4.46.5  Issue Development, Proposal and Resolution

Manual Transmittal

July 22, 2011

Purpose

(1) This transmits revised IRM 4.46.5, LB&I Guide for Quality Examinations, Issue Development, Proposal and Resolution.

Material Changes

(1) Eliminated reference to Exhibit 4.46.3-1, Joint Audit Planning and Monitoring Tool in subsection 4.46.5.4

(2) Delegation Order 236 (Rev. 3) has been renumbered as Delegation Order 4-24. Accordingly, all references to DO-236 have been changed to DO 4-24.

(3) Replaced references to "Large and Mid-Size Business" and"LMSB" with "Large Business and International" and "LB&I" , respectively.

(4) Editorial changes made throughout.

(5) Hyperlinks updated throughout.

Effect on Other Documents

IRM 4.46.5 dated December 29, 2009 is superseded.

Audience

LB&I Team Managers, Specialist Managers, Specialists, and Revenue Agents.

Effective Date

(07-22-2011)

Cheryl P. Claybough
Director, Pre-Filing and Technical Guidance (PFTG)
Large Business and International Division

4.46.5.1  (03-01-2006)
Overview

  1. This section discusses the coordination and monitoring of the examination process. It also provides options for the expeditious resolution of contentious issues. With few exceptions, the coordinating and monitoring actions described below will benefit both Coordinated Industry Case and Industry Case examinations.

  2. The selection and assignment of the team coordinator (TC) is critical to the success of the examination. Coordinated industry cases usually have several team members while most industry cases have one member; however, there are industry cases that may require the assignment of more than one team member and a team coordinator (TC). Since most team managers have several examinations involving multiple team members and specialists, they must rely upon the team coordinators to direct the day-to-day examination activity. The team coordinator is the focal point for communication and workflow. IRM 4.46.5.2 and 4.46.5.3 outline the role of the coordinator, required qualifications and their responsibilities and the relationship with specialists and specialist managers.

  3. Team manager involvement in CIC cases and IC cases differs depending on the complexity of the case and other factors. Although CIC cases generally require more involvement by the team manager and more administrative reporting because of their relative size and complexity, IC cases must also be closely monitored. The team manager should use the planning, coordinating and monitoring tools best suited to the case to achieve optimal results. IRM 4.46.5.4 – 4.46.5.4.7 outline suggested techniques for making on-site visitations, documenting managerial involvement and what records should be maintained.

  4. An important objective of the Service is to resolve tax differences at the lowest level without sacrificing the quality and integrity of those determinations. There are many different approaches that can be taken to resolve issues at the examination level. Each case has its own facts and circumstances, therefore careful and thorough consideration must be given to each option to determine which one(s) may best suit the situation. IRM 4.46.5.5.2 provides more information on alternative dispute resolution tools to assist the team manager and team members in resolving issues.

4.46.5.2  (03-01-2006)
Role of the Team Coordinator

  1. The team coordinator (TC) is the first team member selected by the team manager which allows for early introduction to the objectives of the examination and coordination responsibilities. During the examination, the TC is the focal point for communication. The TC works with the team manager in:

    • Preparing the pre-contact analysis;

    • Participating in pre-examination conferences;

    • Coordinating team planning (including issue assignments);

    • Soliciting statute extensions (at the direction of the team manager);

    • Assembling and editing (for uniformity and harmony) the overall plan; and

    • Preparing the examination report.

  2. In CIC and IC examinations, the TC collects data from team members and updates the planning file. Workpapers are organized for forwarding with the administrative file.

4.46.5.2.1  (03-01-2006)
Qualifications to Be Considered in Selecting a Team Coordinator

  1. A team coordinator should have the following qualifications:

    1. Ability to foresee case coordination needs and to distinguish them from case management needs;

    2. Excellent technical abilities in tax law and auditing;

    3. Prior experience on the case (within guidelines of IRS Policy Statement P-4-5);

    4. Ability to perform in a staff capacity to the team manager;

    5. Ability to communicate effectively, both orally and in writing; and

    6. Ability to work effectively with other team members and taxpayers.

4.46.5.2.2  (03-01-2006)
Team Coordinator Responsibilities

  1. As noted in 4.46.5.2, one of the primary responsibilities of a team coordinator, during the examination, is to serve as a focal point for communications among team members, taxpayers and the team manager. It is essential that all communications flow in an open and orderly manner to minimize:

    1. Loss of control over information document requests;

    2. Confusion as to priority of responses;

    3. Lack of completeness and pertinence to issue development; and

    4. Multiple requests for the same information.

  2. Other key duties of the TC are to:

    1. Assist the team manager in controlling and extending the statutory period of assessment on controlled returns under examination or related to the examination;

    2. Maintain open communications with the taxpayer;

    3. Advise the team manager of any developing problems regarding taxpayer.

    4. Advise the team manager of any apparent need for changes in the examination plan or the procedures being used;

    5. Maintain Form 5699, Information Document Request Log, or a computer generated facsimile for the team manager's review and follow-up;

    6. Develop issues;

    7. Advise the team manager of significant proposed issues and the need for any discussions with team members or the taxpayer;

    8. Maintain Form 5700, Issue Control Sheet;

    9. Update the planning file periodically;

    10. Prepare the Revenue Agent Report (RAR) and other related reports and documents, ensuring they are professional, pertinent and orderly; and

    11. Participate in the post-examination critique (CIC).

4.46.5.3  (03-01-2006)
Specialists and Team Members Detailed from Other Groups

  1. LB&I examination teams may consist of team members who are assigned from other compliance groups, from specialists groups (See IRM 4.46.3.9.10, Specialists and Specialists’ Managers), or from other territories (See IRM 4.46.3.9.12.2, Use of Assistance or Support vs. Primary Group Personnel.) The controlling or primary team manager must recognize that these team members have assigned managers who retain an interest in what their agents are doing and how it is being done. Case management will be more effective when the primary team manager secures the cooperation of all team members and their respective managers.

  2. The primary team manager has ultimate responsibility for the examination. Therefore, team managers or the team members not assigned to the primary team manager’s group should avoid usurping that responsibility. Any actions taken should be in accord with the primary team manager's direction. The primary team manager must be advised about significant decisions which may affect the examination. It would be appropriate, however, for a team member to go to his or her assigned manager for procedural or technical advice. This is in accordance with the specialist manager's shared responsibility for the management of the specialist's activities as described in IRM 4.46.3.7, Management of Specialists. The primary team manager retains the authority to approve specialists’ Forms 5701.

4.46.5.4  (07-22-2011)
Monitoring Examination Progress

  1. Monitoring the progress of the examination is essential as the team manager must quickly react to changing circumstances and adjust the examination scope and depth, as new facts and evidence are obtained.

  2. The proper use of time is an essential element of a quality examination. Examiners are responsible for the day-to-day management of their cases and are accountable for completing their work in the least amount of time necessary to perform a quality audit. Both the number of hours charged to a case and the span of time the case is open must be commensurate with the risk analysis.

  3. Effective communication with taxpayers is a significant factor in conducting a timely, quality examination while minimizing taxpayer burden. All communication with taxpayers should be courteous, professional, and concise.

4.46.5.4.1  (03-01-2006)
On-Site Visits

  1. Visits to the examination site by team managers are a key component to the success of the examination. On-site visits and meetings are important elements of the team manager’s involvement. Team managers should avoid delegating this responsibility to others. There are several types of visits, depending on the stage of the examination. These include:

    1. Planning visits to develop the examination plan;

    2. Monitoring visits with primary team members, support team members, specialist team members and their managers, and the taxpayer while the examination is underway;

    3. Problem solving visits with the team members and/or taxpayers; and

    4. Visits with team members to develop uniform presentation of proposed issues to the taxpayer.

  2. Visits, whether on-site at the primary examination location or at the assistance or support location, should be planned with the following objectives in mind:

    1. Ensure that there are open communications with the taxpayer and that the taxpayer is actively involved in the examination planning process;

    2. Ensure that open communications exist between team members;

    3. Ensure that team members are following the examination plan;

    4. Evaluate the efficiency of the plan and make necessary adjustments with taxpayers when appropriate;

    5. Promote understanding and commitment with the team and the taxpayer;

    6. Check on progress and problems and take corrective action;

    7. Evaluate performance of team coordinator and team members; and

    8. Help resolve technical issues.

  3. Specific areas which may be addressed during visits are as follows:

    1. Review progress on action items generated during previous reviews;

    2. Determine if examination areas are being worked in priority order and if plan modifications altering the scope and depth of the examination are appropriate and timely;

    3. Review examination areas in process and provide instructions regarding the need for examiners to expand, contract, or redirect audit activity;

    4. Review examination areas not in process and determine what, if any, impact subsequent events have had on their potential for adjustment;

    5. Review Forms 5701 for completeness and accuracy;

    6. Review Forms 4764B relating to completed examination areas to ensure that these forms contain audit trails and recommendations for subsequent cycles; and

    7. Monitor document request turnaround time.

  4. In visiting an examination site, the team manager should periodically meet with appropriate levels of company management to discuss the progress of the examination and to resolve any developing problems.

4.46.5.4.2  (03-01-2006)
Planning On-Site Visits

  1. When the on-site visit includes a meeting with the taxpayer, the team manager should, prior to the meeting, provide the participants with an agenda which identifies the specific matters to be discussed. This will allow sufficient time to conduct any research, inquiry, or development of background material necessary to the discussions.

4.46.5.4.3  (03-01-2006)
Team Manager On-Site Visits

  1. Visits to the examination site for the purpose of obtaining data for planning will be necessary.

  2. Team manager visits for the purpose of monitoring the progress of the examination should be:

    1. Conducted with as little disruption to the work of the team members as possible;

    2. Arranged in advance so team members can plan their activities around the visit;

    3. Conducted in an atmosphere that promotes teamwork, professionalism and commitment to getting the job done in the most efficient and effective way possible;

    4. Used as a vehicle for identifying evidence of team member performance; and

    5. Used to identify problems and corresponding corrective actions when necessary.

4.46.5.4.4  (03-01-2006)
Documenting On-Site Visits

  1. During the planning and execution stages of CIC and certain IC examinations, the team manager should maintain a case visitation log for overall control purposes. The log, at a minimum, should contain the following:

    • Date of visitation;

    • Personnel contacted (IRS and taxpayer);

    • Appropriate comments about the visitation (See (3) below); and

    • Reference to team manager's case management files or other data.

  2. The visitation log should also indicate data to be developed or a description of action items to be performed by the next planned visit.

  3. The visitation log should serve as a recap of the team manager's involvement. As appropriate, it should be supplemented with narrative comments about the following:

    • Minutes of planning process meetings;

    • Significant data on planning which relates to depth and scope with possible cross references to other files (risk analysis);

    • Issues and penalties discussed with team members during the visit;

    • Problems involving delays, corrective action taken and followup required;

    • Brief documentation of meetings and agreements reached with the taxpayer during the examination;

    • Observations about information or events that are significant to the current and subsequent examination (noted in critique);

    • Modifications in examination plan and approach;

    • Decisions reached on controversial issues;

    • Involvement with specific team members including audit accounting aides;

    • Specific comments on resolving team members' differences;

    • Specific comments where the team manager does not support a team member (including specialists);

    • Specific comments on the Information Document Request (IDR) log and followup on unanswered requests (See IRM 4.46.4.4, Information Document Request Management Process); and

    • Specific comments on assistance or support examination progress.

  4. The visitation log should be maintained in the taxpayer's case binder (CIC). An example of the type of information for the CIC case binder that would be helpful to achieve effective case control is shown in Exhibit 4.46.5-1.

4.46.5.4.5  (07-22-2011)
Monitoring Examination Time

  1. A system for recording time must be established for use by each team member. The team manager’s analysis of this information will materially assist in controlling and monitoring the examination in the following ways:

    1. The analysis will be useful in making decisions regarding adjustments to the plan. Team managers and team members will perform a risk analysis when 50 percent of the planned time has been spent. They can determine whether the planned time commitment can be met. The results at that point can be evaluated to determine if the potential issues should be pursued or dropped. Taxpayers should be notified timely of changes affecting them and their staffs.

    2. The analysis will provide evidence that high priority areas are being developed early in the examination and are proceeding as planned.

  2. A prescribed format will be established for time to be tracked by specific segment or Standard Audit Index Number (SAIN) line item. Generally, the format developed for time tracking will naturally follow the content of the examination plan. The format used should record time by SAIN item or issue area using:

    • The specific activity as described and allocated in the plan and SAIN number;

    • The planned time;

    • Opening inventory hours;

    • Time recorded by day;

    • Total hours this month;

    • Closing inventory hours; and

    • Miscellaneous items - These items can contain such information as a breakdown of time by two or three major divisions/subsidiaries, or identifying the number of document requests issued. Other formats may be used as long as the desired time data is obtained.

  3. Where two or more team members are engaged in the development of an issue or are applying time to the same line item but for different entities, the team manager is responsible for maintaining a cumulative time record. This will provide the team manager with the information needed to compare actual time spent on each issue with planned time.

  4. In establishing a system for recording time by audit segments, team managers must, by their own actions and reference to the records, only use it as a means to effectively manage the case. It is not intended nor should it ever be used for personnel evaluation purposes.

  5. Time tracking is mandatory for all CIC examinations and is suggested for larger IC examinations.

4.46.5.4.6  (03-01-2006)
Documentation of Management Actions

  1. Documentation will normally be incorporated into the case visitation log and related files in CIC examinations because significant case management activity modifies the approved examination plan. In addition, the team manager will specifically note in the examination plan major changes that involve:

    1. Expanding the examination which will require a 10 percent or more increase in planned time;

    2. Contracting the examination with a significant reduction in planned staff time (10 percent or more);

    3. Reassigning team members;

    4. Changing areas of emphasis to be examined even though the overall planned time is not significantly changed; or

    5. Addressing any other unusual areas not previously identified.

  2. Where significant changes are made, especially in time projections, approval by the Territory manager should be documented. Taxpayers should be notified timely of changes affecting them and their staffs.

4.46.5.4.7  (12-29-2009)
Issue Based Management Information System

  1. The Issue Based Management Information System (IBMIS) provides all levels of management with summary information, based on permission levels, concerning the status of specific cases which, when further consolidated, provides information about the status of their program. Reports can be generated using data from Information Management System (IMS), the Specialist Referral System (SRS), and the Audit Information Management System (AIMS). It is the responsibility of team managers to make sure the information input into each of these programs is correct.

  2. IMS captures issues identified in LB&I examinations. The issues are identified using the Uniform Issue List (UIL) codes Industry Analysts should be contacted to assist in identifying other cases within the industry with similar issues in an effort to exchange information and ideas and/or discuss examination techniques, issue development, etc. The PSP staff should be contacted to provide similar coordination across industries

4.46.5.5  (12-29-2009)
Communicating Audit Techniques and Issues

  1. In the interests of promoting uniformity and consistency when raising and resolving issues, the LB&I Examination Program encourages communications and has introduced several means for exchanging information between agents, teams, Industries and Headquarters. The value of fast and complete communications cannot be overemphasized. See IRM 4.51.2, LB&I Administrative Guidance. This IRM provides guidelines for evaluating emerging issues and procedures for developing, issuing and communicating LB&I Directives and Coordinated Issues. Items of interest include: unusual issues; audit techniques; and tax avoidance schemes.

  2. The Pre-Filing and Technical Guidance Program has Technical Advisors (TAs) available to discuss issues and examination techniques. Each team manager should take full advantage of this program and ensure that each team member assigned to an examination is aware of the program. The TA holds formal industry meetings that managers and examiners are invited to attend.

  3. IRM 4.51.5, Industry Focus and Control of LB&I Compliance Issues, contains procedures to strengthen the industry focus within LB&I on compliance issues. Industry issues are designated as follows:

    • Tier I – High Strategic Importance: Tier I issues are of high strategic importance to LB&I and have significant impact on one or more Industries. Tier I issues require oversight and control by an Industry Owner Executive. The disposition or resolution of the issue must be in accordance with the above Executive’s guidance.

    • Tier II – Significant Compliance Risk: These issues reflect areas of potential high non-compliance and/or significant compliance risk to LB&I or an industry. Tier II includes emerging issues, where the law is fairly well established, but there is a need for further development, clarification, direction and guidance on LB&I’s position.

    • Tier III – Industry Importance: Tier III issues typically are industry-related, and have been identified as issues that should be considered by LB&I teams when conducting their risk analyses.

  4. Guidelines for providing expedited direction to the field on significant LB&I compliance issues can be found in IRM 4.51.6, Issue Management Process Guide. The guide primarily covers Tier I and II issues. Once the Compliance Strategy Counsel approves an issue and designates it as a Tier I or II, the Issue Owner Executive will generally establish an Issue Management Team. One of the purposes of the IMT is to develop the issue and gather information so that clear direction can be issued to the field as quickly as possible.

  5. The LB&I News Center is the central point for various news articles and newsletters, including specialty and technical newsletters. These newsletters can be accessed from the LB&I web page by selecting the Revenue Agents tab.

  6. Other informative newsletters are published by the Industries and Technical Advisors. These newsletters can be accessed through the LB&I Industries' and the Technical Advisors' web pages.

4.46.5.5.1  (03-01-2006)
Items to Be Communicated

  1. Since it is difficult to define "unusual items" in terms of audit significance, the team manager's judgment must be relied upon to help identify the type of information to be reported. There are three broad categories of information that could be of importance and assistance to others: technical issues; examination techniques, and other items of interest.

  2. Technical issues include:

    1. New issues not previously identified or raised;

    2. Unusual tax treatment by a taxpayer(s);

    3. Inconsistency in issue treatment;

    4. New approaches to old issues; and

    5. Coordinated or controlled issues, such as those identified in the Pre-filing and Technical Guidance Program or by Appeals and the Office of Chief Counsel

  3. Examination techniques generally concern recommended examination procedures and may involve:

    1. Novel approaches to the examination;

    2. Usual sources of information; or

    3. Use of new technology, such as computer software, programs, or hardware.

  4. Other items of interest may not specifically fall into the technical issue or examination technique categories but are worthwhile reporting. Examples include:

    1. Industry practices having present or potential tax significance; or

    2. New or existing audit schemes, loopholes and tax avoidance practices needing additional attention.

4.46.5.5.2  (07-22-2011)
Alternative Dispute Resolution (ADR) Tools and Procedures

  1. The use of ADR methods will be considered in all examinations and utilized in appropriate cases. The examination plan will contain instructions to team members to consider the benefits of using these techniques in resolving examination issues.

  2. The following are ADR tools available to the team manager and examination team:

    1. Delegation Order 4-24 (formerly Delegation Order 236, Rev. 3) provides the authority to accept settlement offers and closing agreements in a CIC case under their jurisdiction where a settlement (including a hazards settlement) has been effected by Appeals (IRM 4.46.5.5.4);

    2. Delegation Order 4–25 provides the authority to accept offers and closing agreements in LB&I cases on issues coordinated in the Technical Advisor Program (formerly ISP and IFASP issues). (IRM 4.46.5.6);

    3. Accelerated Issue Resolution (AIR) (IRM 4.46.5.6.8);

    4. Early Referral to Appeals (IRM 4.46.5.6.10);

    5. Fast Track Settlement (FTS) program (IRM 4.46.5.6.11); and

    6. Pre-Filing Agreement (PFA) (IRM 4.46.5.6.12) requests may also be used to resolve or settle tax differences at the examination level.

  3. Discussion of ADR will be standard operating procedure by the examination team, team manager, and territory manager during risk analysis or team strategy meetings. Decisions will be documented in the minutes of the meetings regarding the use of these methods.

  4. LB&I examiners and team managers should also be familiar with the Industry Issue Resolution (IIR) Program. This program resolves frequently disputed or burdensome tax issues that affect a significant number of business taxpayers through published guidance.

  5. Appeals settlement guidelines must be redacted, as appropriate, when shared with taxpayers.

4.46.5.5.3  (07-22-2011)
Delegation Order 4-24 (formerly DO-236, Rev. 3) Application of Appeals Settlement to LB&I Taxpayers

  1. Delegation Order 4-24 Settlement Offers and Closing Agreement in CIC Cases Where Appeals has Effected a Settlement, is to assist in relieving taxpayer burden and reducing both Service and taxpayer costs when similar issues exist which are beyond LB&I’s resolution capabilities.

  2. Delegation Order 4-24 gives team managers limited settlement authority with respect to certain issues. It does not restrict nor reduce the issue resolution capabilities otherwise vested with team managers.

  3. Role of Area Counsel – Area Counsel should be included in all aspects of settlement discussions.

4.46.5.5.4  (07-22-2011)
Conditions Required for Settlement Authority

  1. Delegation Order 4-24 settlement authority may be exercised only if all of the following factors are present.

    1. the issue is in an LB&I case under LB&I's jurisdiction;

    2. A settlement has been effected by Appeals in the same, previous, or subsequent tax period.

    3. The facts are substantially the same as the facts in the tax period settled by Appeals;

    4. The legal authority is still valid;

    5. The underlying issue was settled by Appeals independently of other issues; and

    6. The issue was settled in Appeals, with respect to the same taxpayer (including consolidated and unconsolidated subsidiaries), or another taxpayer who was directly involved in the same transaction or taxable event in the settled tax period.

4.46.5.5.5  (07-22-2011)
Settlement Authority Guidelines

  1. The settlement authority guidelines are not meant to be all inclusive or to replace the judgment and discretion of the team manager. The team manager may use Examination Settlement Authority contained in Delegation Order 4-24 . However, the benefits to be derived by both the Service and the taxpayer are so significant that this authority should be carefully considered before determining that the issue or case should be forwarded unagreed to Appeals. The team manager must weigh all the facts and circumstances and decide whether an issue will be resolved using this authority.

  2. An individual, officially acting for the team manager, will usually be delegated all or most of the manager's authority including that covered by Delegation Order 4-24 .

  3. Under Delegation Order 4-24, LB&I may apply settlement authority where the same or related taxpayer is involved in a prior Appeals settlement. A related taxpayer includes both organizational and transactional relationships. Delegation Order 4-24 illustrates these relationships as follows:

    1. Taxpayers A and B are directly involved in the same transaction or taxable event in tax period 20XX where A and B would logically receive similar tax treatment. Taxpayer A's treatment of the transaction is adjusted by LB&I and settled in Appeals. The adjustment involves the same legal issue with respect to Taxpayer B. LB&I may resolve Taxpayer B's case in a manner consistent with the Appeals settlement of Taxpayer A.

    2. Taxpayers A and B are directly involved in the same transaction or taxable event in tax period 20XX where A and B would logically receive similar tax treatment. Taxpayer A's treatment of the transaction is adjusted by LB&I and settled in Appeals. In addition, Taxpayer A or B (or both) is directly involved in a separate, but similar transaction or taxable event in the same, prior, or subsequent tax period involving the same legal issue as above. The separate, but similar transaction for taxpayer A or B should be settled in a manner consistent with the Appeals settlement, provided that it involves substantially the same facts.

  4. Communication should be maintained with the Appeals Officer having jurisdiction over the earlier or later tax cycles. Regular Appeals/Team conferences should be scheduled before and after Appeals consideration of those tax cycles. Generally, this will be accomplished through the pre-and post-conference procedures. Any such communications may be subject to the ex-parte communications limitation set forth in Internal Revenue Service Restructuring and Reform Act 1998 (RRA 98) Sec.1001(a)(4). (See Rev. Proc. 2000-43; IRM 8.1.1.3.1)

  5. The taxpayer has no right to appeal the team manager’s decision if the team manager declines to exercise team manager settlement authority. However, as a courtesy, the taxpayer may request a conference with the team manager and/or territory manager to discuss the reasons this authority is not being exercised.

4.46.5.5.6  (03-01-2006)
Review by the Territory Manager

  1. Prior to finalization, the appropriate territory manager within the industry function and coordinated with the appropriate field specialist manager must review and approve the proposed settlement, together with the related agreement documents when the agreement concerns a specialist issue. The settlement will be in writing and should be retained by the team manager and also included in the case file.

4.46.5.5.7  (07-22-2011)
Agreement Forms

  1. Delegation Order 4-24 authorizes the team manager authority to execute closing agreements and/or Forms 870-AD with respect to settlement authority issues. Form 870-AD and/or a closing agreement must be used in all instances where Examination Settlement Authority is exercised to ensure consistency, and to affect a more binding and permanent agreement with the taxpayer.

  2. Only agreed settlement authority issues can be presented on the Form 870-AD. Form 870-AD cannot be used for other regularly agreed issues(s). When using a Form 870-AD and both agreed settlement authority issues and other non-settlement authority issues are present, two tax computations will be required

    1. One for the tax attributable to the settlement authority issues(s) and

    2. One for the tax attributable to the non-settlement authority issues(s).

  3. If the taxpayer agrees to the settlement, the Delegation Order permits the use of either a Form 870-AD or a closing agreement in finalizing the settlement. In most circumstances, the use of the Closing Agreement will be preferred for the following reasons:

    1. A closing agreement does not require an income tax calculation whereas the Form 870-AD does require an income tax calculation. This distinction may be important in the event that other examination issues are agreed and unagreed.

    2. On partially agreed cases, where a closing agreement is not used and Form 870-AD is used, three income tax computations would be necessary (Form 870-AD, agreed revenue agent report (RAR), and unagreed RAR).

    3. Issue(s) contained in a closing agreement can be finalized early in the examination and later incorporated in the final RAR. This aspect is particularly advantageous when the RAR is actually prepared much later in the examination process.

    4. The binding effect of a settlement agreement depends on whether the agreement is formal or informal. A closing agreement entered into under IRC section 7121 provides finality and settles the tax controversy addressed by that agreement. A Form 870-AD is an informal agreement, which standing alone, is not binding.

  4. When a Form 870-AD is used to secure agreement on a settlement authority issue that is a potential competent authority issue, it will not be treated as a binding agreement by the U.S. Competent Authority in subsequent negotiations with a treaty country. However, if a taxpayer executes a closing agreement with respect to a potential competent authority issue, the U.S. Competent Authority will endeavor to obtain a correlative adjustment from the treaty country and will not undertake any actions that would otherwise change the agreement. See Rev. Proc. 2006-54 (which superseded Rev. Proc. 2002-52).

4.46.5.5.8  (12-29-2009)
Closing Agreements

  1. Treasury Regulation Section 301.7121-1(a) provides that a closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of an agreement.

  2. IRM 8.13.1, Closing Agreements, provides instructions and prescribes procedures for Service personnel handling closing agreements entered into under IRC section 7121.

  3. IRM 8.13.1 contains a number of examples of closing agreements. The LB&I team should be able to effectively prepare a customized closing agreement based on the particular fact pattern unique to the issue(s) being settled after consulting this chapter and Area Counsel.

  4. A closing agreement terminates an existing Form 872A (Special Consent to Extend the Time to Assess Tax) if language in the agreement could be construed to be the final determination of tax and final administrative Appeals consideration. It is important that a Specific Matters Closing Agreement, Form 906, be used to limit the agreement to only those issue(s) that are being settled. The closing agreement should specifically state that the agreement is not a final determination of tax and final administrative Appeals consideration of any remaining issues.

  5. Deputy Commissioner, International must provide concurrence on cases which U.S. competent authority assistance has been requested, or is intended to be requested, under Rev. Proc. 2006-54 (which supersedes Rev Proc. 2002-52), closing agreements that provide relief under Rev. Proc. 65-17 (as amended) or Rev. Proc. 99-32 for issues involving allocations of income under IRC section 482.

4.46.5.5.9  (03-01-2006)
Closing Agreement - Joint Committee Aspects

  1. The examination team, with Area Counsel’s assistance, is responsible for preparing the closing agreement. However, closing agreements involving any Joint Committee jurisdictional years should not be signed by or on behalf of the Service until the team manager is notified by the Joint Committee Specialist Group that the Joint Committee’s views have been received and considered. IRM 4.36.3.6.2 provides guidance for requesting Joint Committee review of closing agreements. These procedures should also be referred to where issues are resolved early in the examination process, such as through Fast Track Settlement or Early Referral to Appeals.

  2. Closing agreements on Joint Committee cases, including those based on Competent Authority determinations, must not be executed on behalf of the Government until reviewed and approved by the Joint Committee on Taxation. See IRM 4.36.4.10.

  3. If a settlement is reached on an issue near the completion of the LB&I examination, the closing agreement should be submitted with the Revenue Agent’s Report to the local Joint Committee Coordinator for preparation of the Joint Committee Report.

  4. If a settlement is reached on an issue near the beginning of the LB&I examination, there could be substantial delay in executing the closing agreement if the closing agreement is not reviewed by the Joint Committee until the examination is completed. In this situation:

    1. The team manager should consider asking the Joint Committee Refund Counsel to review the issue.

    2. Assuming the Joint Committee Refund Counsel raises no objection, the closing agreement may then be executed by or on behalf of the Service.
      In situations where an issue is resolved early in the examination, such as through Fast Track Settlement or Early Referral to Appeals, the examiner should refer to IRM 4.36.3.6.2 for further guidance.

4.46.5.5.10  (03-01-2006)
Closing Agreements - TEFRA Partnership Considerations

  1. Due to the complexities in attempting to settle TEFRA partnership issues and the technical administrative procedural requirements involved in processing, it is recommended that TEFRA partnership issues be excluded from LB&I Settlement Authority.

4.46.5.6  (07-22-2011)
Delegation Order 4–25, Settlement Authority for Coordinated Issues

  1. Delegation Order 4-25, Settlement Offers, Closing Agreements, and Settlement Agreements Under Section 6224(c) in Cases with Technical Advisor (TA) Program Issues, Appeals Industry Specialization Program (ISP) Issues and Appeals Coordinated Issues (ACI) is an examination tool which can be used to settle appropriate issues at the team manager level.

  2. Team managers should look to Delegation Order 4-25, instead of Delegation Order 4-24, whenever coordinated issues are being considered for settlement. Since Delegation Order 4-24 does not specifically state that team managers have the authority to settle technical guidance coordinated issues previously acted upon by Appeals, these kinds of issues may be settled only if Delegation Order 4-25 applies.

  3. Technical guidance coordinated issues can be settled by the team manager only if Appeals has issued written settlement guidelines. Appeals has issued a significant number of written settlement guidelines and is in the process of developing written guidelines for the remaining coordinated technical guidance issues. Appeals will develop guidelines for future coordinated issues as they are identified. Accordingly, most coordinated issues would be subject to examination settlement authority. Refer to IRM 8.7.3.11 for Appeals Coordinated Issues (ACI) procedures.

  4. Role of Industry Counsel – Industry Counsel should be included in all aspects of settlement discussions.

4.46.5.6.1  (03-01-2006)
Scope of Settlement Authority

  1. Settlement authority covers coordinated issues with Appeals Settlement Guidelines. Settlement authority is available for these types of issues, regardless of the amount of the adjustment. The Delegation Order also grants the authority to execute closing agreements, or the Form 870-AD, necessary to effect any settlement reached.

  2. Prior to finalizing the agreement with the taxpayer, the proposed settlement (whether on the facts or litigating hazards) and any resulting closing agreement must be reviewed and approved by the appropriate Technical Advisor (TA) and Appeals Issue Specialization Program (ISP) coordinator.

4.46.5.6.2  (03-01-2006)
Coordination of Settlement Offers

  1. The team manager should contact the LB&I TA and the Appeals ISP coordinator as soon as a coordinated issue is identified. The team manager should also contact Area Counsel so that the appropriate Industry Counsel can be contacted. These specialists will know which coordinated issues have settlement guidelines and will provide a copy of the appropriate settlement guidelines to the team manager.

  2. The current coordinated issues with the names and telephone numbers of the assigned TAs are available on the intranet by accessing the LB&I Pre-Filing & Technical Guidance home page. The names and telephone numbers of the Appeals TA coordinators can be obtained from the LB&I TA.

4.46.5.6.3  (03-01-2006)
Detailed Procedures for Effecting the Settlement

  1. A team manager must ensure that the issue is fully developed before discussing settlement with the taxpayer.

  2. Team manager provides the taxpayer Form 5701 that reflects the full adjustment during the process. A statement should be included on Form 5701 indicating that there is a settlement guideline on the issue. Within 30 days, the taxpayer will be expected to respond in writing either agreeing to the adjustment or presenting its arguments.

  3. The team manager is responsible for formulating the settlement position with assistance and participation from the TA and the Appeals ISP coordinator.

  4. The Service will pursue settlement attempts through appropriate discussions with the taxpayer and consultation with the TA and the Appeals ISP coordinator.

    1. The team manager, TA and Appeals ISP coordinator should exchange documents (for example. issue write-ups, responses to information document requests, etc.) among themselves as necessary, to reach an appropriate settlement.

    2. The team manager, TA and Appeals ISP coordinator will remain in contact throughout the settlement process as necessary, to ensure that any settlement reached is appropriate.

    3. The taxpayer should be informed that a settlement position is being formulated.

  5. The settlement position will be reflected on a Form 5701-S (Notice of Proposed Adjustment) as amended to indicate the settlement offer. The S should be typed on a regular Form 5701.

  6. Prior to finalizing the settlement offer with the taxpayer, the Form 5701-S together with related documentation must be reviewed and approved by the Technical Advisor and the Appeals coordinator.

    1. Form 5701-S, any closing agreement, or Form 870-AD together with supporting documentation should be provided to the TA and the Appeals ISP coordinator for approval.

    2. Approval lines should be added to the Form 5701-S for the TA and the Appeals ISP coordinator. Their approval may occur simultaneously.

    3. After the TA and the Appeals ISP coordinator approve the settlement, LB&I presents the Form 5701-S to the taxpayer for consideration.

    4. The team manager will inform the TA and the Appeals ISP coordinator whether the taxpayer agrees or disagrees with the settlement.

    5. The case file must contain complete documentation that fully explains the basis for the settlement.

  7. If the taxpayer agrees to the settlement, the Delegation Order permits the use of either a Form 870-AD or a closing agreement in finalizing the settlement. In most circumstances, the use of a closing agreement will be preferred. Refer to IRM 4.46.5.5.8 above for further information regarding closing agreements.

4.46.5.6.4  (03-01-2006)
Procedures to Resolve Internal Disagreement on Teams

  1. Every attempt should be made by the TA, the Appeals ISP coordinator and the team manager to reach agreement on a settlement position. If the disagreement involves a specialist issue, the specialist manager will be involved in the discussions. If an agreement cannot be reached, the matter may be elevated to the next level of management at the discretion of the team manager.

    1. With respect to the TA's, the next level will be the TA's manager.

    2. With respect to the Appeals ISP coordinator, the next level will be the Director of Appeals (LB&I).

    3. With respect to the team manager, the next level will generally be the territory manager.

  2. If agreement still cannot be reached among those parties, negotiations should cease and the adjustment should be proposed in full and closed unagreed. Disagreements will not be elevated to the Industry Directors

4.46.5.6.5  (03-01-2006)
Procedures to Address Taxpayer Dissent with the Proposed Settlement

  1. If the taxpayer does not agree with the proposed settlement, the full adjustment (unsettled position) will be treated as an unagreed issue and closed to Appeals. Both the Forms 5701 and 5701-S should be included in the case file being transferred to Appeals.

  2. Unless the taxpayer presents new information or the facts and circumstances change, Appeals will not offer a new settlement on this issue to the taxpayer.

4.46.5.6.6  (03-01-2006)
Appeals Settlement Guidelines

  1. The Appeals Settlement Guideline will not be given to the taxpayer under any circumstance.

  2. Availability of the Appeals Settlement Guideline will be limited to the applicable LB&I and Counsel personnel involved with developing and approving the settlement position.

  3. At the conclusion of the examination, the Appeals Settlement Guideline should be removed from the case file and destroyed

4.46.5.6.7  (03-01-2006)
Settlement Documentation Requirements

  1. The team manager should prepare a separate settlement memorandum explaining in detail the basis for the settlement and the factors that were taken into consideration in arriving at the settlement. A settlement memorandum should be prepared whether the issue is finally agreed or unagreed. The Form 5701-S, however, should not itself be the settlement document.

  2. In agreed cases, the settlement memorandum should be attached to the Form 5701-S and placed in the case file. In unagreed cases, the settlement memorandum, along with the Form 5701-S should be included with the T-letter and RAR, and forwarded to Appeals to inform them of the previously offered settlement of the issue. The settlement memorandum is the equivalent of the Appeals Case Memorandum and should not be given to the taxpayer

4.46.5.6.8  (03-01-2006)
Accelerated Issue Resolution (AIR)

  1. Accelerated Issue Resolution (AIR) is an examination process to apply the resolution of the same or similar issues arising for an examination of an LB&I taxpayer from one or more tax periods to other tax periods.

  2. Examiners should refer to Rev. Proc. 94-67 and Rev. Proc. 68-16 when considering the utilization of AIR procedures.

  3. Counsel assistance is mandatory when utilizing AIR.

  4. The AIR process applies to both CICs and ICs. However, the AIR process should be limited in IC examinations where it is not practical to include subsequently filed tax return years as part of the current examination cycle.

  5. Although the AIR process does not constitute a formal examination of the taxpayer’s books and records, examiners should follow normal procedures for the control of tax periods on the Audit Information Management System (AIMS).

  6. AIR does not alter in any way the authority team managers have to resolve issues. Unlike Delegation Orders 4-24 and 4-25, AIR does not give managers added settlement authority.

  7. AIR does not affect Policy Statement P-4-5 for subsequent years included in the AIR agreement but not examined. (See Policy Statement P 4-5)

4.46.5.6.9  (03-01-2006)
Team Manager Responsibility

  1. During the AIR process, the team manager must ascertain the accuracy and applicability of the AIR issues. If the AIR issues were developed by specialists, the appropriate specialist managers should be consulted with respect to technical accuracy and consistent treatment of the issues. The team manager and examination team must adhere to the same auditing standards and substantiation requirements as in a normal examination.

  2. In developing the AIR issue(s) and agreement, the team manager should try to ascertain from the taxpayer or other sources some or all of the following:

    1. Are there any revenue rulings, regulations, court opinions, revenue procedures, etc., that are contrary to the position taken by the taxpayer

    2. Was the issue in an earlier or subsequent return of the taxpayer

    3. Was the issue subject to an Advance Pricing Agreement;

    4. Was the issue previously examined;

    5. Is the issue currently being considered by Appeals or pending in litigation;

    6. Has the Service issued or withdrawn a private letter ruling, determination letter, technical advice memorandum or technical advice request on this issue for this taxpayer; and

    7. Is there any pending legislation that may affect the proposed resolution?

  3. Extra caution should be exercised when the AIR issue involves a change of accounting method. The AIR resolution can have a future effect. To resolve any questions or for more information, the Change in Accounting Methods Technical Advisor should be contacted.

  4. Care must be exercised if the taxpayer intends to seek relief from double taxation. The team manager is encouraged to consult with the U.S. Competent Authority with respect to these issues. Approval from the U.S. Competent Authority is required if the parties wish to conclude a closing agreement prior to applying for Competent Authority assistance.

  5. In CIC examinations the team manager is responsible for ensuring that appropriate AIR information is properly entered in IMS.

4.46.5.6.10  (03-01-2006)
Early Referral to Appeals

  1. Early referral is a process to resolve cases more expeditiously through LB&I and Appeals working simultaneously. This process is optional and may be requested by any taxpayer. A taxpayer may request early referral of one or more unagreed issues. Rev. Proc. 99-28, 1999-2 C.B. 109, sets forth the procedures to request early referral. More information can be found on the Appeals web site at http://appeals.web.irs.gov/tech_services/adr/early-referral.htm.

4.46.5.6.11  (12-29-2009)
Fast Track Settlement (FTS) Program

  1. The Fast Track Settlement (FTS) Program allows LB&I personnel and taxpayers an opportunity to resolve issues through an expedited settlement process with an Appeals Official acting as a neutral party. It is mandatory for LB&I examiners to consider the use of FTS for all unagreed issues. Overall control of the case remains in LB&I during the FTS process and either party may withdraw at any time. Detailed information and procedures for the FTS program are set forth in Rev. Proc. 2003-40, 2003-1 C.B. 1044, and IRM 4.51.4. More information can be found on the Appeals web site at http://appeals.web.irs.gov/tech_services/adr/fasttrack.htm.

4.46.5.6.12  (03-01-2006)
Pre-Filing Agreement (PFA) Program

  1. Rev. Proc. 2007-17 (which superseded Rev. Proc. 2005-12 which superseded Rev. Proc. 2001-22) provides the basic information for taxpayers to participate in the Pre-Filing Agreement Program. Pre-Filing examinations can often resolve issues more effectively and efficiently than a post-filing examination because the taxpayer and the Service have more timely access to the records and personnel relevant to the issue. Pre-Filing Agreements allow a taxpayer to request examination of specific issues involving factual questions and well-settled principles of law before the return is filed. If the taxpayer and LB&I are able to resolve the selected issues prior to the filing of the return, Rev. Proc. 2007-17 authorizes the taxpayer and LB&I to finalize their resolution by executing an LB&I Pre-Filing Agreement (PFA).

  2. This program is intended to reduce taxpayer burden that would normally be encountered during the actual examination process.

4.46.5.7  (03-01-2006)
Industry Issue Resolution (IIR) Program

  1. The issues most appropriate for consideration under the Industry Issue Resolution (IIR) Program generally will have two or more of the following characteristics:

    1. The proper tax treatment of a common factual situation (issue is uncertain;

    2. The uncertainty of the proper tax treatment of an issue results in frequent, and often repetitive, examinations;

    3. The uncertainty of the proper tax treatment of an issue results in taxpayer burden;

    4. The issue is significant and impacts a large number of taxpayers within an industry or across industry lines; or

    5. The issue requires extensive factual development, and an understanding of industry practices and views concerning the issue would assist the Service in determining the proper tax treatment.

  2. The IIR Program is described in Rev. Proc. 2003-36, 2003-1 C.B. 85.

  3. Guidance issued under the IIR Program is available on the Service’s web site at http://www.irs.gov. Published guidance will typically be set forth in a revenue ruling or a revenue procedure.

4.46.5.7.1  (03-01-2006)
Issue Recommendation Process

  1. LB&I and SBSE will review and evaluate the issues submitted under the Industry Issue Resolution (IIR) Program. If appropriate, LB&I and SBSE may recommend that an issue be included on the Treasury Department’s and the Service’s Guidance Priority List for the upcoming year, or on quarterly updates to the Guidance Priority List. The Guidance Priority List sets forth the published guidance that Treasury and the Service expect to issue during the published guidance business plan year.

  2. Taxpayers, industry associations, and other interested parties may submit issues at any time during the year. The LB&I and SBSE Divisions will review and evaluate the issues submitted under the IIR Program at least semi-annually, generally after March 31 and August 31 of each year.

  3. Interested parties should submit issues by e-mail to IIR@irs.gov.

4.46.5.7.2  (03-01-2006)
Industry Issue Resolution (IIR) Teams

  1. If an issue is selected as a published guidance project under Industry Issue Resolution (IIR), the Service will establish a team to analyze the issue. IIR team members may include appropriate personnel from the LB&I and SBSE Divisions, Appeals, the Office of Chief Counsel, and the Treasury Department.

Exhibit 4.46.5-1 
Taxpayer Case Binder

  Taxpayer Case Binder
A. Examination Plan
B. Issues
C. Specialists
D. Support
E. Visitation Log and Reports
F. Status Reports
G. IBMIS Report
H. Data for Post - Examination Critique
I. Reports of Meetings with Taxpayer

Team managers should establish and maintain a binder or accordion-type folder for each CIC case that is in process. The above indexing represents what is suggested as the minimum information necessary to a team manager in monitoring and controlling a case. Managers are encouraged to maintain any other data which they find useful in managing their case. The Taxpayer's Case Binder should always be taken when making an on-site visitation in order that information regarding examination audit progress can be extemporaneously updated, management actions documented, and follow-up actions noted or reviewed. While the organization of this data primarily serves the team manager in directing the examination, it also makes a convenient presentation to upper management officials who may want to review the effectiveness of the team manager's stewardship.


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