycle in which an order can be placed is determined by area placing the order and the types of returns.

  2. Area Office Orders of Individual Returns

    • Any cycle for orders from regular DIF Inventory

    • Odd cycles for orders from DIF Corr Inventory

  3. Campus Order of Individual Returns

    • Even cycles for orders from DIF Corr Inventory

    • Any cycle for order from SET Inventory

  4. Corporate Orders

    • Odd number cycles

  5. Partnership Orders

    • Monthly in cycles 05, 09, 13, 18, 22, 26, 31, 35, 39, 44, 48, and 52

  6. Fiduciary Orders

    • Monthly in cycles 05, 09, 13, 18, 22, 26, 31, 35, 39, 44, 48, and 52

  7. Real Estate Mortgage Investment Conduit

    • Monthly

  8. Individual returns cannot be ordered from the current file year until after processing cycle 26.

    1. A computer block will prevent ordering from earlier cycles.

    2. Only with prior written approval can an override code be entered.

    3. If approved, a "1" will be entered in Column 80 of Form 6356, Individual DIF Returns Order Form.

  9. Previous file year individual returns cannot be ordered after cycle 26 of the current file year.

    1. Again, only with written approval can an override code be entered.

    2. If approved, a "9" will be entered in Column 80 of Form 6356.

  10. BMF returns cannot be ordered from the current file year until after processing cycle 26.

  11. To order BMF returns of the current file year prior to Cycle 27, Indicator Code 5 must be used. It will act as an override code.

  12. The Operations Manager, Examination or designee will provide to the Chief, PSP (by December 31, each year) a schedule for ordering and classifying for the next calendar year. A typical schedule will appear as follows and will include every cycle in which orders can be placed.

    Order Due to SC Order Date Cycle Available To Classify
    January 5 January 19 9704 April 13

4.19.11.1.25.9  (11-09-2007)
Order Types

  1. The four basic types of return orders are:

    1. REGULAR ORDER for returns pulls the highest DIF scored returns within a respective class, i.e., 531, 532, 533, etc. and without regard to any Post-Of-Duty (POD) location.

    2. REVISED ORDER replaces order form(s) already at the Campus. A revised order can be completed for any remaining order cycle.

    3. POD EXCLUSION ORDER permits the exclusion of one or more PODs from an order cycle. When the order involves Individual Returns, Forms 1040, a maximum of 17 PODs may be excluded. For Corporate Return orders, a maximum of seven PODs may be excluded each cycle.

    4. POD SUPPLEMENTAL ORDER permits the ordering of returns by post of duty. These orders are filled in addition to orders previously submitted for that order cycle.

    5. POD SUPPLEMENTAL ORDERS post for delivery before regular orders.

    6. POD SUPPLEMENTAL ORDERS for prior year DIF file returns will be prepared in accordance with POD codes that were valid for the prior year.

    7. The due date at the Campus for submitting POD SUPPLEMENTAL ORDERS is the same as for other type orders

    Note:

    Regular and Exclusion Orders can not be ordered in the same cycle for the same Area Office.

4.19.11.1.25.10  (11-09-2007)
Order Processing at Campus (Service Center)

  1. Operations Manager, Examination or designee at the Campus:

    1. Receives all orders,

    2. Perfects and

    3. Processes them to MCC on a cycle basis.

    4. He/she ensures forms are completed properly,

    5. Prepares consolidated forms and

    6. Delivers them for input through the Distributed Orders Input System (DIS) by Wednesday, and the subsequent creation of an order tape/disc for transmission to MCC.

  2. All return orders (IMF and BMF) are input through DIS.

    1. Any errors on the order forms are identified and listed on an error register.

    2. The error register is worked by accessing the EONS system and viewing the order data input by the Direct Data Entry (DDE) function.

    Note:

    EONS must be accessed and error registers reviewed immediately after every order has been input to DIS to determine if errors exist. All errors must be immediately resolved and the order expeditiously re-input through DIS. Only those orders with errors will be re-input.

  3. A list of Error Registers and the Exhibits where they can be found are as follows:

    Error Register Exhibit
    Individual DIF Returns Order 4.19.1-2
    BMF DIF Order 4.19.1-3

  4. Only orders for the current input processing cycle are entered through DIS to create the tape/disc to be sent to MCC.

    • Campuses must transmit the order to MCC no later than the Thursday prior to the MCC Posting Cycle.

    • A failure to adhere to this schedule will lock a center out of the respective order cycle.

    • Timely processing of orders at all points including resolution of error registers is critical.

  5. Once an order is perfected as described above, the computing center will forward the tape/disc to MCC.

  6. The computing center faxes a summary of the order to the Chief, Production Control at ECC-Martinsburg. It contains:

    • The order cycle number,

    • The reel number, and

    • The number of records in the order.

    Timely feedback is provided to Chiefs, PSP, if there is any significant problem or delay in processing or delivering an order.

  7. A typical time frame for processing and delivering an order in terms of MCC Cycles and the Organization responsible for taking the specified action is as follows:

    1. 1st week MCC Order Cycle - Action by Campus Unless a revised order is received by Tuesday morning, the Campus transmits the order for input.

    2. 2nd week MCC Processing Cycle - Action by MCC Post returns processed by Campus in current cycle files. Selects returns ordered from inventory file by Area Office or Campus and puts them on tape/disc.

    3. 3rd week MCC Processing Cycle - Action by MCC Creates tapes for reports to Area Office and Campus on inventory file activity. Ship tapes referred to here and in b) above to Campus.

    4. 4th week MCC Print Cycle - Action by Campus Prints and ships reports on inventory file per b) and c) above to Area Office and Campus, and prints Forms 5546 for returns selected by MCC in b) above.

    5. 5th week MCC Pull Cycle - Action by Campus Area Office and Campus receives inventory reports. Campus Files Function begins to pull returns for forwarding to Campus Classification Section.

    6. 6th week MCC IRMF Cycle - Action by Campus Computer function receives IRMF tapes, prints and delivers IRMF transcripts to Files Function to begin associating with returns.

    7. 7th week Pulling/Associating Returns/IRMF Transcripts Continues - Action by Campus Files Function.

    8. 8th week Receipt Cycle - Action by Campus Files Function delivers returns to Campus Classification Section for screening/classifying.

    Note:

    The week which Files Function deliver returns to be classified could vary (increase) as much as 2 to 4 weeks depending upon Files ability to timely obtain returns and IRMF transcripts.

4.19.11.1.25.11  (11-09-2007)
Monitoring Delivered Returns

  1. Once an order is transmitted to MCC and confirmed with the Chief, Production Control ECC-Martinsburg, the Operations Manager, Examination or designee monitors to confirm return order was timely processed and returns being delivered compare with returns ordered.

  2. This is accomplished by use of Inventory and Delivery Reports. Any significant difference between the number of returns ordered and the number to be delivered, should be immediately brought to the attention of the respective Chief, PSP and Operations Manager, Examination.

  3. MCC generates Inventory and Delivery Reports for each Area Office and Campus.

    • Separate reports are generated for each type of return; i.e., Forms 1040,1120, etc.

    • The top section of these reports indicates the number of returns available for ordering.

    • The bottom portion reflects the number of returns that have been identified for delivery and/or delivered for screening.

    • These reports are cumulative for all returns received, processed and delivered during a file year.

    Note:

    At certain times of the year, there will be available Inventory and Delivery Reports for two different file years. Caution must be exercised to ensure use of the file year report which corresponds with the file year of the return order being considered.

  4. A list of available Inventory and Delivery Reports and the Exhibits where they can be found are as follows:

    Reports Exhibit
    1040-1, AO Individual Inventory and Delivery Report 4.19.11.1-4
    1040-3, SC Inventory and Delivery Report 4.19.11.1-5
    1040-5, Amended Returns Inventory and Delivery Report 4.19.11.1-6
    1040-6, AO/SC Individual Inventory and Delivery Report (Correspondence Returns). 4.19.11.1-7
    1120-1, AO Corporate DIF Inventory & Delivery Report 4.19.11.1-8
    1120-2, AO Corporate Inventory and Delivery Analysis Report 4.19.11.1-9
    1120-3, AO 1120S DIF and 1120F Inventory and Delivery Report 4.19.11.1-10
    1065-1, AO Partnership Inventory and Delivery Report 4.19.11.1-11
    1065-2, AO Partnership Inventory & Delivery Report 4.19.11.1-12
    1041, Fiduciary Inventory and Delivery Report 4.19.11.1–13
    1066-1, AO Real Estate Mortgage Investment Conduit Inventory and Delivery Report 4.19.11.1–14

  5. AO Inventory and Delivery Report 1040-1 is a cumulative report for all returns received and processed during the file year and for all returns delivered to Examination. The report is generated every even MCC Cycle. It shows:

    • the number of DIF returns available for ordering and

    • the number of returns delivered for each file year.

    • It also provides the number of Minimum Tax and Alternative Minimum Tax returns (combined under TXPREFRET), included in the inventory.

  6. AO Inventory and Delivery Analysis Report 1040-2 provides statistical analytical data on individual returns processed and on returns delivered, including specials. This report is computer generated every MCC Cycle for the first 40 cycles and every even cycle thereafter.

  7. SC Inventory and Delivery Report 1040-3 provides the number of returns involving potentially unreported self employment tax available for ordering and the number delivered. This report also shows the number of Specials (returns involving unallowable, tax preference, etc. issues) identified and delivered.

  8. Amended Returns Inventory and Delivery Report 1040-5 reflects the number of returns identified from Category B (paid) claims available for ordering and the number delivered.

  9. AO/SC Individual Inventory and Delivery Report 1040-6 provides the number of DIF Corr returns available for ordering and the number delivered.

    Note:

    Because the system cannot distinguish a Campus Corr order from an Area Office Corr order, deliveries will be determined by reference to the cycle. Use of an even cycle designates an order as a Campus delivery. Use of an odd cycle designates an order as an Area Office order.

  10. AO Corporate DIF Inventory and Delivery Report 1120-1 shows the number of DIF returns available to order for screening and the number which have been delivered by DIF score range. Reports are printed and distributed biweekly for odd numbered cycles for each file year.

  11. AO Corporate Inventory and Delivery Analysis 1120-2 provides data on corporations processed and on returns in inventory or processed including specials and automatics.

  12. AO 1120S and 1120F Inventory and Delivery Report 1120-3 provides data on corporate returns processed and on returns in inventory or delivered.

  13. AO Partnership Inventory and Delivery Report 1065-1 shows the cumulative number of partnership returns available for ordering and the number delivered for classification:

    • By DIF score range and

    • Examination Class,

    • By file year.

    Note:

    Reports for each file year are generated in MCC Cycles 05, 09, 13, 18, 22, 26, 31, 35, 39, 44, 48 and 52.

  14. AO Partnership Inventory and Delivery Analysis 1065-2 provides cumulative analytical data on partnership returns:

    • Processed,

    • Inventoried and

    • Delivered for classification,

    • Including Automatics and Specials.

    Note:

    Reports for each file year are generated in the same MCC Cycles as shown for Report 1065-1.

  15. Fiduciary Inventory and Delivery Report 1041 shows the cumulative number of returns available for ordering and the number delivered for classification. This report provides information regarding Nonautomatic (Table 1) and Automatic (Table 2) Fiduciary returns.

  16. AO Real Estate Mortgage Investment Conduit Inventory and Delivery Report 1066-1 provides:

    • The number of REMIC returns available for ordering and

    • The number delivered for classification by Examination Class for the file year.


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