4.19.15  Discretionary Programs (Cont. 2)

4.19.15.28  (01-01-2015)
Return Preparer Referrals

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.15.28.1  (11-29-2011)
Role of the Exam RPP Coordinator

  1. The Exam RPP Coordinator at each site will be the liaison between Campus Exam and the W&I HQ and elevate any issues for resolution.

  2. RPP Coordinator's primary role is to provide technical assistance to Correspondence Exam in working these cases.

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

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

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

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.15.28.2  (01-01-2014)
Referral Process and AIMS Opening

  1. Cases will be opened on AIMS by W&I HQ Workload Development and Delivery (WDD) team and controlled under Project Code 0133, Source Code 70. Any scheme that is related to EITC will be controlled under Project Code 0132. The AIMS will reflect the respective PBC for each site and an Employee Group Code (EGC) of 5000.

  2. AIMS Tracking Codes may be assigned to identify the scheme.

  3. Returns will be electronically forwarded and established through RGS. Each Return Preparer Scheme has a unique SDC control number and is included in the record sent to the DDb.

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

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

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. CI will not usually control these cases with a Z freeze.

4.19.15.28.3  (11-29-2011)
Controlling RPP Returns

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.15.28.4  (11-29-2011)
Procedures for Working RPP Cases

  1. Normal Exam procedures will apply to working these cases.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

  4. Consult RPP Coordinator, Classification TCO (Tax Compliance Officer) or manager and notate workpapers about the additional issues included in the audit.

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

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. Letter 566-B will be used to initiate the audit process for non-EITC cases. For EITC cases use Letter 566 as the initial contact letter (ICL). The letter will be prepared by checking off the appropriate boxes for the issues being examined. Form 886-A with proper paragraphs and Form 4549/4549-EZ will be included, as well as the proper enclosures.

  8. Follow normal deficiency processing from this point, allowing the normal time frames for purging and issuance of the Statutory Notice of Deficiency.

  9. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  10. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  11. The compliance employee or the manager should not obtain advice from CI for a specific case under examination. However, the campus can request clarification or additional information on a scheme, if necessary, via W&I HQ.

  12. Management must approve any short closing - DC 20, 32, or 33. If a determination is made to short close 25 or more cases from one scheme, then management must inform W&I HQ timely the reason for survey.

  13. Taxpayer/valid POA requests transfer of case(s) to Area Office Examination or Appeals Office, refer to IRM 4.19.13.14, Transfers to Area Office Examination or Appeals Office.

  14. Examiners will ensure that procedures are followed for calculation of the interest suspension period as defined in IRC 6404(g). Please refer to IRM 4.19.13.5.1, IRC 6404(g) Suspension of Interest and Certain Penalties for additional information.

4.19.15.28.5  (11-29-2011)
Examining the Schedule A on Preparer Referrals

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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  3. The examiners are required to familiarize themselves with Schedule A (See IRM 4.19.15.23, Schedule A. This IRM section will provide information related to the allowable and unallowable deductions on the Schedule A.

  4. The examiner will consider asserting penalties such as negligence or substantial underpayment as applicable, as in the normal course of any examination if warranted on a case by case basis. Refer to IRM 20.1, Penalty Handbook, for additional procedures. If any indication of fraud is discovered in either the substantiation submitted or in the return itself, this should be brought to the attention of the W&I RPP Coordinator/manager/W&I HQ analyst.

4.19.15.28.6  (01-01-2010)
Examining the Schedule C on Preparer Referrals

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4.19.15.29  (01-01-2015)
Correspondence Exam Tip Program

  1. Cases worked in the Tip Program are initiated based on information received from Area Offices. Revenue Agents (RAs) and or Revenue Officer Examiners (ROEs) gather data from the employers of tipped employees and use this information to determine each employee’s correct tip income. If the employee did not report the correct amount of tips, Correspondence Exam will issue a report reflecting the increase in income tax and FICA taxes (which includes Social Security and Medicare) based on the unreported tip income. All other unreported income as identified on IRPTR should be addressed and included on the examination report per normal procedures.

  2. The following conditions will apply:

    • The inventory will also include cases where the tipped employee has not filed a return.

    • In all cases normal non-ACE case processing procedures will be used.

    • Penalties will be asserted as required or deemed appropriate. Refer to IRM 20.1Penalty Handbook and IRM 4.19.13.5.2Managerial Approval of Penalties/Bans.

    • The terms "taxpayer" and "employee" are used interchangeably in this section.

    • All correspondence to the taxpayer should contain the name and telephone number of the examiner who prepared the report.

    • References in this section to FICA taxes to include Social Security and Medicare taxes.

    • If a taxpayer has reached the wage base limit for Social Security wages, he or she is still subject to Medicare tax on all wages (including tips) received. There is no wage base limit for Medicare wages.

    • All forms that are specific to the Tip Program and are not currently available through Report Generation Software (RGS) will be loaded onto workstations and attached to the taxpayer’s file. These forms include Form 886-A1, Employee Tip Examinations Worksheet, Form 886-A2, For Information Purpose Only (see Exhibit 4.19.15-1), and Form 886-A, Explanation of Items (see Exhibit 4.19.15-2, Underreported Tip Income), with an explanation that is specific to the Tip Program. If the examination is based on the percentage of gross sales method, Form 886-MC, Computation of Tip Income Using McQuatter's Formula, should be used to demonstrate how the unreported tip income was computed using the McQuatter's Formula. Form 886-MC, should be used for other Tipping Industries such as Food and Beverage cases, and Form 886-M, Explanation of Tip Income, should be used for Gaming cases.

  3. The program will consist of the following types of cases:

    • Non-participating filers who underreported their tip income

    • Non-participating non-filers

    • Participating non-filers

    Gaming Industry cases will be assigned Project Code 0360 if they are from Casino’s other than Indian Tribal Casinos. If they are from Indian Tribal Casinos they will be assigned Project Code 0916, Cosmetology Industry cases will be assigned Project Code 0672, and Food and Beverage Industry cases will be assigned Project Code 0364. Non-filer cases will be assigned the same Project Codes, however, Source Code 24 is used for these cases.

  4. Original returns will not be ordered. RTVUE will be used unless it is necessary to review the original return during audit. If the taxpayer filed a Form 4137, Social Security and Medicare Tax on Unreported Tip Income, with his or her individual income tax return, follow the instructions in the table below to determine the under-reported tip income. On joint returns where both taxpayers are tip earners and have unreported tips, make a separate calculation for each taxpayer.

    If And Then
    The payer on the extension report matches a payer on IRPTR That employer is the only one on IRPTR where the taxpayer would have received tip income Consider the amount of tips reported on Form 4137 when determining the unreported tip income.
    The payer on the extension report matches a payer on IRPTR There is more than one employer on IRPTR where the taxpayer would have received tip income Consider the amount of tips reported on Form 4137 when determining the unreported tip income.

    Note:


    Instruct the taxpayer to provide a copy of Form 4137 and a breakdown on tips reported for each employer with the response to the letter if the Form 4137 was incomplete because it did not identify the employers and the tips reported for each employer.

    It cannot be determined that the employer on Form 4137 is the same employer on the extension report There is one or more than one employer on IRPTR where the taxpayer would have received tip income When determining the unreported tip income for each employer, do a pro- rata allocation of the tip income reported on Form 4137 and apply the ratios to each employer.
  5. The Tip Extension database will contain the following:

    1. Participating Employees:

      Conditions for Participating Employees
      On joint returns where both are tipped employees and their participant status is different, an extension report will be generated for the employee who has under-reported their tip income regardless of participation status.
      For taxpayers who worked for several employers and had different participation statuses with each employer, an extension report will only be generated for employers where the taxpayer under-reported tip income.
      If the tipped employee is shown as participating but has reported tip income less than the amount on the agreement, the taxpayer will be treated as a non-participant.
    2. Primary and Secondary SSNs will be identified.

    3. Amounts reported on Form 4137 will be identified.

  6. The Excel spreadsheets, and/or allocation sheets prepared by the field agents for the Food and Beverage Industry are computed by establishing a tip rate based on both charged and cash sales and allocated to each employee based on position and hours worked. A stiff factor and a tip out rate may also be factored into the computation.

  7. Tip extension reports are not provided for either the Food and Beverage Industry, Cosmetology Industry or Indian Tribal Casino cases. These cases are usually delivered on Excel spreadsheets. These spreadsheets will contain the percent of gross sales or an hourly rate, the venue, the position, hours worked, and shift. This information will be loaded onto the Form 886-A1, Employee Tip Income Examinations Worksheet, which will then be used as the allocation sheet.

4.19.15.29.1  (01-01-2014)
Commonly Used Terms

  1. The following table lists terms used in the Tip Income Program:

    Term Definition/Description
    (1) Tip Agreement Agreement between an employer of tipped employees and the IRS. Here we refer to agreements which set tip rates for all job classifications.

    Note:

    There are various tip agreements between the IRS and the employer. Under a TRDA or GITCA, the employer must secure written statements from at least 75 percent of its employees stating they agree to participate in either the TRDA or GITCA. There are 4 types of tip compliance agreements:

    • TRAC - Tip Reporting Alternative Commitment

    • TRDA - Tip Rate Determination Agreement

    • EmTRAC - Employer-designed TRAC

    • GITCA - Gaming Industry Tip Compliance Agreement

    (2) Participating Employee A tipped employee who enters an agreement with their employer to report tips at or above the tip rate established in the employer's Tip Agreement. This only applies to either a TRDA or GITCA.
    (3) Non-participating Employee A tipped employee who is not a participating employee, or who stated that they would participate but reported less than the agreed upon rate.
    (4) Venue Location where employee works, (i.e., Sunrise Cafe, Pool, Salon or Slots).
    (5) Job Classification/Position Employee’s job title i.e., food, server, maitre d’, bellman, bartender, colorist, nail technician etc.
    (6) Tip Rate/Gaming Amount of tips per hour, shift, drink, car, etc., that is assigned to each employee, based on their job classification and venue. The RAs or the ROEs review information provided by the employer and determine this amount. These rates are part of the tip agreement. The tip rate is multiplied by the number of hours, etc., the employee worked to determine the minimum amount of tips the employee should have reported as income to their employer.
    (7) Tip Rate/Food and Beverage For the Food and Beverage Industry, the tip income is based on the employer’s records. McQuatters v. Commissioner, T.C. Memo 1973-240, specifically addresses the factors that must be addressed. These factors were incorporated into a computation known as the McQuatter’s Formula.
    (8) Reported Tips The amount of tips an employee reports to his or her employer and is included on the taxpayer’s Form W-2.
    (9) Unreported Tips The difference between the employee’s reported tips and the amount of tips received by the employee (e.g., the amount of tips determined to be earned based on the tip rate).
    (10) Allocated Tips Additional tip income on a large food or beverage establishment employee's Form W-2. If the amount of tips the employee reported to the employer is less than 8 percent (or the approved lower rate) of the employee's share of food and drink sales, an amount will be entered in Box 8 of the Form W-2. Do not include allocated tips in determining tip income if the IRS has determined the actual tips through an examination, or if the employer has an agreement with the IRS and the employee is a participating employee.
    (11) Form 4137 This form is used to report tip income and related FICA taxes on the individual income tax return that were not reported to the employer(s) during the year.
    (12) Tip Extension Summary and Report/Gaming Industry Information from the Tip Program databases for each selected employee. This report includes employer’s name, employee’s position, shift, hours worked, tips reported, and tip rate. This information is used to determine the amount of unreported tip income.
    (13) Allocation and or the Excel spreadsheet/Food and Beverage Industry and Cosmetology Industry. The allocation sheet is used to report the tip income that should have been reported to the employer. The allocation sheet will contain the taxpayer’s job and the area of the business in which he or she worked, (i.e., beauty salon name, designer, restaurant name, room service, etc.). It provides details of the computation of the tip rate and the overall unreported tips based on the McQuatter’s Formula.
    (14) Excel spreadsheet for the Tribal Gaming Casinos The Excel spreadsheet will contain all of the same information as stated above but may have tip income computed on an hourly rate as well as on the percentage of gross sales. If all of the tip income is based on the McQuatter’s Formula, the information used to compute the percentages will be provided.
    (15) Form 886-A1, Employee Tip Examinations Worksheet Form 886-A1 is used to determine the employer’s share of FICA taxes after the employee’s share has been assessed.

4.19.15.29.2  (01-01-2014)
Contents of Case File

  1. Tip Income Information – The Area Offices will accumulate employer and employee data from the employers and determine which employees will be selected for an examination. For employee audits that are referred by the Area Offices, the data will be available on the Employee Data Report based on the Tip Agreement. The Employee Data Report and the list of selected employees will be provided to W&I headquarters/ Workload Development and Delivery team. The Food and Beverage and Cosmetology Industry tipped employee audits that are referred from Area Offices will contain a tip allocation worksheet or will be entered into an Excel spreadsheet.

  2. The following information will be available for taxpayers who have been selected for examination:

    • Employee’s name and SSN.

    • Employee’s position, venue and shift.

    • Number of hours worked.

    • Form 886-A1, Employee Tip Examinations Worksheet.

    • Employer’s name.

    • Tip agreement date and RTVUE of tax return, if filed.

    • Tip rate for employee’s position, venue and shift per the Tip Agreement.

    • Fact of filing.

  3. Other Case File Information - Case files may include the following information for all taxpayers:

    • AMDISA for the selected year(s).

    • IMFOLT for the selected tax year(s).

    • IRPTR information for the selected year(s).

    • McQuatter's allocation sheet for the Food and Beverage cases.

    • Employee Data Report.

    • Tracking sheet. Form 886-A1, Employee Tip Examinations Worksheet. (Two copies are required: one copy is to be used as a tracking sheet and another copy as part of the administrative file).

4.19.15.29.3  (12-12-2008)
Case Processing –General Information

  1. The following information describes procedures that are specific to the Tip Income Program. Unless otherwise stated, normal case processing procedures should be followed.

  2. Due to the specific procedures for assessing FICA taxes, all cases in the Tip Program should be filed separately from other cases or flagged for easy identification.

  3. Adjustments to tip income involve both income tax and FICA taxes. Therefore, two sets of report forms are required:

    Type of Tax Report Form Agreement Form
    Income tax Form 4549/Form 4549-EZ Form 4549/Form 4549-EZ
    Social Security Form 885-T Form 2504
    Medicare Form 885-T Form 2504
  4. As the chart shows, three forms must be prepared and sent to the taxpayer (tipped employee): Form 4549/ Form 4549-EZ, Form 885-T, and Form 2504. Form 886-A, Explanation of Items, and Form 886-A1, Employee Tip Examinations Worksheet, must also be sent. If the examination was based on the percentage of gross sales, a Form 886-MC will need to be completed and sent to the taxpayer. This form shows how the tip income was computed using the McQuatter's Formula. This provides the taxpayer with a detailed computation of the unreported tip income. Make sure that your workpapers clearly explain how you arrived at your adjustments. This information will be extremely important if the taxpayer requests a transfer to an Area Office, requests an Appeals conference, or petitions the court.

  5. Research AIMS to determine if another tax year is open for examination. If so, the cases should be worked by the same examiner.

4.19.15.29.3.1  (01-01-2014)
Filed Returns – Initial Contact

  1. Compare the tip income reported on Form 1040, including amounts reported on Form 4137, to the tip income identified by the Area Office.

    If And Then
    The tip income identified by the Area Office exceeds the amount reported on the tax return, including Form 4137   Include the unreported amount in the examination report.
    The taxpayer worked for more than one employer where tips were received The taxpayer participates in the tip agreement at one employer but does not participate at another Only the tip income reported by the employer for which the employee underreported tip income should be included.
    Both the taxpayer and the spouse on a joint return worked in a tipped occupation and a joint return was filed There is tip income information for one taxpayer but not the other Perform the necessary research to determine if there is unreported tip income for the other taxpayer and include all unreported tip income in the report.
  2. Follow the instructions below when allocated tips are shown on the taxpayer’s Form W-2:

    If And Then
    The payer is the same payer as shown on the tip extension report or other source document The taxpayer included the allocated tip amount from Form W-2 as income on Form 1040 Give the taxpayer credit for the allocated tips reported on Form 1040 when determining the unreported tip amount.
    The payer is the same payer as shown on the tip extension report or other source document The taxpayer did not include the allocated tip amount from Form W-2 as income on Form 1040 Disregard the allocated tip amount. Use the information from the extension report to determine the unreported tip income.
    The payer is not the same payer as shown on the extension report or other source document The taxpayer did not include the allocated tip amount from Form W-2 as income on Form 1040 Include the allocated tips as a separate issue when determining the unreported tip income.
    The payer is not the same payer as shown on the extension report or other source document The taxpayer included the allocated tip amount from Form W-2 as income on Form 1040 Assert the FICA penalty on the reported allocated tips.
    Instructions for non-filers:
    • If the payer is the same payer as shown on the tip extension report or other source document, disregard the allocated tip amount. Use the information from the extension report or other source document to determine the unreported tip income.

    • If the payer is not the same payer as shown on the extension report or other source document, include the allocated tips as a separate issue when identifying the unreported tip income.

  3. Use the following table to determine other audit issues:

    If Then
    The information on IRPTR shows allocated tips from a different type of property than the one that generated the unreported tip income. That amount should be included in the unreported income, with the appropriate explanation(s) on Form 886-A. For example – if the unreported tips are from a casino venue and IRPTR shows allocated tips from a restaurant, include the allocated tips from the restaurant as unreported tip income on the exam report.
    Any other items on the return require examination Include them on the report with the appropriate explanation(s) on Form 886-A.
  4. RGS categorization for unreported tip income is: AGI Adjustment/Taxable Earned or Personal Service Income/Unreported Tips from Form 4137. Choose "Primary Taxpayer" or "Secondary Taxpayer" as appropriate and answer "Yes" to the "Assert FICA Penalty" question. This categorization will generate the preparation of Form 2504 and the proper transaction codes on Form 5344.

    • Form 2504 will reflect a late filing penalty if it is applicable.

    • The taxpayer may be subject to a penalty equal to 50 percent of the FICA tax due on unreported tips reported on Form 4137 filed with the return. Write in and identify the applicable amount on the Form 2504 generated by RGS and recompute the total penalty amount shown on the Form 2504. Change the TC 310 amount on Form 5344 to reflect the correct amount.

    • Proper categorization of the tip income will generate Reference Codes 891, 892, 898 and 899 as necessary for the Primary or Secondary taxpayers on Form 5344 and on the Examination Closing Input Document (ECID). Do not delete the Reference Codes as they are required entries for the partial assessment and may need to be adjusted.

  5. Use the following standard explanations for the tip income issues in your initial contact with the taxpayer and in subsequent contacts as necessary.

    Explanation Description
    1101 Tips are includible in income
    8107 IRC 6652(b) penalty – 50 percent of the FICA taxes on the unreported tip income
    8201 IRC 3101 – employee’s share of the FICA taxes on the unreported tip income.
    Custom Explanation Explanation of tip income examination, examination reports and options available to the taxpayer. This is not currently an RGS paragraph. It is attached to the RGS file through MS Word.
  6. Prepare the Form 886-A1, Employee Tip Examinations Worksheet. Enter the name(s) of the employer, taxpayer’s position, location worked, shift, hours, tip rate, amount of tips reported to the employer and amount of tips reported on Form 4137. The remaining calculations will be completed by the formulas built into the spreadsheet. The amount on the "Unreported Tips" line should be the same amount shown on Form 4549/Form 4549-EZ and Line 2 of Form 885-T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, as unreported tip income.

    • Taxpayers contacted in this program have been advised of their reporting requirements by their employers and were given the opportunity to participate in the tip compliance agreement program. Choosing not to participate in a tip agreement is a tipped employee’s choice. If the tipped employee does not accurately report his or her tip income, the failure to report income may constitute intentional disregard of rules or regulations, as defined by IRC 6662(b)(1), or otherwise be subject to a civil penalty.

  7. Consider asserting the Accuracy Related Penalty for Negligence, IRC 6662(b) (1), on the amount of unreported tip income based on facts and circumstances surrounding the case. Assert IRC 6662(d) if requirements for the Substantial Underpayment Penalty are met.

  8. Consider any fraudulent/altered documents provided by the taxpayer for fraud penalty referral. Refer to IRM 25.1Fraud Handbook and IRM 4.19.10.4Fraud Referrals for a list of indicators of fraud and the referral process.

  9. Letter 525 is the initial contact letter for these cases. Prepare the mail-out package using normal procedures and include Form 886-A (Unreported Tip Income) and the custom explanation.

    • RGS auto-populates the deficiency, penalty and interest from Form 4549/Form 4549-EZ as the balance due on Letter 525. Correct this amount to include the Form 4549/Form 4549-EZ amount plus the taxes and penalty shown on Form 2504.

  10. Follow normal Letter 525 procedures for mail-out and suspense.

  11. Prepare a Form 886-A1Employee Tip Examinations Worksheet for each employee. This form can hold up to 5 venues. Leave a copy of each Form 886-A1Employee Tip Examinations Worksheet that has been completed loose in the case file to be used as a tracking sheet. If multiple tracking sheets are prepared please staple them together so that they can be forwarded as one package.

    • On joint returns, enter the SSN of the taxpayer who received the tip income on the Form 886-A1 Employee Tip Examinations Worksheet.

    • If the unreported tip income per the information provided by the Area Office was included on Form 4137 filed with the return, you must still complete a tracking sheet for the tips and FICA taxes shown on Form 4137 so the corresponding employer’s share of FICA taxes can be assessed. Attach the Form 4137 filed with the return to the tracking sheet. No other documents or reports should be attached to the tracking sheet.

    • When the case is ready to close, the tracking sheet Form 886-A1, Employee Tip Examinations Worksheet, should match the closing actions and determination on Form 5344. These tracking sheets will be sent to the originating Area Offices’ Tip Coordinator on a monthly basis and quarterly basis to Indian Tribal Gaming (ITG) Tip Compliance Coordinator from TEGE.

  12. Tip cases will include two partial Forms 5344, one Form 5344 for the FICA taxes, penalty, and reference codes, and one for the income tax and related penalties and reference codes. Both forms are to be input at the time of closure, so Posting Delay Codes (PDCs) are needed to prevent unpostable transactions and for audit trail purposes.

    Disposal Code and Closure Posting Delay Codes
    DC 04 (agreed) before 90 day letter All transactions can be entered on one Form 5344. No PDC needed.
    DC 04 but IRC 6404(g) applies Same as above but input PDC 1.
    DC 09 (agreed) after 90 day letter FICA taxes and related actions will have to be processed on the partial Form 5344 and Income tax on the closing Form 5344. Both will be processed at the same time. Input PDC 1 on the final.
    DC 09 (agreed) after 90 day letter and IRC 6404(g) applies The partial will use a PDC 1 but the Closure will use PDC 2.
    DC 10 (Default) and DC 13 (Undeliverable) Follow instructions for DC 09 above.
  13. The FICA taxes and the related penalties cannot be included on the Statutory Notice of Deficiency. These assessments must be made prior to the issuance of the 90 day letter. Refer to IRM 25.6 Statute of Limitations for assessment statute of limitations on unreported tips income and IRM 4.23.7.4, Form 4137 Requirements. Ensure that the assessments are input timely and properly, prepare Form 5344 whenever you prepare a report and make the following notations (see table below) on the Examination Closing Input Document (ECID) or Form 3198. Attach the ECID to the inside of the case folder. Attach Form 3198 to the outside of the case folder.
    The Examiner may include Form 886-A2 (For Information Only) with the 90 day package. This will inform the taxpayer that the income tax and the FICA taxes are both due.

    If Then And Enter These Amounts
    You are issuing the report with Letter 525 Annotate the ECID or Form 3198
    • Assess FICA taxes$ XX.XX (TC 300)

    • Assess FICA Penalty $XX.XX (TC 310)

    • Assess Delinquency Penalty $XX.XX (TC 160) (if applicable)

    • Enter TC 470/ CC 90

    • Enter Hold Code 4

    On
    • Form 2504 - Total Amount of Tax

    • Form 2504 - IRC 6652(b) Penalty

    • Form 2504 - IRC 6651 Penalty

    Change the TC 300 shown on Form 5344 TC 300 entered by RGS less the total amount of tax on Form 2504. (Deficiency shown on Form 4549 )
    If applicable, change the TC 160 shown on the Form 5344 TC 160 entered by RGS less the delinquency penalty shown on Form 2504

4.19.15.29.3.2  (11-29-2011)
Non-Filers

  1. Follow the procedures beginning at IRM 4.19.17.3, Non-Filer Processing.

  2. The AIMS database should be created with the following information:

    Item Value
    Status 06
    Source Code 24
    Project Code The Gaming Industry cases generating from non-Indian Tribal Casinos will have Project Code 0360. Indian Tribal Gaming cases will have Project Code 0916. Food and Industry Non-Gaming cases will have Project Code 0364 and Cosmetology Industry will have Project Code 0672.
    Org Code 5XXX
    Push Code 036
  3. After you have verified that the "dummy" TC 150 and TC 420 have posted to Master File, prepare Form 4549/Form 4549-EZ based on all available IRP information and the tip income information in the case file.

  4. RGS categorization for unreported tip income is: AGI Adjustment/Taxable Earned or Personal Service Income/Unreported Tips from Form 4137. Choose "Primary Taxpayer." The Filing Status on these cases will be either "Single" or "MFS" . Answer "Yes" to the "Assert FICA Penalty" question. This categorization will generate the preparation of Form 2504 and the proper Transaction Codes on Form 5344.

  5. Follow the instructions under Filed Returns for standard explanations, asserting penalties and the preparation of Examination Closing Input Document (ECID) or Form 3198, Form 886-A (Unreported Tip Income) and the tracking sheet.

  6. Send initial contact letter and follow normal procedures for preparation, mail-out and suspense.

4.19.15.29.4  (08-29-2013)
Case Processing – Revised Reports and Responses to 90 day Letters

  1. If the taxpayer replies to the Letter 525 or Letter 1862 and a revised report is prepared, issue Letter 692 (SC/CG). Follow normal procedures for mail out and suspense of the letter.

    If Then And Enter These Amounts
    You are issuing the report with Letter 692 Annotate the ECID or Form 3198:
    • Assess FICA taxes $ XX.XX (TC 300)

    • Assess FICA Penalty $XX.XX (TC 310)

    • Assess Delinquency Penalty $XX.XX (TC 160) (if applicable)

    • Enter Hold Code 4

    On
    • Form 2504 – Total Amount of Tax

    • Form 2504 – IRC 6652(b) Penalty

    • Form 2504 – IRC 6651 Penalty

    Change the TC 300 shown on Form 5344 TC 300 entered by RGS less the total amount of tax on Form 2504. (Deficiency shown on Form 4549 )
    Annotate the ECID or Form 3198 TC 160 entered by RGS less the Delinquency Penalty shown on Form 2504
    If the case falls under the provision of IRC 6404, input TC 971 AC 064 with dollar amount  
  2. Ensure that the assessments for FICA tax and related penalties are made before the 90 day letter is issued. Refer to IRM 25.6 Statute of Limitation on assessment statute of limitation on unreported tips income and IRM 4.23.7.4 Form 4137 Requirements. If you are evaluating a response to a 90 day letter and have reduced the amount of under-reported tip income, prepare the ECID or Form 3198 as shown in the table after the next paragraph to ensure that the taxpayer is not over-assessed for FICA taxes and the penalty.

    Note:

    If a taxpayer requests Appeals rights during the course of an examination, the FICA tax and penalty will be assessed prior to transferring to Fresno Appeals function. This is to ensure that the FICA tax and penalty statute are not barred. Any notices generated relating to FICA tax and penalty to the taxpayer should be suppressed. The Examiner/lead and the Clerical unit will review case file to ensure that it is followed and that the case file includes workpapers and Form 886-A1 with tip unreported income calculations for the taxpayer. The Fresno appeals function will adjust/abate the FICA tax and penalty, if necessary, at the conclusion of their appeals process.

  3. Send Letter 555 and follow the normal procedures for mail-out and suspense. Keep in mind the restrictions on increasing the assessment and requesting documentation after the statutory notice has been issued. See IRM 4.19.13.12, Statutory Notices.

    Direction Transaction/Reference Code Amount
    Abate FICA taxes TC 301 Difference between the FICA taxes already assessed and the amount shown on the corrected Form 2504
    Abate FICA Penalty TC 311 Difference between the FICA penalty already assessed and the amount shown on the corrected Form 2504.
    Abate Delinquency Penalty (if applicable) TC 161 Difference between the delinquency penalty already assessed and the amount shown on the corrected Form 2504.
    Input Reference Codes 891 and 898 (for Primary taxpayer) Difference between the Primary taxpayer’s unreported tip income shown on Form 4549/Form 4549-EZ that accompanied the 90 day letter and the Primary taxpayer’s unreported tip income shown on your revised report. (Show this amount in brackets.)
    Input Reference Codes 892 and 899 (for Secondary taxpayer) Difference between the Secondary taxpayer’s unreported tip income shown on the Form 4549/Form 4549-EZ that accompanied the 90 day letter and the Secondary taxpayer’s unreported tip income shown on your revised report. Show this amount in brackets.
  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.15.29.5  (01-01-2014)
Case Processing – Closing Actions and Other Information

  1. There are special rules for assessing FICA taxes. FICA tax and the associated penalties may have to be assessed prior to issuing the 90 day letter. In order to ensure that assessments are input timely and properly, follow the instructions for the Examination Closing Input Document or Form 3198. Also refer to IRM 4.19.15.29.4(2) Case Processing - Revised Reports and Responses to 90-Day Letters.

  2. Unless otherwise instructed, follow normal closing procedures. Refer to the table to determine the action to take and to IRM 4.4, AIMS Processing.

    If Then
    The taxpayer agrees to the 15/30 day letter Input all transaction codes per the ECID, Form 3198, or Form 5344 as printed by RGS. Disregard handwritten notations, except for changes to the TC 310 amount.
    The taxpayer does not respond to the 15/30 day letter Do a partial assessment if the case has a short statute. If not, input the partial assessments at the time of closing. Use AMCLSF and input the following:
    • TC 300 per the examiner’s instructions

    • TC 310 per the examiner’s instructions.

    • TC 160 per the examiner’s instructions. This will not occur on all cases.

    • Reference Codes 891, 892, 898 and 899 as shown on Form 5344.

    • If partial is input at closing use Posting Delay Code 1.

    • Hold Code 4

    • TC 470 with Closing Code 90 on IDRS using Command Codes REQ77/FRM77 if partial is input prior to 90 day.

    Prepare the 90 day letter for the income tax deficiency and penalties shown on Form 4549/Form 4549-EZ.
    The taxpayer agrees to the 90 day letter or the 90 day letter defaults. Using AMCLSE input:
    • TC 300, TC 350/ Ref. 680, TC 160 per the Form 4549/Form 4549-EZ issued with the 90 day letter.

    • Input all other transactions and references per Form 5344, if they have not been previously input.

    A revised report and Letter 555 adjusting the tip income were issued after the 90 day letter and the taxpayer agrees or the case defaults. Do a partial abatement using AMCLSF and input the following:
    • TC 301 per the examiner’s instructions.

    • TC 311 per the examiner’s instructions

    • TC 161 per the examiner’s instructions. This will not occur on all cases.

    • Reference Codes 891, 892, 898 and 899 per the examiner’s instructions.

    Using AMCLSE input:
    • TC 300, TC350/ Ref. 680, TC 160 per the revised Form 4549/Form 4549-EZ issued with the Letter 555.

    • Input all other transactions and references per Form 5344, if they have not been previously input.

  3. Requests for Transfers to an Area Office and Statute Extensions. A case should not be transferred if there are less than 13 months remaining on the statute of limitations. Refer to IRM 4.19.13.14.1 Transfers to Area Office.

    • All Tip program cases that require transfer to Area Office should be routed to the clerical support unit. The support unit will update AIMS and RGS and then route to the following address: Internal Revenue Service - Attn: PSP M/S 4031 - 600 17th Street - Denver, CO 80202

    • HQ analyst should be informed of the transfer request to the Area Office.

    • Refer to IRM 4.19.17, Non-Filer Program, for information on the statute of limitations for non-filers and the returns they file in response to the initial contact letter or subsequent letter.

    • In cases where the time constraints do not allow for transferring the case, contact the taxpayer, explain the situation and ask the taxpayer to explain what his or her concerns are. Try to resolve the issues via correspondence. If the taxpayer insists on transferring his case and the Statutory Notice has not yet been issued and there are less than 13 months remaining on the statute of limitations, the statute of limitations must be extended.

    • If the taxpayer filed Form 4137 with the tax return, prepare Form 872Consent to Extend the Time to Assess Tax, and Form SS-10Consent to Extend the Time to Assess Employment Tax to extend the statute of limitations on both the income and the FICA taxes. Follow normal procedures for mail out and suspense of the request to extend the statutes. Refer to IRM 25.6, Statute of Limitations.

    • If Form 4137 was not filed with the return, prepare Form 872 for the income tax only.

  4. Other Processing Guidelines

    • If the taxpayer states that he or she disagrees with the report and you cannot clearly determine the basis of the disagreement, follow normal procedures for contacting the taxpayer to get clarification.

    • If necessary, the unreported tip income as shown on the original report can be adjusted. However, do not change the taxpayer’s hours, shift, position, or venue unless the taxpayer has provided information from the employer.

    • Obtain as much information as possible from the taxpayer and document it in detail on your workpapers.

    • Access any additional information that is available from the Tip Match database and other employer driven resources.

    • If the taxpayer disagrees with an adjustment that is not related to the tip income use normal procedures to evaluate the information the taxpayer provides.

    • Tip diaries must meet specific requirements in order to be accepted. For information on the specific requirements for a tip diary, see Pub 531, Reporting Tip Income, or section 31.6053-4(a)(2) of the Employment Tax Regulations. Also refer to the SERP Job Aids.

    • If the taxpayer states he or she agrees with the adjustment to the tip income, but provides information about employee business expenses the taxpayer may be entitled to, evaluate that information and make the necessary determination based on the information provided.

    • If the taxpayer responds to the Letter 1862 with a tax return, review the return for accuracy and process the return as instructed in IRM 4.19.17.3, Non-Filer Processing.

    • If the taxpayer’s response results in a revision to Form 4549 /Form 4549-EZ and Form 2504 make sure you make the corresponding changes to the tracking sheet.

    • If the taxpayer wishes to have a representative conduct the examination on his or her behalf, Form 2848 must give the representative authority to handle the income tax and the FICA tax issues.

4.19.15.30  (01-01-2014)
10 Percent Additional Tax on Early Distributions – IRC 72(t)

  1. The 10 percent early distributions additional tax is an income tax which is assessed on the Individual Master File and taken into account when the total corrected income tax is determined by the tax examiner. Returns included in this program should all have taxable early distributions from qualified retirement plans, Individual Retirement Arrangements (IRAs), or annuity contracts.

  2. To encourage taxpayers to save for retirement, Congress enacted an early distributions tax that requires taxpayers to pay an amount equal to 10 percent (or 25 percent of certain SIMPLE IRA distributions, if applicable) of the taxable amount distributed from a retirement plan before they reached the age of 591/1. The tax is 10 percent (or 25 percent if applicable) of the amount of early distributions includible in gross income and required to be reported on Lines 15b or 16b of Form 1040. The 25 percent additional tax applies to early distribution from a SIMPLE IRA account that occurs within 2 years from the first contribution made by the employer. Distributions subject to the 25 percent additional tax are reported on Form 1099-R with a Distribution Code S in Box 7.

  3. There are a number of exceptions to these additional taxes. Tax examiners will be required to determine if the taxpayer meets one of the exceptions or if the taxpayer simply failed to report the proper amount. See Table A and B for details regarding exceptions. Generally, the plan Procedural Instructions Administrator (PIA) (individual or entity who is responsible for preparing Form 1099-R ) will not know if a taxpayer is using the distribution for a first time home purchase, qualified medical expenses or qualified higher education expenses. Therefore, the PIA will code the Form 1099-R Box 7 as 1 (early distribution, no known exception.)

4.19.15.30.1  (01-01-2015)
Procedural Instructions

  1. Tax Examiners who work these cases should take the following Basic Income Tax Training lessons: IRA, Pensions, Annuities and IRA Deductions.

  2. For more information consult Pub 590, Individual Retirement Arrangements (IRAs), Pub 575, Pension and Annuity Income (Including Simplified General Rule), Instructions for Form 5329 and Instructions for Form 1099–R.

  3. Tax examiners must conduct the following research before contacting the taxpayer to determine if the case should be surveyed and to ensure the audit report is correct.

    IDRS Command Codes If Then
    INOLES to determine taxpayer’s age. At time of distribution 59 1/1 or older survey, close on AIMS using DC 31
    55 or older and meets exception per TABLES A and B survey, close on AIMS using DC 31
    TXMOD to verify if taxpayer amended Form 1040 and reported 10/25 percent additional tax reported survey case and close on AIMS using DC 31.
    IRPTR
    1. to verify if payer filed amended Form 1099-R for the distribution(s) that is (are) subject to the 10 percent or 25 percent additional tax,

    2. to verify that all taxable pension, IRA distributions, or any other taxable income have been reported on the return. Include in income any unreported taxable income determined, and

    3. to determine if pension or IRA distributions are substantially equal to distributions received in the prior or subsequent tax years. These should be surveyed and closed DC 31 if criteria is met.

    Form 1099-R Box 7 Code is:
    1. 2 (early distribution, exception applies and under 59 1/1)

    2. 3 (Disability), or

    3. 4 (Death)

    survey, close on AIMS using DC 31.
    Form 1099-R Box 7 Code is:
    1. G (Direct Rollover of a distribution to a qualified plan, a Section 403(b) plan, a governmental Section 457(b) plan, or an IRA. This does not include the direct rollover of a designated Roth account distribution.)

    2. H (Direct Rollover of a designated Roth account distribution to a Roth IRA.)

    Note:

    See the instructions to Form 1099-R for Codes G and H.

    survey, close on AIMS using DC 31.

    Note:

    If the additional tax on early distribution does not apply, consider opening the examination if the amount of unreported income is material

  4. 10 percent additional tax cases are opened on AIMS in Project Code 0123, Source Code 06.

  5. Cases selected using the UCP (Unattended Case Processing) Filter Create Discretionary tool will create in RGS Group B2, pending Status 10, with the Letter 566 and accompanying Form 886-A. A 100 percent review of these cases is required to identify cases that should be surveyed prior to contacting the taxpayers. Based on the required research shown above, if it is determined the taxpayer meets one of the exceptions and is not liable for the 10 percent additional tax, the case should be surveyed and letter and forms not issued to the taxpayer. Also, the 10 percent additional tax issue should be reviewed to ensure the tax is only being assessed on applicable distributions and to include any unreported income. Cases which pass review, after any necessary corrections have been made, should be reintroduced to ACE (Automated Correspondence Exam) for subsequent automated processing.

  6. The case will be suspended for 45 days.

  7. The Letter 525, Form 886-A and Form 4549/Form 4549-EZ (audit report) will be prepared systemically during ACE Create 2 processing. Cases which fire one of the standard filters during Create 2 processing will reject to RGS Group B2. The audit reports must be randomly reviewed, per ACE procedures in IRM 4.19.20.1.9, Reviews. The standard explanation included in Form 886-A is determined by whether an amount is reported on Lines 15b and/or 16b on Form 1040, or 11b and/or 12b on Form 1040A.

    1. Use the following standard explanations if an entry is on Line 16b (pensions and annuities taxable amount) but there is no entry on Line 15b (IRA distribution taxable amount) of the Form 1040. Also, an entry is on Line 12b (pensions and annuities taxable amount) and there is no entry on Line 11b (IRA distribution taxable amount) of the Form 1040A:

      Additional tax of 10 percent due to the early distribution made from your qualified retirement plan.
      We are proposing to adjust your tax by 10 percent of the taxable amount of the early distribution made from your qualified retirement plan because you received the distribution before you reached age 591/1, and the payment did not qualify for one of the following allowable exceptions:
      • Payments made from the Plan after you separate from service if you will be at least 55 during the year of payment

      • Payments made on account of total and permanent disability

      • Payments made in substantially equal amounts over your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary)

      • Payments after the death of the participant

      • Payments of Employee Stock Ownership Plan (ESOP) dividends

      • Payments paid directly to the government to satisfy a federal tax levy

      • Payments made to an alternate payee under a Qualified Domestic Relations Order (QDRO)

      • Payments not exceeding the amount of your deductible medical expenses (whether or not you itemized deductions)

      • Payments while you are on active duty if you were called to duty after September 11, 2001, for more than 179 days

      • Payments from a governmental defined benefit pension plan to a qualified public safety employee who is at least age 50 at the time the public safety employee separates from service

      If you believe you qualify for one of the exceptions, please provide us with documentation that shows you meet one of the above exceptions. Examples of acceptable documents include:
      • corrected Form 1099-R from the issuing entity, or

      • a statement from your plan administrator explaining why you meet the exception, or

      • a statement from your medical practitioner explaining your disability, or

      • copies of cancelled checks or receipts showing when and what qualified expenses were made, or

      • a copy of the QDRO (generally part of your divorce decree).

      Additional tax of 10 percent due to the early distribution made from your annuity contract.
      We are proposing to adjust your tax by 10 percent of the taxable amount of the early distribution made from your annuity contract because you received a distribution before you reached age 591/1, and the payment did not qualify for one of the following allowable exceptions:
      • Payments after the death of the annuity owner

      • Payment made on account of total and permanent disability

      • Payments made in substantially equal amounts over your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary)

      • Payments allocable to an investment in the contract before August 14, 1982

      • Payments made under a qualified personal injury settlement

      • Payments made under an immediate annuity contract or

      • Payments made under a deferred annuity contract purchased by your employer upon termination of a qualified plan that is held by your employer until you separate from service

      • Payments while you are on active duty if you were called to duty after September 11, 2001, for more than 179 days

      • Payments from CSRS and FERS made under a phased retirement annuity (effective date pending implementation of final OPM regulation)

      If you believe you qualify for one of the exceptions, please provide us with documentation that shows you meet one of the above exceptions. Acceptable documents include:
      • corrected Form 1099-R from the issuing entity, or

      • a statement from your annuity holder explaining why you meet the exception, or

      • a statement from your medical practitioner explaining your disability

    2. Use the following standard explanations if an entry is on Form 1040 Line 15b (IRA distribution taxable amount), but there is no entry on Line 16b (pensions and annuities taxable amount), or if an entry is on Line 11b (IRA distribution taxable amount), but there is no entry on Line 12b (pensions and annuities taxable amount) for Form 1040A.

      Additional tax of 10 percent due to the early distribution made from your Individual Retirement Account (IRA).
      We are proposing to adjust your tax by 10 percent of the taxable amount of the early distribution made from your Individual Retirement Account (IRA) because you received the distribution before you reached age 591/1, and the payment did not qualify for one of the following allowable exceptions:
      • Payments made on account of the total and permanent disability

      • Payments made in substantially equal amounts over your life or life expectancy (or joint lives or life expectancies of you and your beneficiary)

      • Payments after the death of the IRA owner

      • Payments for qualified higher education expenses

      • Payments to buy, build, or rebuild a first home

      • Payments paid directly to the government to satisfy a federal tax levy

      • Payments not exceeding the amount of your deductible medical expenses (whether or not you itemized deductions)

      • Payments to unemployed individuals for health insurance premiums

      • Payments while you are on active duty if you were called to duty after September 11, 2001, for more than 179 days

      If you believe you qualify for one of the exceptions, please provide us with documentation that shows you meet one of the above exceptions. Examples of acceptable documents include:
      • corrected Form 1099-R from the issuing entity

      • a statement from your plan administrator explaining why you meet the exception

      • a statement from your medical practitioner explaining your disability, or

      • copies of cancelled checks or receipts showing when and what qualifying expenses were made.

    3. Use all of the standard explanations (per 7a and 7b above) on Form 886-A if there is an entry on both Lines 15b (IRA distribution taxable amount) and 16b (pensions and annuities taxable amount) on Form 1040 [Lines 11b (IRA distribution taxable amount) and 12b (pensions and annuities taxable amount) on Form 1040A].

  8. Suspend the case for 45 days waiting for taxpayer response to Letter 525. If no reply is received, follow the procedures in IRM 4.19.13.11, No Response and Unagreed Cases.

  9. Use the following table when reviewing the taxpayer’s reply.

    If Then
    The taxpayer signs the report or, prior to the mailing of a Statutory Notice of Deficiency, pays the full amount, Close the case using normal procedures.
    The taxpayer submits documentation and you need additional information,
    1. If the taxpayer provides a phone number, attempt to call the taxpayer and notate the phone call in your case file.

    2. If the attempt to contact the taxpayer is unsuccessful, follow procedures in IRM 4.19.13.9.1 (Taxpayer Response – Additional Information Needed).

    The taxpayer appeals the determination, Follow relevant procedures in IRM 4.19.13.11, No Response and Unagreed Cases and IRM 4.19.13.14, Transfers to Area Office Examination or Appeals Office.
    The taxpayer submits sufficient documentation (refer to tables A and B below) to verify an exception was met, Close no change using normal procedures.
  10. Table A provides the category of plan and in what tax year the exception is available. Verify that the correct plan applies to the correct exception. For example, a distribution from a 401(k) Plan is not available for the first time home buyer exception. The distributions made after separation from service after age 55 exception is not available for an IRA distribution.

    TABLE A
    Exceptions to early distribution tax IRA Qualified Retirement Plan Annuity Tax Year
    Payments made on or after the date the plan participant or account holder reached 591/1. x x x ALL
    Payment made to a beneficiary upon death of the plan participant or contract holder. x x x ALL
    Payment made based on total and permanent disability of the recipient. x x x ALL
    Distribution made as a part of a series of substantially equal payments. x x x ALL
    Distribution used for certain higher education expenses. x     Starting 1998
    Distributions used for first-time home purchase (Up to $10,000). x     Starting 1998
    Distributions made after separation from service in or after the year the participant reached age 55.   x x Starting 1998
    Distributions made to the extent of deductible medical expenses that can be claimed on Line 4 of Schedule AForm 1040. (Does not apply to annuity contracts or modified endowment contracts.) x x   After 1996
    Distributions made to unemployed (at least 12 weeks) individuals for health insurance premiums. x     After 1996
    Payments to an alternate payee under a qualified domestic relations order QDRO.   x   ALL
    Payments made if, as of March 1, 1986, the plan participant separated from service and began receiving benefits under a written election.   x x ALL
    Payments made to correct excess deferrals, excess contributions, or excess aggregate contributions.   x   ALL
    Payments allocable to investment in a deferred annuity contract before August 14, 1982.     x ALL
    Payments from an annuity contract under a qualified personal injury settlement.     x ALL
    Payments made under a deferred annuity contract purchased by the employer upon the termination of a qualified retirement plan or qualified annuity and that is held by the employer until the participant separates from service.     x ALL
    Payments made under an immediate annuity contract.     x ALL
    The distribution is due to an IRS levy of a qualified plan under Section 6331 of the Internal Revenue Code. x x x Starting in 2000
    Qualified hurricane distributions (up to $100,000) as described in section 1400Q(a)(4) of the Internal Revenue Code. x x x On or after August 25, 2005 and before January 1, 2007
    Distributions to qualified reservists called to active duty for more than 179 days or for an indefinite period. x x x After September 11, 2001
    Payments from a federal retirement plan made under a phased retirement annuity program     x Upon implementation of final OPM regulations.
  11. The following bullets apply to Table A

    • A five percent rate may apply to certain annuity distributions – see IRM 4.19.3.14.3, 10 Percent Tax on Early Distributions From Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for more information.

    • IRAs include: Traditional, Roth, and SIMPLE IRAs.

    • Qualified Retirement Plans include: 401(a) qualified pension, profit-sharing, and stock bonus plan, including 501(a) tax exempt trust plan, 403(a) qualified employee annuity plan, 403(b) employee annuity contract purchased by a public school or by a 501(c)(3) tax exempt organization, employee stock option plan (ESOP), 401(k) qualified cash or deferred arrangement plan, CSRS, FERS, the Federal Thrift Savings Plan, and any tax favored deferred compensation plan that is not an IRA, a SIMPLE IRA or an individual retirement annuity.

  12. Table B details acceptable documentation for exceptions to the early distributions tax. The list is not all inclusive.

    Table B
    If the taxpayer claims one of the following exceptions: Then acceptable verification is:

    Note:

    Always accept a corrected Form 1099-R. Do not accept Form 5329 submitted after filing as verification.

    Payments made on or after the date the plan participant or account holder reached age 591/1, Taxpayer’s age verified using IDRS CC INOLES or birth certificate.
    Payment made to a beneficiary upon death of an IRA holder or pension plan participant (not applicable to modified endowment contracts), Date of death verified via IDRS CC INOLES or death certificate, plan beneficiary form or statement from plan administrator.
    Payment made based on total and permanent disability, Letter from medical practitioner or Social Security disability payments from Form SSA-1099 using IDRS CC IRPTR verifying the taxpayer’s permanent and total disability.
    Distribution made as a part of a series of substantially equal payments,
    • Review prior and subsequent year IRP documents, tax returns or RTVUE for amounts distributed and/or reported.

    • Confirm math is correct by method described in Publication 590, Individual Retirement Arrangements (IRAS), or Publication 575, Pension and Annuity Income (Including Simplified General Rule)..

    • Rev. Rul. 2002-62 will affect some distributions made after 2001 if there has been a modification to the series of periodic payments.

    Distribution used for certain higher education expenses (tuition, fees, books, supplies and equipment required by the school for enrollment or attendance of a student). Eligible expenses should be reduced by scholarships and any other tax-free awards.

    Reminder:

    The distribution and payments must be within the same tax year.

    Verified expenses from Form 1098-T using IDRS CC IRPTR, copies of cancelled checks/money orders and invoices, or statement from school showing dates and payment amounts of higher education expenses.

    Reminder:

    Do not accept direct payments from taxpayer to student.

    Distributions used for a first-time home purchase, up to $ 10,000 (this is a lifetime limit). The distribution must be used for this purpose within 120 days after the distribution. Must be principal residence
    • Acceptable costs include expenses to acquire, construct or reconstruct a residence, reasonable settlement, financing, or other closing costs,

    • First time homebuyer defined as the taxpayer and, if married, the spouse, as well as any child, grandchild or ancestor of the taxpayer or spouse, who had no ownership interest in a principal residence in the two year period preceding the date of closing or preceding the date that construction/reconstruction commenced,

    • The 60-day rollover period (see below) for recontributing the distribution to an eligible retirement plan is extended to 120 days if the taxpayer does not close due to delay or cancellation of the purchase or construction of the residence.

    To verify if first-time purchase, use IDRS and research prior years for mortgage interest or real estate tax payments for first time purchase:
    • Copies of cancelled checks or money orders, contracts, or closing (settlement) statements showing how the money was used.

    • Letter from financial institution or seller explaining reason for delay or cancellation of closing if applicable.

    Distributions made after separation from service in or after the year the participant reached age 55.
    • Use IDRS CC INOLES to verify taxpayer’s age

    • Check taxpayer’s current and prior years Form W-2s to verify separation from service.

    Distributions made to the extent of deductible medical expenses that can be claimed on Line 4 of Form 1040Schedule A, regardless of whether the taxpayer itemized deductions. (Does not apply to annuity contracts or modified endowment contracts.) IRM 4.19.15.23, Schedule A, for verification procedures.
    Distributions made to individuals unemployed (for at least 12 weeks) for payment for health insurance premiums.
    • Verify unemployment from Form 1099-G or employee records

    • Copies of cancelled checks, money orders for insurance payments or statement of account from insurance agent/company

    Paid to an alternate payees under a qualified domestic relations order, QDRO. Divorce decree or statement from plan administrator.
    Payments from an employer plan made if, as of March 1, 1986, the plan participant separated from service and began receiving benefits under a written election. Statement from plan administrator.
    Payments made from employer plans to correct excess wage deferrals, excess contributions, or excess aggregate contributions. Statement from plan administrator. See Employee Compensation, Retirement Plan Contributions in Pub 525 , Taxable and Nontaxable Income.
    Payments from a deferred annuity contract to the extent allocable to investment in the deferred annuity contract before August 14, 1982. See Publication 575, Taxable and Non-Taxable Income, for more information and accept statement from plan administrator.
    Payments from an annuity contract under a qualified personal injury settlement. See Publication 575, Taxable and Non-Taxable Income, for more information and accept statement from plan administrator.
    Payments made under an immediate annuity contract. See Publication 575, Taxable and Non-Taxable Income, for more information and accept statement from plan administrator.
    Payments made under a deferred annuity contract, purchased by the employer upon the termination of a qualified retirement plan, or a qualified annuity that is held by the employer until the participant separates from service. See Publication 575, Taxable and Non-Taxable Income, for more information and accept statement from plan administrator.
    The distribution is due to an IRS levy of a qualified plan under Section 6331 of the Internal Revenue Code Copy of IRS Levy showing account levied.
    Rollover – This is a tax-free distribution of assets from one eligible retirement plan that is reinvested in another eligible retirement plan or the same plan. The rollover must be completed within 60 days from the date of receipt of the distribution. The amount rolled over is not subject to either the 10 percent or 25 percent additional tax. See Publication 590, Individual Retirement Arrangements (IRAS), for the frozen deposit exception to this rule. Statement from administrator of the new plan.
    Transfer –If the taxpayer instructs the plan trustee to transfer funds directly to another plan, the transferred amount is not taxable or subject to the early distributions tax. Statement from plan administrator.
    Payments from CSRS and FERS made under a phased retirement annuity program. Statement from plan administrator.
    Permissible withdrawal made from an eligible automatic contribution arrangement (EACA) Statement from plan administrator.
  13. The following bullets apply to Table B

    • The tax on early distributions does not apply to any part of the distribution that is tax free, such as amounts that represent a return of the taxpayer’s cost or amounts rolled over/transferred (see above) to another retirement plan.

    • To avoid the 25 percent additional tax on an early distribution from a SIMPLE IRA Plan, the distribution must be rolled over/transferred into another SIMPLE IRA Plan.

    • Certain Roth IRA distributions are not subject to the 10 percent additional tax, see 2001 Instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAS) and Other Tax Favored Accounts, Page 2 and Publication 590, Individual Retirement Arrangements (IRAS), for more information. Rev. Rul. 2002-62 allows certain taxpayers who began receiving fixed payments from their IRA or retirement plan based on the value of their account at the time they started receiving payments to switch – without penalty – to a method of determining the amount of their periodic payments based on the value of their account as it changes from year to year. If the taxpayer elects to do this, it may result in a lower periodic payment. See Rev. Rul. 2002-62 for more details.

    • Rev. Proc. 2003-16 provides guidance for applying to the IRS for a waiver of the 60-day rollover requirement. It also provides for an automatic waiver under certain circumstances. The Procedure is effective for distributions after December 31, 2001. See Rev. Proc. 2003-16 for more information.

4.19.15.31  (01-01-2015)
Gambling Issues (Income and Losses) - General

  1. Taxpayers may deduct gambling losses as itemized deductions on Line 28 of Schedule A. The amount of gambling losses may not exceed the amount of the gambling income reported on Form 1040. Gambling losses cannot be netted against gambling income before the computation of the Adjusted Gross Income on the front of the Form 1040. Each item, income or loss, must be reported on the appropriate line or form.

  2. Form W-2G is a reporting requirement for certain gambling winnings. Gambling winnings are not the same as gambling income. A taxpayer recognizes gambling income (or a gambling loss) at the end of the taxpayer’s gambling session (that is, when tokens are redeemed).

  3. The Initial Contact Letter 566 (CG) will be used to inquire about the income and/or deductions. The Corporate Exam Toll Free telephone number will be used on these letters. Normal suspense periods will be applied to all letters issued.

  4. The following table shows examples of documentation taxpayers may provide to support their deduction for gambling losses. This is not an all-inclusive table. For returns with unreported IRPTR gambling winnings, the taxpayer may provide information that supports the exclusion of winnings from gambling income. For example, a taxpayer may show that after receiving the winnings he subsequently continued to gamble and lose the winnings, and ended his gambling session with no gambling income. Use good judgment when evaluating any information the taxpayer provides, including the possible inclusion of additional income.

    Note:

    Refer to http://www.irs.gov/pub/irs-utl/am2008011.pdf , for additional information on the concept of a gambling session, for residents of U.S. The CCA only applies to slot machine play, and at this point, only to U.S. citizens. It does not extend the concept to non-resident aliens. See Sang and Won Kyung Park v. Commissioner (CA-DC, No. 12-1058).

    Gambling Documentation – Examples
    Documentation or wagering activity Information provided
    Diary of winnings and losses Date and type of wager or wagering activity
    Name and address or location of the gambling establishment.
    Names of other persons present at the gambling establishment.
    Amount(s) won or lost.
    Canceled checks, credit records, bank withdrawals; copies of casino credit records, copies of casino check cashing records Location of the gambling establishment; date of the wager.
    Keno Date the keno tickets were validated by the gambling establishment.
    Slot machines A record of the machine number and all winnings by date and time the machine was played.
    Table games (twenty-one, blackjack, craps, poker, baccarat, roulette, wheel of fortune, etc.)
    • The number of the table at which the taxpayer was playing.

    • Casino credit data indicating whether the credit was issued in the pit or at the cashier’s cage.

    Bingo
    • A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets.

    • Supplemental records include any receipts from the casino, parlor, etc.

    Racing (horse, harness, dog, etc.)
    • A record of the races, amounts of wagers, amounts collected on winning tickets and amounts lost on losing tickets.

    • Supplemental records include unredeemed tickets and payment records from the racetrack.

    Lotteries
    • A record of ticket purchases, dates, winnings and losses.

    • Supplemental records include unredeemed tickets, payment slips, and winnings statements.

  5. Taxpayers with whom telephone contact is made should be encouraged to respond in writing with all documentation related to their gambling activities.

4.19.15.31.1  (12-12-2008)
Initial Contact for Gambling Income

  1. Issue Letter 566 (CG) as the initial contact letter to the taxpayer. Check "Schedule A Itemized Deductions" . Identify the issue by typing "Gambling Losses" . Identify income as an issue if there is unreported income.

4.19.15.31.2  (12-12-2008)
Evaluating Gambling Issue Responses

  1. Use the following guidelines when evaluating response to gambling issues.

4.19.15.31.2.1  (01-01-2015)
Gambling Losses – IRC 165(d)

  1. Carefully examine all documentation of losses for the year of the loss to ensure the losses are for the year related to the win. Notate the workpapers with the amount of losses and income from the documentation.

  2. Receipts provided to support losses may also include gambling income not included on the return. Carefully review all documentation for income as well as losses. Subsequent reports (except for cases where the statutory notice has been issued) must include the income as well as the losses.

  3. Examine unredeemed (losing) tickets carefully to ensure that they are for the correct year and that they had not been previously discarded prior to being acquired by the taxpayer.

  4. Use sound judgment when considering taxpayer replies. Consider all aspects of the case, including the credibility of the taxpayer, additional burden, and the amount of tax when deciding whether to pursue for more documentation.

4.19.15.31.2.2  (01-01-2015)
Gambling Income

  1. Form 5754, Statement by Person(s) Receiving Gambling Winnings, is completed by the taxpayer and given to the payer of the gambling winnings to ensure that the Form W-2G issued is correctly prepared when the taxpayer receives gambling winnings on behalf of another person or as a member of a group of winners on the same winning ticket.

    1. A signature is required on Form 5754 only if federal income tax was withheld from the winnings.

    2. Form 5754 should not be accepted as proof the income was distributed to other taxpayers. If the amount of disputed winnings exceeds $500, research the accounts of other taxpayers using Command Code IRPTR to determine if a Form W-2G was issued to that payee. If a Form W-2G was issued, then consider this an acceptable explanation.

    3. If multiple Form W-2Gs were not issued, correspond with the taxpayer and explain that the gambling income is to be reported by the person to whom the Form W-2G is issued. Advise the taxpayer that a statement from the payer is required in order to accept the Form 5754.

  2. Follow normal procedures for evaluating the information the taxpayer provides regarding the unreported gambling income. Make all necessary adjustments to gambling losses and income and issue a report, with the appropriate explanations and a cover letter. Refer to the table below for letter sequencing.

4.19.15.31.2.3  (12-12-2008)
Replies – General Processing

  1. Use the following table when processing replies.

    Processing Taxpayer Replies to Letter 566 (CG) and Subsequent Letters
    If And Then
    The taxpayer replies to Letter 566 (CG), Letter 525, Letter 692 (SC/CG) or the 90 day letter with information to support gambling losses You are able to determine that he is entitled to the entire deduction Close the case "no change."
    The taxpayer replies to Letter 566 (CG) or Letter 525 with information to support gambling losses You are able to verify that the taxpayer is entitled to part of the amount claimed Issue Letter 525 or Letter 692 (SC/CG) with Form 4549, allowing the partial amount verified and an appropriate explanation.
    The taxpayer replies to Letter 566 (CG) or Letter 525 with information to support gambling losses You are able to determine that the taxpayer is not entitled to any part of the deduction Issue Letter 525 or Letter 692 (SC/CG) with Form 4549 and an appropriate explanation.
    The taxpayer replies to Letter 566 (CG), Letter 525 or Letter 692 (SC/CG) with information to support gambling losses You are able to determine that the Line 28 amount belongs on another line Issue Letter 525 with Form 4549 and an appropriate explanation.
    The taxpayer replies to the 90 day letter with information to support gambling losses You are able to verify that the taxpayer is entitled to part of the amount claimed Issue Letter 555 with a revised Form 4549 and an appropriate explanation to the taxpayer.
    The taxpayer replies to the 90 day letter with verification of his deduction You are able to determine that the taxpayer is not entitled to any part of the deduction Issue Letter 555 with the latest Form 4549.
    The taxpayer replies to the 90 day letter with verification of his deduction You are able to determine that the Line 28, Schedule A, amount belongs on another line Issue Letter 555 with a revised Form 4549 and an appropriate explanation to the taxpayer. Do not increase the deficiency as shown on the 90 day letter.

4.19.15.31.2.4  (12-12-2008)
No Response Cases

  1. Take the following action if the taxpayer has not replied to the most recent letter by the normal purge date:

    Latest Letter Issued Action
    Letter 566 (CG) Prepare Letter 525 and Form 4549 disallowing the gambling losses and adding the unreported gambling winnings. Use Standard Explanations #1407 and/or #9412.
    Letter 525 or Letter 692 (SC/CG), and the Form 4549 reflects a deficiency Follow normal procedures to have Statutory Notice issued based on the adjustments shown on Form 4549.
    Letter 525 or Letter 692 (SC/CG), and the Form 4549 reflects an overpayment Close the case DC 08.
    90 day letter Close the case DC 10.

4.19.15.31.3  (01-01-2015)
Special Gambling Closing Procedures

  1. When closing cases consideration must be given to the disposition of receipts to the taxpayers. Receipts will not be returned to the taxpayer as a matter of practice. All verification of losses must be retained with the case file. If the verification is not substantial, for example a statement from a casino, it can be retained in the closed case file. If the documentation would be difficult to file, retain the records in a retrievable method for a period of nine months.

  2. Provided the IRS and the Taxpayer agree on the amount of the losses verified on the documentation, there is no reason to retain the receipts. If the taxpayer requests the return of the receipts , contact the taxpayer by telephone to confirm the taxpayer's request. Explain that there is no longer a tax requirement to retain the receipts. If the taxpayer insists, the tickets must be stamped before they are returned.

    Note:

    When making or receiving phone calls, an IRS employee must follow IRM 21.1.3.2.3, Required Taxpayer Authentication, to ensure that he or she is speaking to the appropriate taxpayer and to prevent the unauthorized disclosure of tax information.

  3. If the taxpayer does not address the disposition of unredeemed tickets, retain them for a period of nine months after the case closes.

4.19.15.32  (03-21-2014)
Health Coverage Tax Credit – IRC 35

  1. Health Coverage Tax Credit (HCTC) is a fully refundable prepayment credit available to two distinct groups of taxpayers:

    1. Workers who have been displaced by foreign trade and who are eligible to receive Trade Adjustment Assistance (TAA) or Alternative Trade Adjustment Assistance (ATAA) benefits, and

    2. Pension recipients covered by the Pension Benefit Guaranty Corporation (PBGC).

    3. The term eligible individual in this text refers to a person meeting a) or b) above.

  2. HCTC is computed on Form 8885, Health Coverage Tax Credit, and

    1. Is equal to 65 percent (72.5 percent for March 2011 - December 2013) of the premiums paid by an eligible individual for qualifying health insurance covering that person and any qualifying family member.

    2. Eligibility is determined on a month-by-month basis. An eligible coverage month is any month that a person is deemed to be an eligible individual by either a state workforce agency or the PBGC.

    3. December 2002 was the first month that HCTC became available and is due to expire at end of December 2013.

  3. Advance HCTC became available in 2003.

    1. The HCTC Processing Center forwards payment of 100 percent of the cost of health insurance coverage for a person enrolled in the advance payment option directly to the insurer or health care provider.

    2. Department of Treasury pays 65 percent (72.5 percent from March 2011- December 2013) of the premiums [TC 971 AC 171].

    3. The eligible individual reimburses the HCTC Processing Center 35 percent (27.5 percent for March 2011 - December 2013) [TC 971 AC 170].

    4. Advance HCTC payments are reported on Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments.

  4. For definitions of qualifying coverage, other specified coverage, qualifying family members and more, refer to Publication 502, Medical and Dental Expenses Including the Health Coverage Tax Credit, and the following web site:
    http://www.irs.gov/hctc

4.19.15.32.1  (11-29-2011)
HCTC Procedures – Project Code 0505

  1. All HCTC cases must be worked by specially trained technicians at AUSC (Austin Service Center). The cases are not available for CEAS self-assign.

  2. Procedures for the program are dependent on whether the credit has been posted to the taxpayer’s account.

  3. Returns are classified for HCTC and related issues such as Medical and Dental Expenses on Schedule A, Self-employed Health Insurance Deduction (SEHID), and Archer Medical Savings Account (MSA) Deduction. Refer to:

    1. Publication 502, Medical and Dental Expenses Including The Health Coverage Tax Credit,

    2. Publication 535, Business Expenses,

    3. Publication 969, Health Savings Account And Other Tax-Favored Health Plans , and

    4. IRM 4.19.15.23., Schedule A for information about related medical issues.

  4. Consult your manager concerning any large, unusual or questionable items not previously classified on the return.

  5. Returns are categorized as "Processed Claims" if HCTC is posted to the account. TXMOD of a processed claim should include Transaction Code (TC) 766 in an amount equal to the HCTC claimed on Form 8885.

    1. Beginning with processing year 2004, TC 766 should include Credit Reference Number (CRN) 250.

    2. Consult the work leader if HCTC was adjusted in some other manner (examples: TC 291, TC 806, and TC 766 with CRN 336).

  6. Returns are worked as "Unprocessed Claims" if the credit is not posted to the account.

  7. HCTC inventory is started under Project Code 0505. Processed Claims for which the HCTC was claimed as an end of year credit only are identified by Tracking Code 7559. Processed Claims for which the taxpayer received advanced payments of the HCTC and claimed the HCTC as an end of year credit are identified by Tracking Code 7560. If the HCTC is classified as an issue on an Unprocessed Claim opened under a Project Code other than 0505, Tracking Code 7561 should be assigned to the case.

  8. The HCTC Program Office provides AUSC Exam with a database of eligible individuals.

    1. Access the HCTC Eligibility Database to determine the eligible coverage months and whether potential eligibility was based on TAA, ATAA or PBGC benefits.

    2. See your work leader if the eligible individual is not in the database.

4.19.15.32.2  (04-01-2013)
HCTC Taxpayer Initial Contact

  1. Consider any health insurance records filed with the return, HCTC Eligibility Database information, and the IDRS account prior to contacting the taxpayer.

  2. Unprocessed Claim - Source Code 30

    1. Send Letter 566-D.

    2. Include Form 886-H HCTC Form to request information the taxpayer could provide to verify his entitlement to HCTC and any other Forms 886 applicable for the program or classified issues.

    3. Update to Status 10 and suspend the case for 45 days.

    4. Follow general claims procedures through case closure. See IRM 4.19.16, Claims.

  3. Processed Claims selected by W&I Exam Headquarters - Source Codes 06 and Tracking Code 7560

    1. Send Letter 525 with Form 4549, Income Tax Examination Changes.

    2. Include Form 886-H HCTC to request information the taxpayer could provide to verify his entitlement to HCTC and any other Forms 886 applicable for the program or classified issues.

    3. Update to Status 22 and suspend the case for 45 days.

    4. Follow the instructions in IRM 4.19.13.11, No Response and Unagreed Cases and IRM 4.19.10.1.6.1, Standard Suspense Periods for Correspondence Examination, if the taxpayer does not reply to the initial contact or subsequent letters.

  4. Other Processed Claims - Source Code 06

    1. Send Letter 566.

    2. Include Form 866-H HCTC to request information the taxpayer could provide to verify his entitlement to HCTC and any other Forms 886 applicable for the program or classified issues.

    3. Update to Status 10 and suspend case for 45 days.

    4. Follow the instructions in IRM 4.19.13.11, No Response and Unagreed Cases and IRM 4.19.10.1.6.1, Standard Suspense Periods for Correspondence Examination, if the taxpayer does not reply to the initial contact or subsequent letters.

4.19.15.32.3  (01-01-2014)
HCTC Responses

  1. Follow the procedures in the table below to process replies (not all inclusive).

    If Then
    The eligible individual did not have qualifying coverage as of the first day of the eligible coverage month, Do not allow premiums paid for anyone’s coverage for that month in HCTC computation. (See Exception below the table.)
    The eligible individual had other specified coverage as of the first day of an eligible coverage month, Do not allow premiums paid for anyone’s coverage for that month in HCTC computation. (See Exception below the table.)
    An otherwise qualified family member had other specified coverage as of the first day of an eligible coverage month, Do not allow premiums paid to cover the family member for that month in the computation of HCTC.
    A family member did not have qualifying coverage as of the first day of an eligible coverage month, Do not allow premiums paid to cover the family member for that month in the HCTC computation.
    The taxpayer is a noncustodial parent, Do not allow premiums covering the child of divorced or separated parents in the computation of HCTC.
    Health insurance premiums were paid to cover a family member (other than a spouse) who was not claimed as a dependent, Do not allow premiums paid for the non-qualifying relative in the computation of HCTC unless the taxpayer is the custodial parent who has unconditionally waived the right to claim the exemption over to the noncustodial parent with Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial , or a divorce decree executed before 2009.
    Premiums covering ineligible months were used to compute the HCTC claimed, Do not allow payments for ineligible coverage months in the HCTC computation.
    • For tax years 2003 - 2005, Advance HCTC payments were not included on Form 8885, Health Coverage Tax Credit. For tax years 2006 and subsequent, Advance HCTC payments were made for the same coverage claimed on Form 8885, Health Coverage Tax Credit

    Recalculate the allowable HCTC.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    A Health Savings Account (HSA) or an Archer MSA distribution ( Form 1099-MSA) was not included on Form 8885, Health Coverage Tax Credit Subtract the distribution from allowable premiums and re-compute the HCTC.
    The eligible individual was a PBGC recipient under age 55 as of the first day of an eligible coverage month, Do not allow premiums paid for coverage for that month in the HCTC computation.
    The eligible individual or qualifying family member received a (Consolidated Omnibus Budget Reconciliation Act (COBRA) subsidy under the American Recovery and Reinvestment Act (ARRA) of 2009, Do not allow premiums paid for any coverage of that person for the same month in the HCTC computation.
    The taxpayer requests a meeting with an Appeals officer, Follow relevant procedures in IRM 4.19.13.11, No Response and Unagreed Cases and IRM 4.19.13.14, Transfers to Area Office Examination or Appeals.

    Note:

    Prior to December 29, 2007, appeal rights were generally not applicable to HCTC.

    Documentation is incomplete, Disallow HCTC and any other unsubstantiated issues under examination.
    Verified payments for health insurance premiums are unallowable for HCTC but qualify as a Schedule A, Self-employed Health Insurance, HSA, or Archer MSA deduction, Advise the taxpayer to file an amended return to claim the disallowed premiums as a deduction from income unless a double tax benefit was previously claimed.
    HCTC and other classified issues are fully substantiated, Allow all issues and close the case.

    Note:

    Math verify Form 8885, Health Coverage Tax Credit.

    If the taxpayer does not have a qualified plan but would meet the other requirements for HCTC, Recommend the taxpayer investigate state qualified plans for future coverage. The IRS maintains a listing by state at irs.gov, (keyword/search term: HCTC).

    Note:

    The HCTC Program Office provides AUSC Exam with a list of state qualified plans including group numbers and other means by which to identify the qualified products for use when reviewing taxpayer records.

    Exception:

    Under Section 241(b)(3)(C) of PL-112-40, end date of February 2011 was removed so that family members remain eligible after February 2011 for listed events:

    • Enrollment in Medicare,

    • Divorce, and/or

    • Death.

  2. Processed Claims: The table below details the specific actions to take when working responses for processed claims. (Remember to use the letters and forms required under general claims procedures when considering responses for unprocessed claims. See IRM 4.19.16, Claims.

    If Then
    The taxpayer signs the report or, prior to the mailing of a Statutory Notice of Deficiency, pays the full amount, Close the case agreed using normal procedures.
    The taxpayer submits documentation and you need additional information, Follow procedures in IRM 4.19.13.9.1, Taxpayer Response – Additional Information Needed.
    The taxpayer submits sufficient verification that the return is substantially correct. Close using "no change" procedures.

4.19.15.32.4  (11-29-2011)
Case Closure

  1. Unprocessed Claims - If

    1. Allowing HCTC, use Credit Reference Number (CRN) 250 with the allowable amount in Block 15 of Form 5344.

    2. Disallowing HCTC in whole or in part, provide a detailed explanation on Letter 105-CLetter 106-C.

  2. Processed Claims - Follow the applicable steps below:

    If And Then
    Allowing HCTC Form 5344 does not include changes to tax, income, or other credits,
    1. Use DC 02 in Block 13 of Form 5344.

    2. Input "no change" Issue Code 61065 in Block 41.

    Disallowing HCTC TC 766 does not include a CRN, Input CRN 767 with the unallowable amount and a minus sign (-) in Block 15 of Form 5344.
    TC 766 includes CRN 250, Input CRN 250 with the unallowable amount and a minus sign (–) in Block 15 of Form 5344.
    HCTC is posted to the account in any other manner (see above),
    1. Consult the work leader for the appropriate reversal code.

    2. Use Hold Code 3 in Block 7 of Form 5344 to prevent a notice.

    A refund is frozen with TC 576, Issue Letter 105-C or Letter 106-C if required. IRM 4.19.15.18.5, Response/No Response to Unallowable Notices/Letters.

4.19.15.33  (11-29-2011)
Self-Employed Health Insurance Deduction – IRC 162(l)

  1. A taxpayer may be able to deduct part or all of the amount paid for health insurance, if the taxpayer is one of the following:

    • A self-employed individual and has a net profit for the tax year from a Schedule C, Profit or Loss From Business (Sole Proprietorship)Schedule C-EZ, Not Profit From Business (Sole Proprietorship)or Schedule F, Profit or Loss From Farming

    • A shareholder owning more than two percent of the outstanding stock of an S Corporation (or is considered as owning more than two percent by reason of the attribution rules under IRC 318) with wages reported on Form W-2, or

    • A partner with net earnings from self-employment reported on Line 15a of Schedule K-1 (TY 2003 Form 1065). For TY 2004, the net earning is reported on Line 14 of Schedule K-1 (TY 2005 and TY 2007 Form 1065).

    Note:

    A self-employed individual’s deduction of health insurance for income tax purposes does not reduce his net earnings from self employment. (See Section 162(I)(4))

  2. Under IRC 318 attribution rules, a taxpayer is considered more than a 2-percent shareholder in a S Corporation if:

    1. The shareholder is the taxpayer’s spouse, parent, child or grandchild, and

    2. The shareholders (either singly or combined) own more than two percent of the shares in the corporation.

  3. For tax years prior to 2003, the employee-shareholder may claim 70 percent of the amount paid as an adjustment to income; the taxpayer may take the remaining 30 percent on Schedule A if they itemize.

  4. Beginning in 2003 and thereafter, a self-employed individual or employee-shareholder may claim 100 percent of the amount paid.

  5. In calculating the deductible amount, taxpayers should use the Self-Employed Health Insurance Worksheet in the Instructions for Form 1040 which indicates the deduction is the lesser of

    1. the amount paid for health insurance coverage, or

    2. net profit or earned income from the business under which the insurance plan is established, minus any deductions claimed on the Form 1040 for one-half of the Self-employment Tax and contributions to Self-Employed SEP, SIMPLE, and Qualified Plans.

  6. Taxpayers may receive a Form 1099-MISC, Miscellaneous Income, for self-employed income. Generally, the taxpayer prepares a Schedule C to report this income; however, it may also appear on the "Other Income" line. Ensure the taxpayer has reduced this income by any expenses applicable to the earning of this income to arrive at net income. Taxpayers who are in business as a self-employed writer, inventor, artist, etc., should report their income on Schedule C, and apply appropriate expenses to obtain net income.

  7. Constructive ownership of stock under IRC 318 applies to taxpayer’s spouse, his children, grandchildren and parents.

  8. For purposes of the deduction, a two-percent-plus shareholder’s wages from the S Corporation are treated as the shareholder’s earned income. No deduction is allowed in excess of an individual’s earned income derived from the trade or business with respect to which the plan providing the health insurance coverage is established.

  9. For employee-shareholders, the health insurance premiums must be paid in the current year by the corporation and included in the wages (generally shown in Box 14 of the Form W-2) of the employee-shareholder. The amount may include payments for insurance covering the taxpayer, his/her spouse, and dependents. If the premiums were not included in the employee-shareholder’s wages, the employee-shareholder may not deduct them.

  10. The taxpayer may not claim the Health Care Tax Credit (for which additional qualifications apply) for the same expenses the taxpayer claimed for the Health Insurance Deduction.

  11. A taxpayer may not take this deduction if the taxpayer participated, or is eligible to participate in any subsidized health plan maintained by his/her or spouse’s employer.

4.19.15.33.1  (12-12-2008)
Self-Employed Health Insurance Deduction

  1. Cases are worked to determine if taxpayers are:

    1. Erroneously claiming health insurance payments on the front of the return because they had insufficient expense to overcome the offset,

    2. Erroneously claiming health insurance payments because they are unable to itemize, or

    3. Claiming the deduction when they have no self-employment or earned income.

  2. Procedures are as follows:

    1. The Initial Contact Letter 566 will be used to inquire about the income and/or deductions.

    2. The Corporate Exam Toll Free telephone number will be used on these letters.

    3. Normal suspense periods will be applied to all letters issued.

4.19.15.33.2  (12-12-2008)
Initial Contact Letter

  1. The following table shows the initial contact letter to be sent to the taxpayer:

    Rule(s) Broken Letter to Issue Amount to Disallow
    914: Taxpayer claiming self-employed health insurance deduction with no apparent self-employment income. Letter 566 with the appropriate box checked None

4.19.15.33.3  (11-29-2011)
Evaluating Responses

  1. Use the following guidelines when evaluating responses to Self-Employed Health Insurance Deduction:

    • Carefully examine all documentation to determine if all or some of the amounts were paid for qualifying insurance. If the taxpayer was eligible to participate in the spouse's or the employer's subsidized health plan he cannot deduct premiums for any month in which he was eligible.

    • Determine if taxpayer had sufficient earned income for the claimed self-employed health insurance deduction. (Note: The deduction is limited to the profit from the business.) Review Form 1099-MISC or other documentation to ensure the taxpayer was self-employed. If the income is unreported, include additional income in the report and compute self-employment tax, if appropriate.

    • If taxpayer indicates income is from an S Corporation, review Schedule K-1 and/or other documentation (i.e., Form W-2 ) to establish they received and reported wages from an S Corporation in which they were more than a two percent shareholder.

    • If IDRS information is used to link a taxpayer to a corporation, examiners may use judgment in accepting the taxpayer’s statement as verification that he/she has more than two percent ownership. (The basis for the examiner's judgement must be fully documented on the workpapers.)

    • Ensure the taxpayer has reduced his earned income by any deduction he claimed for One-Half of Self-Employment Tax and a deduction he claimed for Self-Employed SEP, SIMPLE, and Qualified Plans (when applying lesser of earned income reduced by these deductions and amount paid).

    • If the taxpayer does not have a Form W-2 from a Subchapter S Corporation, a quick way to determine if the taxpayer is self-employed may be to review the taxpayer’s Schedule SE, Self-Employment Tax. The amount of income on which he paid SE tax can be used as the amount of income from net self-employment income.

    • Responses involving the concept of material participation generally relate to the allowance of a loss rather than income and are unlikely to be applicable here.

    • Since our taxpayers are "cash basis" taxpayers, all deductible expenses must be incurred by them in the current year. Income must be distributed to them and/or reported by them when earned.

  2. If the taxpayer filed a joint return, conduct research to determine if both spouses received earned income during the year in question. If both spouses received earned income, request a statement from the taxpayers’ employers. The statement(s) must indicate:

    1. If the spouses were eligible to participate in the companies’ subsidized health plan(s), and

    2. The number of months (if any) that the spouses were eligible to participate in the plan.

4.19.15.33.4  (12-12-2008)
Potential Documentation

  1. Request a copy of the health insurance policy indicating the payment was made for qualifying individuals, i.e., the taxpayer, spouse, or dependents.

  2. If the insurance premiums were paid by the corporation, verify premiums were included in the taxpayer’s wages from the corporation (most generally will appear on Form W-2).

  3. If premiums were paid by the taxpayer, request cancelled checks, receipts, payroll deductions, etc., to support the deduction.

  4. The Schedule K-1 and/or BMFOL or BMFOLT for the S Corporation may be used to establish the taxpayer is linked to that corporation. Copies of the articles of incorporation, stock certificates or similar documentation may be used to establish whether the taxpayer is a more-than-two percent-shareholder. If the taxpayer indicates he qualifies by reason of attribution rules, ask the taxpayer about his relationship to the shareholder. Common sense may be applied in this area since small corporations often do not have all the formal trappings of a publicly held corporation. A taxpayer’s statement may be sufficient to establish this fact if other issues have been satisfactorily resolved.

  5. If the taxpayers are claiming payments for long-term care insurance, request birth certificates if the taxpayer’s age can not be determined from IDRS. See Publication 535, Business Expense, to determine the aged-based limitations.

  6. If the taxpayer paid the expenses to the insurance company, cancelled checks, documentation to show payroll deduction, etc., should be adequate to support the deduction.

4.19.15.33.5  (12-12-2008)
Resources To Assist In Technical Determination

  1. Useful tools:

    • Publication 502, Medical and Dental Expenses, Including the Health Coverage Tax Credit.

    • Publication 535, Business Expenses.

    • IRC 162(l), IRC 1372, IRC 401.

    • If payment is for long-term care insurance, see limitations in Chapter 7 of Publication 535.

    • Instructions for Form 1040, U.S. Individual Income Tax Return – includes a Self-employed Health Insurance Deduction Worksheet which the taxpayer should prepare to determine any limit to his deduction.

4.19.15.33.6  (11-29-2011)
Replies – General Processing

  1. Use procedures in the following table when processing replies.

    Processing Taxpayer Replies to Letter 566 and Subsequent Letters
    If And Then
    The taxpayer replies to Letter 566, Letter 525, Letter 692 (SC/CG) or the 90 day letter with information to support the deduction You are able to determine that the taxpayer is entitled to the entire deduction Close the case ‘no change’.
    The taxpayer replies to Letter 566 or Letter 525 with information to support the deduction You are able to verify that the taxpayer is entitled to part of the deduction claimed Issue Letter 525 or Letter 692 (SC/CG) with Form 4549 and an appropriate explanation.
    The taxpayer replies to Letter 566 or Letter 525 with information to support the deduction You are able to determine that the taxpayer is not entitled to any part of the deduction Issue Letter 525 or Letter 692 (SC/CG) with Form 4549 and an appropriate explanation.
    The taxpayer replies to Letter 566, Letter 525 or Letter 692 (SC/CG) with information to support deduction You are able to determine that the amount belongs on another line Issue Letter 525 with Form 4549 and an appropriate explanation.
    The taxpayer replies to Letter 566, Letter 525 or Letter 692 (SC/CG) with information Timeframe has expired and information indicates that taxpayer is not entitled or not eligible
    Prepare Form 886-A addressing correspondence received and explain disallowance.
    Send Form 886-A with Form 4549 based on Local Procedures to have 90 day manual letter issued with the Form 886-A and Form 4549.
    The taxpayer replies to the 90 day letter with information to support deduction You are able to verify that the taxpayer is entitled to part of the deduction claimed Issue Letter 555 with a revised Form 4549 and an appropriate explanation to the taxpayer.
    The taxpayer replies to the 90 day letter with verification of his deduction You are able to determine that the taxpayer is not entitled to any part of the deduction Issue Letter 555 with the latest Form 4549 and an appropriate explanation to the taxpayer.
    The taxpayer replies to the 90 day letter with verification of his deduction You are able to determine the deduction amount belongs on another line Issue Letter 555 with a revised Form 4549 and an appropriate explanation to the taxpayer. Do not increase the deficiency as shown on the 90 day letter.

4.19.15.34  (01-01-2014)
Form 1040, Schedule C - Correspondence Examination

  1. The Form 1040, Schedule C ,Profit or Loss From Business (Sole Proprietorchip, is used to report the profit or loss for a business operating as a sole proprietorship. The nature of the business can be as a manufacturer of a product/goods, retail and wholesale sales, or provider of a service. A taxpayer can be involved in more than one business venture. A separate Schedule C is required for each type of business.

  2. Each type of business has certain characteristics. For example, a manufacturing activity will have costs for materials and labor included in the costs of goods sold. On the other hand, a sales-oriented activity will normally only include the cost of items for resale in their cost of goods; the labor for sales would be included in the wages as an expense of sales. Finally, a service oriented activity will normally have no cost of goods, unless materials and supplies are sold or charged in the business.

  3. Because the taxpayers are not accountable to anyone as sole proprietors there are opportunities for them to mix personal and business interests in the pursuit of their trade or business. It is incumbent on the examiner to recognize those instances where personal expenditures are being deducted as business expenses and to make the proper adjustments to the taxpayer's return.

  4. To be deductible as a business expense, the expenditure must be reasonable, ordinary and necessary during the course of the business, and be related to the business. The objective of any correspondence examination related to a sole proprietorship is to verify the amount of the expenditures, determine if they qualify as business expenses, and that they were properly treated on the return. Correspondence examinations are limited in scope to certain line items to determine their deductibility as business expenses.

  5. A Schedule C - General Questionnaire (see Exhibit 4.19.15-4.) should be used on all Schedule C examinations to determine the type of business involved, location, records available, ownership and how the business expenses are paid. In addition to the general questionnaire, there are issue specific Form 886-As and questionnaires designed to utilize the principles of Professional Decision Making (PDM) to assist in the evaluation of the taxpayer's documentation.

4.19.15.34.1  (12-12-2008)
Schedule C - Car and Truck Expenses

  1. The rules for a sole proprietor are the same as for an employee business expense (except that there is no accounting to another party). The expenses must be incurred in the conduct of the business. The taxpayer must show by diary, log or other means how many business and total miles were driven in a tax year. If the taxpayer is claiming actual expenses, records must be maintained to establish all the costs associated with the operation and maintenance of the vehicles as well as documentation to support the computation of the business use percentage. In addition, if the business use percentage is not greater than 50 percent there may be limitations imposed on certain expenses. Special rules apply for leased vehicles. Examiners must comment on personal usage of the vehicles in the workpapers.

  2. Exhibit 4.19.15-5, Form 886-A – Schedule C – Car and Truck Expenses.

  3. Exhibit 4.19.15-6, Schedule C – Car and Truck Expense Questionnaire.

4.19.15.34.2  (01-01-2015)
Schedule C - Travel Expenses

  1. The rules for the travel expenses of a sole proprietorship are the same as for an employee business expense. The travel must be attributable to the pursuit of a trade or business. In addition there are specific record keeping requirements for travel, meals and entertainment ( IRC 274(d)). For all travel expenses taxpayer must provide information to support the location, dates, business purpose, and who they met with along with the required receipts for the deductions claimed.

  2. It is imperative that the examiner establish the taxpayer's "tax home" in order to accurately determine the eligibility of the amounts deducted as "away from home" expenses. The examiner must also determine whether the nature of the travel is temporary (generally last less than one year) or indefinite. If it is determined that a trip qualifies as business travel all the associated costs (airfare, rail fare, bus fare, lodging, meals, taxis, etc.) are also deductible. However, if the taxpayer is accompanied by a spouse, other family member or relative, the expenses for that person are considered nondeductible personal expenses unless he/she is performing bona fide business services.

  3. Special allocations are required if a taxpayer is mixing personal and business activities on any given trip.

  4. See Exhibit 4.19.15-7, Form 886-A – Schedule C – Travel, Meals and Entertainment Expenses.

  5. See Exhibit 4.19.15-8, Travel, Meals and Entertainment Questionnaire.

4.19.15.34.3  (12-12-2008)
Schedule C - Mortgage Interest

  1. Mortgage interest deducted on a Schedule C should be directly related to a business asset. If the taxpayer is using a structure for both business and personal activities an allocation must be computed to properly reflect the amount attributable to the business. If an adjustment is made to remove a portion of the mortgage interest because it is deemed to be a personal expense the examiner must consider whether it may still be deductible as an itemized deduction on the Schedule A.

  2. See Exhibit 4.19.15-9, Form 886-A – Schedule C – Interest Expense.

4.19.15.34.4  (12-12-2008)
Schedule C - Legal and Professional Fees

  1. Amounts paid to attorneys, accountants, appraisers, engineers, etc., for services related to the operation of a business are deductible as business expenses. Amounts paid for wills, estates, divorce and tax preparation fees (except for business returns such as Forms 941 and 940) are personal expenses and should not be deducted as a business expense (however if they qualify as a deductible personal expense the proper adjustment must be considered). The costs of defending an action in criminal court are not deductible as a business expense. Expenses incurred before the business commences are considered start-up or getting ready expenses and are not currently deductible (these expenses may be capitalized and amortized if the taxpayer makes a proper election). Illegal payments (bribes, kickbacks, etc.) are not deductible as business expenses. Expenses related to the acquisition of real estate or a capital asset should be added to the basis of that asset and depreciated. The costs of defending a title or a patent are also considered capital expenses and should be capitalized and depreciated/amortized. The examiner should seek technical assistance if the issue of capitalization and depreciation is being considered.

  2. See Exhibit 4.19.15-10, Form 886-A – Schedule C – Legal and Professional Fees.

4.19.15.34.5  (01-01-2015)
Schedule C - Repairs and Maintenance

  1. Expenses incurred to repair or maintain equipment and property used in the pursuit of the business activity are deductible as business expenses. Generally as equipment is used it will wear out and an expense is incurred to repair or replace a worn part or component. However, if the repair is expected to extend the useful life of the asset beyond one year the costs should be capitalized and depreciated. Examiners should review invoices to determine what was repaired and the nature of the repairs. A series of repairs to the same asset may be an indication that the asset is being reconditioned to prolong its useful life rather than just being fixed. For example, a drill press may need new drills and replacement of the brushes in the motor to keep it running efficiently. However if the motor is replaced rather than repaired this may be an expense that is expected to last more than one year and should be capitalized and depreciated. Additionally, repairs to modify the asset to perform a different function are considered a capital expenditure. Examiners should review repair receipts and invoices to determine that the repairs are related to a business asset and that they are not capital expenditures that should be capitalized and depreciated. Examiners should seek technical assistance if they are considering an adjustment to capitalize and depreciate any given repair expense.

  2. See Exhibit 4.19.15-11, Form 886-A – Schedule C – Repairs and Maintenance.

  3. See Exhibit 4.19.15-12, Schedule C – Repairs and Maintenance Questionnaire.

4.19.15.35  (01-01-2014)
Return Preparer Analysis Tool (RPAT) Program in W&I Campus

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  2. AIMS Openings:

    • Project Code (SPC) 0258, Source Code 49 will be used when opening the inventory. The inventory will be opened by W&I WDD team.

    • AIMS Tracking Code, when applicable.

  3. Procedures for working the inventory. Correspondence Exam will:

    • Classify the returns based on the pre identified issues.

    • If overview or audit issues are identified in the inventories, limit the scope of the audit to those issues. However, if other issues/credits or Schedules appear egregious and the issue requires examination, scope can be expanded with concurrence from manager/lead/Classification TCO.

    • Inform HQ analyst of any trends, patterns of false documents. Do not submit fraud referrals unless coordinated with HQ analysts.

    • Note:

      Do not routinely disallow the entire Schedule A in its entirety, unless a pattern of abuse is noted. See IRM 4.19.15.28.5.Examining the Schedule A on Preparer Referrals for further discussion.

    • Issue Initial Contact Letter 566 (CG), 30 day and 90 day letters per normal procedures.

    • Document the workpapers, with any statements provided/made by the taxpayer.

    • Follow examination and closing procedures as provided under PC 0133 Program. See IRM 4.19.15.28, Return Preparer Referrals, IRM 4.19.15.23, Schedule A, IRM 20.1, Penalty Handbook, IRM 4.19.13.25Campus Exam Identity Theft, IRM 4.19.15.5, Education Tax Credits, General Requirements and Exam Programs, IRM 4.19.15.3,Child Tax Credit, and other sections as applicable.

  4. W&I HQ analyst may forward the audit results on the egregious preparers to CI HQ quarterly on Form 13649, Multi-Case Inventory Referral (formerly Referral for SBSE Campus Correspondence Examination), for preparer penalty considerations or to LDC on a secured E-mail.

  5. Programming has been established through DDb to identify each scheme and related taxpayers so that the examination results can be queried at the HQ level by the Scheme Identification Numbers and Project Codes.

4.19.15.36  (11-29-2011)
CI Education Credit Program (W&I Campus)

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    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. AIMS Openings:

    • Project Code (PC) 0385, Source Code 70 will be used when opening the inventory and the inventory will be opened by the WDD team.

    • AIMS Tracking Code, if applicable.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Procedures for working the inventory:

    • Issue audit letters as specified under PC 0133 Program. See IRM 4.19.15.28, Return Preparer Referrals.

    • Document the workpapers, with any statements provided/made by the taxpayer.

    • Follow examination and closing procedures as provided under PC 0133 Program. See IRM 4.19.15.28, Return Preparer Referrals.

    • IRM 4.19.15.23,Schedule A . IRM 4.19.15.5, Education Tax Credits - General Requirements and Exam Programs, IRM 20.1, Penalty Handbook, IRM 4.19.13.25Campus Exam Identity Theft, and other IRM sections as applicable.

4.19.15.37  (01-01-2015)
Telephone Excise Tax Refund (TETR) Cases - Background

  1. See Note below.

    Note:

    The IRS Telephone Excise Tax Refund (TETR) program ended on Friday, July 27, 2012. The IRS will not process any Telephone Excise Tax Refund requests submitted after that date for tax paid before July 31, 2006. For additional information refer to Announcement 2012-16. The Telephone Excise Tax Refund is a one-time refund or credit of federal telephone excise taxes previously paid on non-taxable telephone service. Notice 2006-50, issued on May 25, 2006 and vacated April 10, 2012, defines non-taxable as long-distance telephone service and bundled services. For ease of administering this refund, the excise tax can be claimed on the 2006 federal income tax return, or on a Form 843 Claim for Refund and Request for Abatement. The Service conceded the issue after several federal court decisions held that the tax does not apply to long-distance service as it is billed today. If the taxpayer paid the federal excise tax on long-distance telephone service for both landline and wireless service, Voice over Internet Protocol (VoIP) and internet plans, they can request the telephone tax refund. This includes individuals, businesses and nonprofit organizations. The telephone tax continues to apply to local-only service. The IRS is not refunding taxes charged on local-only service because those are taxable services. Although Notice 2006-50 has been vacated by the United States Court of Appeals for the District of Columbia, the end of the TETR program on July 27, 2012 was not affected.

4.19.15.37.1  (01-01-2015)
Additional Information

  1. Additional TETR information and materials should be referenced when working TETR cases. These include:

    • Announcement 2012–16 in IRM 4.19.15.37

    • Notice 2006–50, Communications Excise Tax; Toll Telephone Service

    • Notice 2007–11, Communications Excise Tax; Toll Telephone Service

    • Form 8913, Credit for Federal Telephone Excise Tax Paid, and Instructions

    • IRS News Release IR-2006–179

    • Training Courses available: Course 22159-102 (Student Guide), 22159-101 (Administrative Guide), and Exam Training (no Course number)

4.19.15.38  (01-01-2014)
Individual Taxpayer Identification Number (ITIN)

  1. A taxpayer identification number (TIN) must be furnished on all tax returns, statements, and other tax-related documents. The Department of the Treasury created the individual taxpayer identification number (ITIN) so that a foreign individual not eligible for a social security number (SSN) could use an identification number for federal tax reporting. See Treasury Regulation § 301.6109-1. An ITIN:

    1. Does not authorize an individual to work in the United States.

    2. Does not qualify an individual for the Earned Income Tax Credit (EITC).

    3. Is not valid for identification purposes outside the tax system.

    4. Does not entitle the holder to Social Security benefits.

    5. Does not establish or affect immigration status.

  2. An ITIN is a nine-digit tax processing number in the same format as an SSN, except that:

    1. The first digit is (9).

    2. The fourth and fifth digits range from (70 – 88), (90 - 92), or (94 - 99).

  3. Any individual who has a valid filing requirement but does not qualify for an SSN is eligible to receive an ITIN.


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