4.28.1  Examination Specialization (ES) Program and Procedures

4.28.1.1  (03-04-2008)
Examination Specialization (ES) Overview

  1. This section provides guidance and procedures for Examination Specialization.

  2. The Examination function traditionally groups tax returns on the basis of income or asset levels and types of returns. Based on these criteria, returns are assigned to examiners for all types of businesses and issues.

  3. Examination Specialization (ES) focuses on assignment of limited issues, industry or entity segments to identified examiners.

  4. Examiners may be provided training and/or specialized research materials.

4.28.1.1.1  (03-04-2008)
Purpose

  1. The objective is to enhance examiners' skills and use of audit technique to respond to the unique business practices of a particular segment. The concept is an integral part of a long-range plan to enhance voluntary compliance, improve overall professional competence and expertise of examiners, and increase productivity. A goal is to increase efficiency and effectiveness of the Service through the development of issues of merit while providing a high degree of consistency in the treatment of those issues.

4.28.1.1.2  (03-04-2008)
Program Direction

  1. The focus of ES is for a more coordinated National program in terms of strategies to deal with noncompliant segments. Research will be performed that will develop workload selection systems and compliance measures for identified segments. We will determine, in consultation with the field, what segments need attention and where resources should be allocated.

  2. A coordinated National program will be delivered in terms of assignment of resources to develop audit technique guides.

4.28.1.1.3  (03-04-2008)
Audit technique Guides (ATGs)

  1. An integral part of ES is the development of audit technique guides (ATGs) .

  2. Audit technique guides are not intended to provide legal analysis or resolve positions on controversial or unusual legal issues. They provide techniques found to be useful when examining a particular issue, industry or entity segment.

4.28.1.1.4  (03-04-2008)
Compliance Initiative Project (CIP)

  1. Compliance Initiative Project (CIP) procedures should be utilized, as necessary, for research and development of issue, industry, or entity specific workload. Refer to IRM 4.17 Compliance Initiative Project Guidelines for more information.

4.28.1.1.5  (03-04-2008)
Applied Time

  1. The following are guidelines for charging time to studies/projects:

    1. For non-case time spent during the CIP phase, and time spent on writing and coordination of ATGs, examiners should use activity code 575, Compliance Outreach. Managers and non-field technical personnel should charge their time to 675, Compliance Outreach,

    2. Area ES Facilitators should charge their duties to Activity Code 511, Technical Guidance,

    3. Training/education on market segments is charged to 683, Training-Other,

    4. All case related time should be charged to the case itself.

4.28.1.2  (03-04-2008)
Headquarters — Examination Responsibility

  1. The Director, Exam, is responsible for the implementation and oversight of all programs within the Exam Business Unit, including ES.

  2. The Director, Communications, Liaison, & Disclosure through the Director, Stakeholder Liaison (SL), is responsible for education and outreach to external customers. Exam will provide support to SL as appropriate.

  3. Exam and SL will coordinate to address issues with widespread noncompliance within market segments with industry and business stakeholders.

4.28.1.2.1  (03-04-2008)
Headquarters — Examination Oversight

  1. Headquarters ES Analysts are responsible for the oversight of the SB/SE ES activities with respect to:

    1. Development of Audit technique guide,

    2. Interaction with industry/trade associations and the practitioner community on post-filing issues,

    3. Oversight of the ES activities by ES Facilitators,

    4. Being informed about industry practices,

    5. Addressing current concerns, such as inconsistent treatment of taxpayers,

    6. Working jointly on teams to address industry issues such as the IIR program,

    7. Proposing changes to tax law,

    8. Making Guidance requests,

    9. Monitoring ES program activity, and

    10. Maintaining currency of the Technical Guidance web site.

4.28.1.2.2  (03-04-2008)
Additional Responsibilities

  1. The following are additional responsibilities of Headquarters ES analysts.

4.28.1.2.2.1  (03-04-2008)
Training

  1. ES analysts assist with the coordination of training including:

    1. Working with host Area to organize classes,

    2. Arranging for guest speakers outside the host Area,

    3. Providing materials for workshops, and

    4. Assisting in the update of training materials.

4.28.1.2.2.2  (03-04-2008)
Coordination with Other Operating Units

  1. ES analysts coordinate with other Operating Units such as:

    1. Pre-filing and Technical Guidance Organization in LMSB - coordination and collaboration on common products and services to ensure consistency of treatment of issues and taxpayers,

    2. Appeals - settlement of cases,

    3. Chief Counsel - development of positions for issues,

    4. Other examination type offices, such as Speciality Programs, and

    5. Other affected offices, such as Learning and Education, Communication and Liaison, and Disclosure, etc.

4.28.1.2.2.3  (03-04-2008)
Interagency Administration

  1. ES analysts co-administer programs such as the Low Income Housing Credit, New Market Tax Credit, Capital Construction Fund, Rehabilitation Tax Credit, etc. with other government agencies.

4.28.1.2.2.4  (03-04-2008)
Congressional Inquiries

  1. ES analysts address Congressional inquiries pertaining to specific issues, industries, and entity segments.

4.28.1.2.3  (03-04-2008)
Audit Technique Guide Selection

  1. Analysis is conducted of a particular segment using historical voluntary compliance levels, closed case data, filing populations, current compliance initiatives and any other available information. Based on this analysis, Headquarters may ask for field assistance for ATG development. In other instances, an Area will provide suggested segments for ATG development after an analysis at the Area level. This could include input from the local Area Research office staff.

4.28.1.2.4  (03-04-2008)
Audit Technique Guide Development

  1. With respect to ATG development, Headquarters is responsible for the following:

    1. Overseeing the identification and selection of topics,

    2. Coordinating the identification of resources, such as availability of expertise, funding, etc.,

    3. Coordinating administrative needs, such as arranging travel for meetings, task forces, etc.,

    4. Coordinating review with Chief Counsel, Prefiling and Technical Guidance Organization in LMSB , and other affected stakeholders,

    5. Reviewing the final document to verify incorporation of all changes and comments from Chief Counsel and others,

    6. Preparing ATG for publication and distribution. That would include ensuring copyright permissions are present, final editing, and clearance with other Headquarters Operating Units, and

    7. Initiating updates and revisions to published ATGs.

4.28.1.3  (03-04-2008)
Area Responsibility

  1. Areas are responsible for assisting with the development or revision of Audit Technique Guides. See 4.28.1–1, Guidelines for Development of Audit Technique Guides.

  2. An area may establish an ES facilitator as a technical resource person for an issue, industry, or entity type.

  3. The following are some of the specific duties of an ES Facilitator :

    1. Skills transfer and technical support to examiners;

    2. Development of local Compliance Initiative Projects and coordination of national projects;

    3. Instruction of local Continuing Professional Education classes;

    4. Liaison to Headquarters analysts and Technical Advisors for dissemination of information to local Area;

    5. Non-evaluative case reviews to identify trends and emerging issues in the local Area;

    6. Support publication of internal Local Area ES newsletters;

    7. Support ATG development or revisions ;

    8. Support local outreach initiatives in coordination with SL.

4.28.1.4  (03-04-2008)
Counsel

  1. The Office of Chief Counsel in Headquarters provides consultation on ATGs. They review the presentation of audit technique and the accuracy of legal issue discussions in ATGs prior to publication.

  2. Area Counsel provides the following assistance:

    1. Assign an attorney to assist Examination with the development of an ATG,

    2. Evaluate the ATG for both content and presentation, and ensure that the ATG uses proper citations for authorities,

    3. Ensure technique developed are defendable in court, i.e., unique industry specific indirect methods such as Lundberg Survey for gas retailers,

    4. Reviews the accuracy and sufficiency of the ATGs legal issue discussions. Advises the examiner(s) to add or delete issue discussions,

    5. Requests assistance from the appropriate office(s) within the Chief Counsel's office through established procedures before providing significant legal advice regarding ATGs.

4.28.1.5  (03-04-2008)
Ordering, Classifying, & Selecting Returns

  1. The following two methods to select returns for examination begin by sorting each post of duty’s current inventory by market segment in order to assess inventory needs.

    1. MACS (Midwest Automated Compliance System) can be used to select returns for each post of duty. Using a specific post of duty, NAICS code/market segment, and activity code, the classifier can review the returns on MACS and can order only those with apparent audit potential. A CIP is not required if only returns above the Area's DIF cutoff score are reviewed and no other selection criteria are used. Refer to IRM 4.28.1.5.1 below for additional detail on MACS.

    2. ES facilitators can be used to identify issues prevalent within their segments. Once an issue is identified it can be profiled using MACS, and a CIP will be obtained. With an approved CIP, MACS is utilized to secure returns in that segment.

  2. Under both methods, the original return may need to be obtained in order to properly identify the issue(s), as not all items are identifiable on a MACS facsimile.

4.28.1.5.1  (03-04-2008)
MACS

  1. The Midwest Automated Compliance System (MACS) is useful to ES because it provides the ability to identify returns in specific segments using NAICS codes and other return characteristics. MACS is a secure computer system that stores up to three years Individual Return Transaction File (IRTF), Business Return Transaction File (BRTF), and master file information for an Area.

  2. The same security should be provided for MACS facsimile returns and all other MACS output containing taxpayer identifying information as is given actual tax returns and all other confidential taxpayer information. This includes transmittal via Form 3210, Document Transmittal, or other appropriate method. Disposal of MACS data should be immediate; as soon as it is determined that the data is no longer needed.

  3. The menu driven system allows MACS coordinators to profile the return filer population by segment and to locate taxpayers by SSN, name of either spouse or a partial address. The system can also identify a random sample of taxpayers and display a proforma return and schedules for three years on the computer screen for classification. It will print a facsimile of any Form 1040, 1120, 1120S or 1065 return filed.

  4. MACS can also:

    1. Identify potentially noncompliant groups of taxpayers based on the classification criteria provided,

    2. Provide a Cash T for each year and other data, such as prior audit history, DIF score, POD, etc., and

    3. Use computed fields (such as percentages and ratios) as classification criteria.

Exhibit 4.28.1-1  (03-04-2008)
Guidelines for Development of Audit Technique Guides

Objective The objective is the development of an audit technique guide (ATG) that captures the unique business practices and examination technique of the segment studied.
Research & Development A team should be assembled to conduct the research and development phase prior to writing the audit technique guide. A team may consist of an ES analyst (or Technical Advisor (TA)) and field examiner with one team member designated as the team coordinator (generally the ES analyst or TA). A team approach may not be necessary if expertise already exists in a segment, but ES analyst or TA participation is necessary.
Writing the Guide The responsibility for writing the guide should be equally shared if a team approach is used. Writing the ATG should be initiated early in the research and development process and be ongoing until completion. The process requires continual rewriting as new information is learned. The guide should follow the standard format provided in Training document 3178–002, "A Template for Writing Audit technique Guides (ATGs)."
   
  Depending on the results of research and development, it may be appropriate in some instances to prepare an abbreviated ATG or "White Paper" in lieu of a comprehensive ATG. As the ES analyst or TA will generally be leading this effort, their concurrence is required in this situation.
Standard Format A standardized format should be used as this minimizes editing work and revisions as well as provides consistency in presentation, which makes ATGs more user friendly.
Final Edit The Headquarters ES Analyst or TA will have the final review and approval of the ATG.
  The ES Analyst or TA will coordinate with the team members to create a historical file which includes a printed copy of the audit technique guide, a diskette with the ATG file, copyright permissions, and copies of IRC Code sections, Treasury Regulations and court cases cited in the ATG.
   

Exhibit 4.28.1-2  (03-04-2008)
Audit Technique Guide Standard Format
(Refer to Training 3178–002, "A Template for Writing Audit Technique Guides for details" )

Cover Page The cover page will contain the name of the industry, issue, or entity type and the most recent revision date.
Table of Contents List the section titles and corresponding page numbers for all sections and subsections.
Required Section Issue, Industry, or Entity Type and Overview: Describes the issue, industry or entity segment and provides an overview. This section should include: background of segment, unique business practices, unusual recordkeeping systems and practices, any relevant anticipated trends in the segment, and additional resources available to examiners.
  Issues: This section discusses specific issues which are frequent or unique to the segment. Also, where applicable, include information on these areas of noncompliance: underreporting of income, nonfiler, employment taxes, excise taxes, nonpayment of taxes (ARDI), IRP document compliance, and international noncompliance.
  Examination Technique: This section covers techniques specific to the issues identified. This includes: examples of documents to request, key interview questions, things to look for during tour of business, unique indirect methods, things to look for in books and records, and other known sources of information pertaining to the segment.
  Supporting Law: Provide legal support for the issues discussed in the ATG. Cite the relevant Code sections and related regulations, Revenue Rulings and court decisions. Provide a brief discussion on why the cites are relevant.
  Additional Information: This section provides additional information on the issue, industry, or entity segment that does not fit into the structured chapters. Examples include: computational worksheets, market-specific worksheets, and guidance on report writing (but do not include pro-forma write-ups of issues).
  Glossary of Terms: List and define segment specific terminology useful to examiners. Slang and regional terminology would also require definitions.

Exhibit 4.28.1-3  (03-04-2008)
Excerpts from Writing Template Document

Introduction The following information has been extracted in part from training Document 3178-002(12/05) and IRM 11.3.
Use of DLN’s EIN’s & SSN’s Many guides will contain hypothetical tax problems, tax returns, and miscellaneous forms which require the use of document locator numbers (DLNs), employer identification numbers (EINs) , and social security numbers (SSNs). The following DLNs, EINs and SSNs can be used.
  Employer Identification Numbers and Document Locator Numbers
  Hypothetical EINs and DLNs can begin with any two-digit prefix that is not used by the Service to assign to actual EINs or DLNs . DLNs currently not in use are: 01, 02, 03, 05, 10, 12, 14, 15, 20, 21, 24, 26, 27, 30, 32, 37, 40, 42, 44, 45, 46, 47, 48, 50, 53, 57, 60, 61, 63, 64, 67, 68, 69, 70, 71, 78, 79, 80. EINs can begin with 00, 07, 08, 09, 17, 18, 19, 28, 29, 49, 78, 79, or 89.
  Social Security Numbers
  SSNs that will not require input to a computer may only be constructed using the sequence 000–00–XXXX, with the last four digits being randomly selected (for example, 000–00–1624 or 000–00–8721).
Use of Names and Addresses In many examples and exercises, first names are generally sufficient. "Joe" or " Mary" identifies sex and immediately relieves you of the " he" or "she" problem.
  When you need last names there are two lists to choose from. One list is composed of county names and the other is a list of colleges and universities. Select all of the names in one guide from the same list. When using the lists of American colleges and universities or U.S. counties to develop taxpayer names, print the following statement on the first page of the training document:
   The taxpayer names and addresses shown in this
 publication are hypothetical. They were chosen
 at random from a list of names of American
 colleges and universities as shown in Webster’s
 Dictionary or from a list of names of counties in the
 United States as listed in the
 United States Government Printing Office Style Manual.
  Names for streets can be selected from the same lists or, as an alternative, numeric addresses such as "First Street" , "Second Street" , etc., are acceptable.
  Cities must be neutral; for example, "Anytown." However, use of the name of any major city is also acceptable; for example, Dallas, San Francisco, and Boston.
  Any combination of names or addresses which can cast reflections on the character or behavior of any person or taxpayer, or which could detract from efficient presentation of the contents of the course, should not be used.
Copyrighted Material A copyright is the exclusive legal right given an author, composer, playwright, publisher, or distributor to reproduce, publish, sell or distribute a literary, musical, dramatic, or artistic work. The Service will not knowingly include copyrighted material in their publications or other works without license or written permission of the copyright owner. To avoid possible lawsuits due to copyright infringement, originators of Audit Technique Guides must follow the requirements for publishing copyrighted material in IRM 1.17.2.10.2 before including previously published material in their Audit Technique Guide. Attorneys in the Ethics and General Government branch of the Office of the Associate Chief Counsel (General Legal Services) are available to help originators who need assistance resolving a copyright matter.
Official Use Only Generally, IRS materials are available to the public under the Freedom of Information Act (FOIA) unless the material is classified "Official Use Only." Once issued with the "Official Use Only" classification, the originating function must determine if the material can be released each time it is requested by members of the public. Once a document is released to the public it is usually considered declassified. (See IRM 11.3, Disclosure of Official Information, for more information on classification and declassification of training materials.)
  If the training material is to be withheld from the public, the Headquarters Analyst must concur with the "Official Use Only" classification. The Headquarters will facilitate and obtain concurrence from the Office of Government Liaison and Disclosure the first time it is to be issued with this classification. No concurrence is needed to remove the "Official Use Only" classification.
  When required, the procedures for obtaining the concurrence of the Office of Government Liaison and Disclosure in the Headquarters are as follows:
  1.  Have " Official Use Only" marked on each page and the cover of the draft of the publication to be classified.
  2.  IRM 11.3, Disclosure of Official Information, describes how "Official Use Only" should be marked on the pages and cover, and also describes special adaptations of the "Official Use Only" designations.
  3.  Include a " memo to reviewers" requesting "Official Use Only" classification with a place for the Headquarters Director, Government Liaison and Disclosure, to sign off. This sign-off copy should be maintained in the course file.
  If materials classified "Official Use Only" are updated or reissued, the continuing need for classification should be considered. (See IRM 11.3, Disclosure of Official Information, for declassification guidelines.)

Exhibit 4.28.1-4  (03-04-2008)
Copyright Permission Letter

Internal Revenue Service Department of the Treasury
    Washington, DC 20224
    Person to Contact:
John Austin
Mr. Joseph Pecos
Chief, Legal Staff
Dallas Publishers, Inc.
100 Houston Square
New York, NY 10512
Telephone Number:
(XXX) XXX–XXXX
Refer Reply
to:

(your symbols)
Date:
March 29, 20XX
Dear Mr. Pecos:  
     
This letter confirms the agreement reached in your telephone conversation of March 29, 20XX, with John Austin of our staff regarding our use of your copyrighted material.
     
We wish to use the article, "What the Revenue Agent Seeks," from the March 20XX issue of Dallas on Taxes in our Audit technique Guide. The guide will be used by IRS examiners. The Audit technique Guide will also be made available to the general public through the Internet and for purchase from the Government Printing Office.
     
As a footnote where the cite occurs, we would reference the article with:
  Reprinted from Dallas on Taxes, March 20XX (Copyrighted 20XX), by permission of the publisher, Dallas Publishers, Inc.
     
Please call (name, title) if the agreement as set out in this letter is not entirely satisfactory to you; otherwise, please sign and return the attached copy.
    Sincerely,
 /s/
Your Name
Your Title
Agreed:____________ Date:__________

Exhibit 4.28.1-5  (03-04-2008)
Technical Guidance Web Site

The Office of Exam Specialization and Technical Guidance (ESTG) is committed to the development of technical expertise among personnel in SB/SE, namely group managers, revenue agents and tax compliance officers. This site is designed to assist the frontline in their daily examination work. The information can be accessed at the SB/SE website by accessing http://sbse.web.irs.gov/tg.

The web page has a list of industries, issues, and entities. Under each can be found information and audit tools to assist in specific examinations. Many audit technique guides (ATG) are also available. These Guides contain examination technique, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations.

The ATGs information can be accessed at the IRS website by accessing http://www.irs.gov/ then select Businesses from the top line list. A link to the Audit Technique Guides is provided under the Tax Information for Businesses section. The direct link is: http://www.irs.gov/businesses/small /article/0,,id=108149.00.html


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