4.75.10  Exempt Organization Pre-Audit Procedures

Manual Transmittal

August 12, 2014

Purpose

(1) This transmits revised IRM 4.75.10, Exempt Organization Examination Procedures, Exempt Organizations Pre-Audit Procedures.

Background

IRM 4.75.10 provides guidelines and procedures for the pre-audit analysis of returns under the jurisdiction of TE/GE, EO Examinations.

Material Changes

(1) IRM 4.75.10 has been rearranged. The section on surveying a return after assignment was shifted to IRM 4.75.16, Case Closing Procedures. The remaining IRM 4.75.10 has been modified to present information on preparing for a field audit. Included are discussions of issue focused audits, risk analysis, directed single issue audits, requesting documents from the organization to be received and reviewed prior to the visitation, and contemporaneous documentation (Forms 5464 and 5773).

(2) Terms such as examiner, examination, and examine were changed to agent, audit, and audit, in connection with the Plain Writing Act. This included a change to the title from "Pre-Examination Procedures" to "Pre-Audit Procedures" . The term agent is deemed to include revenue agents and tax compliance officers.

(3) All sections were rewritten to comply with the Plain Writing Act. For additional information on the Plain Writing Act, see http://www.plainlanguage.gov.

(4) The following IRM sections were renumbered and many are also modified with revised or additional content:

Previous IRM subsection New IRM subsection
IRM 4.75.10.3 IRM 4.75.10.1 (5)
IRM 4.75.10.5 Moved to IRM 4.75.7
IRM 4.75.10.6 Moved to IRM 4.75.7
IRM 4.75.10.7 IRM 4.75.10.6.1
IRM 4.75.10.8 Moved to IRM 4.75.7
IRM 4.75.10.9 Moved to IRM 4.75.7
IRM 4.75.10.10 Moved to IRM 4.75.7
IRM 4.75.10.11 Moved to IRM 4.75.29
IRM 4.75.10.12 Moved to IRM 4.75.7
IRM 4.75.10.13 Moved to IRM 4.75.16
IRM 4.75.10.14 IRM 4.75.10.5
IRM 4.75.10.15 IRM 4.75.10.6.6
IRM 4.75.10.16 IRM 4.75.10.6.4
IRM 4.75.10.17 Split between IRM 4.75.10.6.2 and IRM 4.75.10.10.1
IRM 4.75.10.18 IRM 4.75.10.6.3
IRM 4.75.10.19 Merged into IRM 4.75.10.6.3
IRM 4.75.10.20 IRM 4.75.10.6.8
IRM 4.75.10.21 IRM 4.75.10.6.7
IRM 4.75.10.22 IRM 4.75.10.3
IRM 4.75.10.23 IRM 4.75.10.8
IRM 4.75.10.24 IRM 4.75.10.9
IRM 4.75.10.25 Moved to IRM 4.75.11
IRM 4.75.10.26 IRM 4.75.10.12.1
IRM 4.75.10.27 IRM 4.75.10.8.3
IRM 4.75.10.28 IRM 4.75.10.12.2
IRM 4.75.10.29 IRM 4.75.10.7
IRM 4.75.10.30 IRM 4.75.10.7.2
IRM 4.75.10.31 IRM 4.75.10.11
IRM Exhibit 4.75.10–1 Removed
IRM Exhibit 4.75.10–2 IRM Exhibit 4.75.10-1
IRM Exhibit 4.75.10–3 IRM Exhibit 4.75.10-2
IRM Exhibit 4.75.10–4 IRM Exhibit 4.75.10-3
IRM Exhibit 4.75.10–5 IRM Exhibit 4.75.10-4
IRM Exhibit 4.75.10-6 Removed
IRM Exhibit 4.75.10–7 IRM Exhibit 4.75.10-5
IRM Exhibit 4.75.10–8 IRM Exhibit 4.75.10-6

(5) IRM 4.75.10.1 was expanded to include cites to other IRMs.

(6) IRM 4.75.10.1.1 was added to incorporate TE/GE policy memorandum TEGE-04-1013-19 regarding the use of RCCMS.

(7) IRM 4.75.10.2 was expanded to define systems, IDRS, and command codes.

(8) IRM 4.75.10.4 was expanded to include additional IRC sections relating to taxes an exempt organization may be liable for.

(9) IRM 4.75.10.6.1.1(6)c. A secured e-mail is acceptable documentation of approval from Counsel of 6-year statute.

(10) Added 4.75.10.6.6.1, 4.75.10.6.6.1.1, 4.75.10.6.6.2 relating to issue focused audits, risk analysis, and single issue audits, respectively.

(11) IRM 4.75.10.6.8 - added Art Appraisal Services to list of SRS referrals.

(12) Added 4.75.10.10 relating to receipt of documents prior to the audit.

(13) Added Exhibit 4.75.10-7 and 4.75.10-8 relating to risk analysis examples and the risk analysis workpaper.

(14) Added Exhibit 4.75.10-9 relating to the request for the EP or EO determinations administrative file

(15) Moved and revised IRM Exhibit 4.75.11-1, Sample Form 2848 to Exhibit 4.75.10-10.

(16) Added new Exhibit 4.75.10-11, Correspondence Rules

Effect on Other Documents

This supersedes IRM 4.75.10, dated May 1, 2004.
This incorporates parts of Interim Guidance Memorandum TEGE-04-1013-19, dated 9/30/2013, Reporting Compliance Case Management System (RCCMS) Use Policy, targeting this audience.

Audience

Exempt Organization revenue agents and tax compliance officers

Effective Date

(08-12-2014)

Tamera L. Ripperda
Director, Exempt Organizations
Tax Exempt and Government Entities

4.75.10.1  (08-12-2014)
Pre-Audit Procedures Overview

  1. This manual provides procedures to be performed prior to the initial visitation for a field audit and/or as part of the initial steps in an office correspondence audit. Procedures for office correspondence audits can be found at IRM 4.75.27, Exempt Organizations Examination of Returns, Office/Correspondence Examination Program (OCEP).

  2. See IRM 4.75.11, On Site Examination Procedures, for a description of the procedures to perform after initial contact has been made with an organization (or its representative). IRM 4.75.11 does not contain all on-site audit procedures. Additional sources of information are found in:

    • IRM 4.75.12, Required Filing Checks, discusses the required filing checks

    • IRM 4.75.13, Issue Development, covers issue development and explains how to conclude an audit

    • IRM 4.75.15, Closing Letters and Reports of Examination, discusses closing letters and reports of examination

    • IRM 4.75.16, Case Closing Procedures, presents the case closing procedures

  3. The procedures in this manual outline how to:

    1. Analyze general program returns assigned for audit.

    2. Prepare an audit plan.

    3. Identify all potential issues disclosed on the return.

    4. Set the proper scope for the audit.

    5. Ask appropriate questions during the initial taxpayer contact.

    6. Prepare a clear, concise, and appropriate initial Form 4564, Information Document Request.

    7. Request appropriate taxpayer documents to be received and reviewed in advance of the site visitation.

    8. Develop appropriate interview and internal controls questions prior to the field visit.

  4. For cases involving employment tax issues, follow the procedures in this manual with respect to cases where employment taxes are identified during the pre-audit analysis as an issue. Consult IRM 4.23, Employment Tax, as it provides the definitive guidance on employment tax issues.

  5. The forms used in this IRM are from the Reporting Compliance and Case Management System (RCCMS) or the Multimedia Publishing Division Catalog at http://publish.no.irs.gov/catlg.html.

  6. This manual does not provide procedures for audits conducted by the Team Examination Program (TEP). Procedures for TEP audits can be found at IRM 4.75.29, Exempt Organizations Team Examination Program Procedures.

4.75.10.1.1  (08-12-2014)
Policy on Using RCCMS

  1. Effective October 1, 2013, the Acting Commissioner, TE/GE issued Interim Guidance Memorandum TEGE-04-1013-19, Reporting Compliance Case Management System (RCCMS) Use Policy. The memorandum defines the use of RCCMS in processing all examination and compliance cases.

  2. Use RCCMS to create and control examination cases.

  3. Cases will have an electronic copy of the return and / or related research material regarding the case.

  4. Agents working cases are required to prepare, develop and store workpapers within the RCCMS system. Users are also required to make use of Microsoft Office software and Adobe pdf files, along with forms, letters, and templates in the RCCMS repository.

  5. Agents must maintain all in-process and completed workpapers in RCCMS and synchronize with the central database on a daily basis. The synchronization will serve as an automatic backup of stored data files in the central database server.

  6. An electronic case file within RCCMS should closely resemble the content of what a paper case file included prior to the migration to electronic case files. This includes all workpapers and pertinent source documents used in making a determination as to whether there are any issues or changes that will be discussed or resolved prior to closing the case.

    Note:

    Refer to case file assembly instructions in IRM 4.75.16.7, and IRM Exhibit 4.75.16-18, Guidelines for Using EO Sub-Folders in RCCMS.

4.75.10.2  (08-12-2014)
Definitions

  1. Following are definitions of terms essential to the use of this manual.

  2. "Primary Return" is the annual EO information return under EO jurisdiction around which other returns revolve. Primary returns report all aspects of an organization's financial and operational activities. The primary return also serves as the return-of-record for statute purposes. The following returns are primary return types:

    • Form 990, Return of Organization Exempt From Income Tax

    • Form 990-EZ, Short Form Return of Organization Exempt From Income Tax

    • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation

    • Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Person

    • Form 5227, Split-Interest Trust Information Return

    • Form 1065, U.S. Return of Partnership Income (for IRC 501(d) apostolic organizations)

    Note:

    Form 990-N (e-Postcard) does not constitute a return for statute of limitations purposes; however it is treated as a primary return for disposal code purposes upon closure.

  3. "Related Return" is any return of the same taxpayer. However, discrepancy adjustment returns and Forms 4720-A arising from transactions with the EO are treated as related returns for disposal code and principal issue code purposes. Related returns need not be of the same tax year as the primary return. Related returns include returns under the jurisdiction of employee plans and tax-exempt bonds. Related returns also include payee information returns and statements, such as Forms W-3 /W-2, Forms 1096 /1099 series, and includes returns such as Forms 8282, Forms 8899, etc., and secured converted returns.

  4. "Case" is defined as the primary return (or other selected return) open for audit for one year (or tax period) plus other returns, if any, involving interrelated interests and/or transactions that require concurrent audits. Other returns are defined to include returns subsequent and/or prior to the primary return (or other selected return) of the taxpayer, as well as returns for related taxpayers for the primary year and subsequent and/or prior years.

  5. "Exempt Organization" for the purposes of this IRM includes organizations exempt from federal income tax under IRC 501, IRC 527, non-exempt charitable trusts described in IRC 4947(a)(1) and split interest trusts described in IRC 4947(a)(2).

  6. "LUQ" is an acronym for large, unusual, and questionable items.

  7. "National Standard Time Frames" are a set of time frames established for the purpose of evaluating the quality of customer service provided during an audit. The standard time frames are:

    1. 10 days for the agent to close agreed or no-change cases, counted from the first date that the signed report is received back from the taxpayer or from the date the no-change determination is made by the agent.

    2. 20 days for the agent to close unagreed cases counted from the final closing conference or after the closing conference was declined.

    3. 45 days between significant activity (30 days for OCEP audits).

      Note:

      Significant activities are considered those where substantial work is performed on a case file or require a response in writing.

    4. 10 days for the manager to initial/date the case file after receipt from the agent.

    5. 3 "business" days to respond to phone calls.

    6. 14 days to respond to correspondence.

      Note:

      All days are calendar days, except when responding to phone calls.

  8. "Scope" is commonly defined as the extent and boundaries of an audit. In the context of audits conducted by the IRS, the scope of an audit incorporates the:

    • Objectives of the audit

    • Issues identified in the pre-audit and during the audit

    • Nature and extent of audit procedures to be performed

    • Tax periods to be audited

    • Identification of activities which the audit will or will not cover

  9. "Workpaper" refers to documents created by agents to document:

    1. All audit procedures completed to test account balances being scrutinized.

    2. The "facts, law, argument, taxpayer's position, government's position, and conclusions" of each issue raised.

    3. Any analysis, analytical review, or computations completed to support a proposed adjustment.

  10. "Information Document Request" (IDR) refers to the Form 4564, Information Document Request. This form is provided to taxpayers to request documents and written answers to questions. The form is mailed, faxed, or handed to the recipient.

    Note:

    Before faxing a document to a taxpayer, obtain assurance from the authorized recipient that he/she is ready to receive the fax to prevent inadvertent disclosure.

  11. Additional definitions are provided below, that have been grouped for ease of use.

4.75.10.2.1  (08-12-2014)
Files

  1. "Administrative File" refers to the file folder(s) containing the:

    • Audit report(s)

    • Information/tax return

    • Form 5772, EO Workpaper Summary

    • Form 5773, EO Workpaper Summary Continuation Sheet

    • Form 5774, Private Foundation Workpapers (private foundations only)

    • Form 5464, Case Chronology Record

    • Supplemental workpapers

    • Correspondence exchanged with the taxpayer. For correspondence rules, see Exhibit 4.75.10-11.

    • Other documents

    Note:

    Refer to case file assembly instructions in IRM 4.75.16.7, and IRM Exhibit 4.75.16-18, Guidelines for Using EO Sub-Folders in RCCMS.

  2. "Administrative Record File" refers to the file folder(s) prepared for Counsel in declaratory judgment cases. See IRM 4.75.32, Declaratory Judgment Cases and the Administrative Record.

  3. "Determination Administrative File" is a file maintained by Rulings and Agreements, EO Determinations, Cincinnati, Ohio containing the:

    • Exemption application

    • Attachments to the application (articles of incorporation, charter, bylaws, etc.)

    • The initial determination letter (advance ruling letter, if applicable)

    • Any subsequent determination letters (final ruling letter)

    • Amendments to organizing documents

    • Other historical information

      Note:

      As of 2004, the Records Unit no longer processes requests to add materials collected during audits into the files.

  4. "EO BMF Extract" is an exempt organizations master listing from the Business Master File. Refer to http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Business-Master-File-Extract-EO-BMF.

  5. "EO Select Check" is an on-line search tool that allows users to select an exempt organization and check certain information about its federal tax status and filings. Refer to http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check. EO Select Check consists of three databases:

    • Organizations eligible to receive tax-deductible contributions (Pub. 78 data). Subordinate organizations in a group ruling are not listed in this database. Refer to the EO BMF Extract.

    • Automatically revoked organizations (even if they subsequently acquire a new tax-exempt status)

    • Form 990-N (e-Postcard) filers and filings

  6. "On-Line SEIN" is a database containing images of all Forms 990, 990-EZ, 990-PF, 990-T, 4720, 1120-POL, and 8872. All images are presented as scanned during processing in the Ogden Service Campus. No portions are redacted.

  7. "Filed Forms 8871 and 8872" is used to search for and view copies of all submitted Forms 8871, Political Organization Notice of Section 527 Status, and Forms 8872, Political Organization Report of Contributions and Expenditures (both paper and electronic filings). Refer to http://forms.irs.gov/app/pod/basicSearch/search?execution=e2s1.

  8. Suspensions Pursuant to IRC 501(p) is provided on-line at http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Suspensions-Pursuant-to-Code-Section-501(p).

4.75.10.2.2  (08-12-2014)
Systems

  1. "IDRS" is the Integrated Data Retrieval System, a major application consisting of databases and operating programs that support IRS employees working active tax cases within each business function across the entire IRS. This system allows IRS employees to take specific actions on taxpayer account issues, track status and post transaction updates to the Master Files. Actions taken via IDRS include notice issuance, installment agreement processing, offers in compromise, adjustment processing, penalty and interest computations and explanations, credit and debit transfers within an account or other related accounts and research of taxpayer accounts for problem resolution of taxpayer inquiries. These updates are done in both a batch process and through online interactive real-time programs commonly known in the IRS as Command Codes.

  2. "AIMS" is the Audit Information Management System, which provides inventory and activity controls of active Examination cases. AIMS uses linkage to IDRS to input status changes, adjustments, and case closing actions.

  3. "RCCMS" is the acronym for the Reporting Compliance Case Management System. This system is used for electronic transmission of administrative files between the various examination functions (for example, classification to the examination group to the closing unit and then to special review) as well as the generation of workpapers.

    Note:

    Refer to electronic case file assembly instructions in IRM 4.75.16.7, and IRM Exhibit 4.75.16-18

  4. "Web-ETS" is the acronym for the Web-based Employee Technical Time System. Web-ETS provides TE/GE employees a web-based application to:

    1. Establish cases.

    2. Maintain inventory.

    3. Report time as it is applied.

      Note:

      To access Web ETS, visit http://mtb0120epcms30.ds.irsnet.gov/webets

4.75.10.2.2.1  (08-12-2014)
Integrated Data Retrieval System (IDRS)

  1. "MF" is Master File, a record containing all information regarding the taxpayer’s filing of returns and related documents. MF can be specified further – such as Individual Master File, Business Master File, etc.

  2. "BMF" is the Business Master File, which contains information on taxpayers who file business returns (940, 941, 990, 1120, 1065, etc.) and related documents.

  3. "NMF" is the Non-Master File, which includes those returns that have not yet been programmed to the Master File (MF). This includes Forms 4720-A (MFT 66) and 990-BL (MFT 56). To obtain NMF transcripts, send a fax request using Form 10321, Fax Transmission Cover Sheet, to the IRS Accounting Operations Department, 201 W. Rivercenter Blvd, Covington, KY, 41011, 859-669-2959. To follow-up on a request, call 859-669-5498. An NMF account in IDRS is identified by the taxpayer identification number (TIN) followed by the letter "N" .

  4. "Command codes" (CC) are used to access taxpayer account information through IDRS. The codes consist of five alpha characters in a specific input format. Specific information can be obtained through an additional character called a definer code.

  5. "Definer codes" are typically alpha characters placed at the end of a command code to obtain more specific information.

  6. "MFT" is short for Master File Tax, a specific type of account code required in each transaction to identify the specific type of return module to which a transaction is being posted. For example, Form 990 returns have an MFT of 67 and Form 990-T returns have an MFT of 34.

  7. "Tax module" is the part of a taxpayer’s account which reflects tax data for one tax class (MFT) and one tax period. For example, a taxpayer has filed three Forms 990. The taxpayer has only one account, but three tax modules.

  8. "Transaction Codes" (TC) are three-digit codes used to identify actions taken on a taxpayer’s account. Transaction codes are most commonly posted to specific tax modules.

  9. "Document Locator Number" (DLN) is a controlled number assigned to every return or document input through the Account Data Processing system. The fourteenth (last) digit is the year of processing and is assigned by the Campus computer at the time of the original input.

4.75.10.2.2.2  (08-12-2014)
IDRS Command Codes

  1. The first five letters constitute the command code, and the sixth character is a definer code.

  2. AMDISA (Audit Management Display Information System) displays a summary of the AIMS file.

  3. BMFOLI (Business Master File On-Line) gives the status of entity and tax modules, tax module balances, posted return indicators, and IDRS service centers.

  4. BMFOLO provides information on an exempt organization.

  5. BMFOLR is the return information screen, containing a brief summary of key entries from the return.

  6. BMFOLT provides a transcript of transactions on a tax module.

  7. BMFOLU is used to view Combined Annual Wage Reporting (CAWR) information.

  8. BMFOLZ is the audit history screen, displaying the closing codes and assessment amounts of prior audits.

  9. BRTVU (Business Return Transaction View) provides an in-depth display of business return information. It is only available for the three most recent tax years.

  10. INOLES (Inquiry On-Line Entity) displays the online entity screen, providing much of the same data as BMFOLO. It can be used for any individual or business.

  11. IRPTRR (Information Returns Processing Transcript) provides a hardcopy printout of the requested information returns (Forms W-2, 1099, etc.) issued by an organization. For online transcripts of documents received by a taxpayer, IRPTRO is used.

  12. TXMOD provides a history of a tax module, which can include campus notices issued.

  13. For NMF transcripts, send a fax request to the IRS Accounting Operations Department, Covington, KY, 859-669-2959.

4.75.10.3  (08-12-2014)
Agent Workpapers

  1. From the start to the finish of an audit, agents generate workpapers. Upon case assignments, they create case chronologies (Form 5464, Case Chronology Record), to document receipt of the files, before even reviewing the files.

  2. Workpapers provide the principal support for the agent's report. They document the:

    1. Issues identified.

    2. Procedures applied.

    3. Audit tests performed.

    4. Information obtained.

    5. Documents inspected.

    6. Conclusions reached.

  3. Provide adequate documentation in the workpapers for any conclusions drawn.

  4. Quality workpapers have the following characteristics:

    To ensure workpapers are... Then
    Accurate Use the RGS system for adjustments to Forms 1040 and 990-T, and the employment tax Excel templates maintained by Small Business/ Self Employed (SB/SE) for employment tax assessments.
    Legible Generate all workpapers electronically, as they can be imported into RCCMS. Handwritten workpapers, while still permissible, are required to be legible to other readers. Scan (or digitally photograph) such workpapers to import them into RCCMS.
    Clear Note all steps taken to explain how the conclusion was reached.
    Concise Make concise entries in the Forms 5464 and 5773 (described below). If an entry requires in-depth explanations, create a separate workpaper.
    Organized Assemble closed case files per IRM 4.75.16, Case Closing Procedures.
    Properly Labeled RCCMS folders are used to organize the documents uploaded to RCCMS. See IRM 4.75.16.7 and Exhibit 4.75.16-18 .
    Professional Avoid prejudice, bias, or animus in any statements concerning any organizations or individuals. The organization can request a copy of the agent's workpapers through the Freedom of Information Act. Additionally, a court review of the workpapers and other Service personnel statements which are part of an administrative file could result in a finding against the Service.
  5. Workpapers serve multiple purposes, such as:

    1. Assisting reviewers, managers, or others in determining the sufficiency of the audit.

    2. Providing a source of information for subsequent year audits.

    3. Becoming a part of the administrative record, if shared with the organization, in the event the case is litigated.

  6. Prepare separate case file folders if multiple types of returns are audited.

    Example:

    Keep all Forms 990 in one folder, place Forms 990-T in a separate folder, and place Forms 941 in yet another folder, each with their own separate sets of Forms 5772 and 5773. Include only one Form 5773, EO Workpaper Summary Continuation Sheet, in each folder. It is not necessary to create a separate Form 5464 , for each type of return. The form has multiple columns for the different types of returns for the same taxpayer.

  7. For instructions on case file assembly, see IRM 4.75.16.7. For guidelines on organizing electronic records in RCCMS, see IRM Exhibit 4.75.16-18, Guidelines for Using EO Sub-Folders in RCCMS.

4.75.10.3.1  (08-12-2014)
Workpaper Preparation

  1. Prepare workpapers from the moment the case is assigned to the moment the case is closed. Record in a timely manner all of the actions taken.

    Note:

    Do not rely on memory. After the field visitation is concluded, agents generally have no further access to the books and records. At that time agents rely solely on the copies of documents made and any workpapers generated during the on-site audit.

  2. The workpapers consist of standardized forms (Forms 5772, 5773, 5464), agent generated supporting workpapers, and when appropriate, copies of documents or other materials secured during the audit.

  3. See IRM 4.75.10.3.8 for a discussion of workpaper format.

4.75.10.3.2  (08-12-2014)
Standard Forms

  1. The following standardized forms, listed in order of importance, are prepared in EO audit cases:

    • Form 5464 , Case Chronology Record

    • Form 5772, EO Workpaper Summary

    • Form 5773, EO Workpaper Summary Continuation Sheet

    • Form 5774, Private Foundation Workpapers (applicable in private foundation cases only)

  2. Form 5773 and Form 5774 provide an orderly presentation of workpaper material, including an indexing system. These forms are designed as working tools for pre-audit planning and use during the audit. Their purpose is to organize the agent's workpapers, provide a summary of the findings, and provide reminders as to procedures to be performed or issues to be considered.

4.75.10.3.3  (08-12-2014)
Form 5464, Case Chronology Record (CCR)

  1. Use Form 5464 (CCR) to record actions taken on the case, contacts made, follow-up dates and time expended. The form is a historical record and a quick reference for Tax Exempt Quality Measurement System (TEQMS) attributes. Update the CCR contemporaneously with the actions taken.

  2. Include on the CCR all direct audit time charged to the case. The time must agree with the direct audit time as reported on Web ETS. When the case is ready to close, the total time on the CCR and Web ETS must reconcile to the total time recorded on Form 5599, EO Examined Closing Record.

  3. Indicate on the CCR the date that the case was received and the dates of subsequent pre-audit planning activities.

  4. Include in the CCR, at a minimum, the following entries related to pre-audit work:

    1. Any work performed before taxpayer contact.

    2. The date the case is put in status 12 on AIMS.

    3. Dates IDRS and AIMS research are requested, received, and reviewed.

    4. Dates of conversations with the organization's contact person(s) and/or representatives and their phone number(s).

    5. The date the appointment letter, initial IDR, and other enclosures are mailed.

    6. Appointments scheduled including the date, place, time and contact(s).

      Note:

      Exhibit 4.75.10-6 provides an example of the notations documenting the pre-audit work.

  5. Include in the CCR, at a minimum, the following entries related to work performed after initial contact:

    1. Any work performed during and after taxpayer contact.

    2. Dates of contacts with taxpayers, representatives, and third parties, whether in person or by phone.

    3. The date of receipt and processing of Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization.

    4. The date a tour of the organization's site was completed.

    5. Dates other correspondence is received from or sent to the taxpayer and/or representative.

    6. The date Form 872, Consent to Extend Time to Assess Tax, is issued and obtained.

    7. Subsequent IDRs issued and follow-up dates.

    8. Delays or lack of cooperation by the taxpayer and/or representative.

    9. Explanations for delays of significant action on the case by the agent.

    10. Explanations of any delays in completing the audit resulting from both actions by the IRS (training, details, etc.), and/or the taxpayer/representative.

      Note:

      Document any instances where the taxpayer/representative demonstrates a lack of cooperation.

  6. Include in the CCR, at a minimum, the following entries related to management involvement:

    1. Description of group manager involvement, including informal discussions about case development and quality.

    2. Dates of formal, in-process case reviews, on-the-job-visitations, and workload reviews, where the case was discussed. The group manager should make these notations at the time of involvement.

      Note:

      As cases are electronic in RCCMS, agents should email their CCR to their managers for the comments, or note in the CCR places for the manager to record approval.

    3. The date the case was closed to the group manager.

    4. The date the case was approved for closing by the group manager.

  7. Since it is part of the audit trail, the Form 5464 may be disclosed to the taxpayer under the Freedom of Information Act. Ensure entries are professional, accurate, and concise. If a lengthy discussion of an entry is desirable (for example, a long phone call), place this information on a separate workpaper indexed to the CCR.

  8. Properly document all delays in the event the CCR is used in an interest abatement case. See IRC 6404(e) to determine if a deficiency is attributable in whole or in part to any unreasonable error or delay on the part of the Service.

4.75.10.3.4  (08-12-2014)
Form 5772, EO Workpaper Summary

  1. Use Form 5772 for pre-audit planning and as the first page of the workpapers. It contains a list of procedural and technical reminders. Review the list as part of the planning process and check the boxes appropriately to indicate those items to be considered during the audit. If the item is checked on Form 5772, include it on Form 5773.

  2. During the pre-audit, complete the following items on Form 5772:

    • Organization's name, address and EIN

    • Return form number

    • Year(s) under audit

    • Specialist's name

    • Items to be considered

  3. Add additional items during the on-site audit and case closing, as needed.

  4. See Exhibit 4.75.10-4, Sample Form 5772.

4.75.10.3.5  (08-12-2014)
Form 5773, EO Workpaper Summary Continuation Sheet

  1. The Form 5773 is a vital element of the entire audit process. Use the Form 5773 to:

    • Provide summaries of the planned actions to be taken (pre-audit comments)

    • Record the procedures performed

    • Discuss findings reached

    • Document the conclusions of the audit

  2. The header contains the name of the organization, the examining agent, and the page number of the Form 5773.

  3. The table that composes the main body of the workpaper is split into four columns:

    1. The workpaper index.

    2. The items to be verified.

    3. The audit procedures and conclusions.

    4. Workpaper references.

    Figure 4.75.10-1

    A. PREAUDIT
      Pre-audit Comments Review IDRS to verify information, and to correct if necessary.  
    1. IDRS Research [Confirm T/P Information] Verified the taxpayer's address. Reviewed the filing requirements, filing history, and EO information. 3.A.1
     
  4. Each section of the main body of the Form 5773 contains pre-audit comments that are located in each audit topic.

    1. If blank, add proposed pre-audit comments as to the procedures planned to be conducted during the audit.

    2. If comments have been provided, revise the comments, as applicable, to the type of audit, entity, and/or issues expected to be encountered.

    Caution:

    When using a pro forma pre-audit plan that has been developed for organizations exempt under a specific IRC section, the pre-audit must be customized for the organization and return under audit.

  5. In the subsections following the pre-audit comments, summarize the procedures taken and conclusions reached that have been fully documented in a separate workpaper. In certain situations, there may not be a separate workpaper, as the findings may be summarized in a single sentence.

    Example:

    In section C-8, Legislative Activities, an agent notes that there were no legislative or lobbying activities conducted, nor legislative expenditures.

    Caution:

    Do not use Form 5773 in lieu of a workpaper when an in-depth process has been performed. Generally if the summary takes more than five brief sentences, include a separate workpaper in the file.

  6. If an audit subtopic is not applicable, enter "Not applicable" or "N/A" in the blank audit procedure/conclusion cell (beneath the pre-audit comments), and explain briefly why it is not applicable.

  7. The fourth column is used to reference workpapers using an index.

    Example:

    An agent indexes the initial interview as C-1-1 through C-1-5 (indicating the number of pages in the interview). See IRM 4.75.10.3.8.3.

  8. Complete the relevant portions of the Form 5773 as each workpaper is completed. If the workpaper is later revised, update the Form 5773 so the workpaper and the Form 5773 are consistent.

  9. See Exhibit 4.75.10-5 for an example of a partially completed Form 5773.

4.75.10.3.6  (08-12-2014)
Form 5774, Private Foundation Workpapers

  1. This form is used in audits of private foundations. It is prepared in addition to the Form 5773.

  2. Instructions for completing Form 5774 are as follows:

    1. Consider each "Action" under the "Examination Program Guide" and place an "X" or check mark in the appropriate block for each completed action.

    2. Provide a comment in the workpapers for each action taken.

4.75.10.3.7  (08-12-2014)
Supporting Workpapers

  1. Prepare workpapers describing the audit techniques, research conducted and the conclusions reached.

  2. The agent's supporting workpapers consist of:

    1. Descriptions of the issues identified in the pre-audit phase, and any pre-planned procedures.

    2. Descriptions of the issues identified during the audit.

    3. Documentation of audit techniques (taxpayer interviews, review of minutes, analysis of financial statements, etc.). Be specific as to what records were reviewed.

      Example:

      When reviewing travel reimbursements, indicate which travel vouchers were reviewed, whether the expenses were valid expenses, and whether the expense amount tied to the organization's books and records.

    4. Summaries of information provided through interviews, minutes, etc., which is used to draw conclusions about exempt status, tax liability or other identified issues raised by the agent. An example is a workpaper describing the organization's activities.

    5. Copies of a taxpayer's records used in the analysis of books and records.

      Example:

      A statement of income and expenses used by the agent to reconcile the return to the books.

      Note:

      See IRM 4.75.11, On-Site Examination Guidelines, for a discussion of copying taxpayer records.

  3. Use judgment in determining the content of the workpapers. Every workpaper in the file should have some relevance to accomplishing the audit objectives.

  4. Copious transcriptions of minutes or governing instruments are rarely necessary. Prepare a brief description of the information in the governing instruments, minutes, etc.

  5. Agents can develop their own format, so long as they include all the necessary information and adequately document the actions taken.

4.75.10.3.8  (08-12-2014)
Workpaper Format

  1. The format of an agent's workpapers can vary. However, generally, each workpaper has the following:

    • A heading

    • A body and conclusion

    • An index and file name

4.75.10.3.8.1  (08-12-2014)
Heading

  1. Every schedule and workpaper in the case file should contain the following information in the heading:

    • Taxpayer's name

    • Subject heading

      Note:

      The subject can match a subsection title (item to be verified) from the Form 5773, or can identify an account or item audited.

    • Form number

    • Year audited

    • Agent's initials (or name) and date

  2. The agent's initials and date could be on the top or bottom of the workpaper, as long as the information is present on the workpaper. (These dates should reconcile to the dates documented on the CCR.)

    Note:

    The date can be either the first date the workpaper was started or the date it was completed.

4.75.10.3.8.2  (08-12-2014)
Body and Conclusion

  1. State in the body of the workpaper what audit steps and techniques were performed. Document the tests performed, procedures applied, and/or oral testimony received.

  2. The body of the workpaper would also include any analysis of issues.

    Example:

    When developing a case for assessing unrelated business income tax, the agent's workpaper is titled Unrelated Business Income Computations. In the body of the document, the agent identifies the taxable revenues and related expenses, computes allocations of overhead expenses that are used for both exempt and non-exempt purposes, and calculates the total tax due.

  3. Each workpaper should include a conclusion summarizing the issue or line item being verified and state what action, if any, is needed. If there are multiple workpapers, the conclusion should be on the last workpaper of the issue or line item.

4.75.10.3.8.3  (08-12-2014)
Index and File Name

  1. All workpapers are to bear a workpaper index number. The index used should reference the supporting workpapers to the Form 5773. Exact placement of the index is left at the agent's discretion.

  2. Pages are to be numbered consecutively within each section. A workpaper on "Initial Interview" might be indexed C.1.1. If the initial interview workpaper requires more than one page, the subsequent pages might be indexed C.1.2, C.1.3, etc.

4.75.10.3.9  (08-12-2014)
Multiple Returns

  1. When there are multiple returns involved in an audit, such as a Form 990 and a Form 990-T, prepare a separate set of workpapers for each type of return. A separate Form 5773 is also required.

  2. The primary case file, generally the Form 990, should contain a complete set of workpapers that adequately addresses all issues raised. Any related case files for Forms 990-T, 941, 940, etc. need only contain workpapers relevant to the issues on the related returns.

  3. The agent may copy and include in the related case files relevant portions of the Form 990 audit file.

4.75.10.3.10  (08-12-2014)
Disclosure

  1. Confidential information related to the case file must be secured from unauthorized disclosure. Generally, information that would not be disclosed to the taxpayer if a request were made under provisions of the Freedom of Information Act (FOIA) should be considered confidential or sensitive in nature.

    Example:

    Informant’s claims and fraud referrals.

  2. Secure confidential information in "To be Opened by Addressee Only" envelope(s). Use Other Gov TDF 15-05.11, Sensitive But Unclassified (SBU) Cover Sheet, as a cover sheet to alert others to the sensitive nature of the information.

  3. Other Gov TDF 15-05.11 can also be used as a cover for the case file if there is any information in the file requiring protection.

4.75.10.4  (08-12-2014)
General Audit Objectives

  1. The primary objectives for the audit of an exempt organization are to determine if:

    1. The organization is organized and operated in accordance with its exempt purpose(s), thus continuing to be recognized as exempt from federal income taxes.

    2. The Form 990, Form 990-EZ, Form 990-PF, or Form 5227 is complete, correct, and contains all public information required by IRC 6033.

    3. The exempt organization has properly filed all returns and forms for which it is liable. See IRM 4.75.12, Required Filing Checks, for required filing checks.

    4. The exempt organization or its related entities are liable for other taxes and if so, the correct amount of tax under:

      IRC Section(s) Type of Tax
      511-514 Unrelated Business Taxable Income
      527(f) Political Activities (non-501(c)(3))
      3101, 3111 Federal Insurance Contribution Act (FICA)
      3301 Federal Unemployment Tax (FUTA)
      3402 Income Tax Withholding
      3406 Backup Withholding
      4401, 4411 Gaming Activities
      4911, 4912 Lobbying Activities (501(c)(3))
      4940–4948 Transactions by Private Foundations
      4951–4953 Transactions by Black Lung Benefit Trusts
      4955 Political Activities (501(c)(3))
      4958 Excess Benefit Transactions
      4965 Tax Shelter Transactions
      4966, 4967 Transactions by Donor Advised Funds
      4976 Disqualified Benefits from Funded Welfare Benefit Plans
      6033(e)(2) Lobbying Activities (non-501(c)(3)) (Proxy Tax)

4.75.10.5  (08-12-2014)
Overview of Pre-Audit and Pre-Field Visitation Procedures

  1. If, after considering the statute of limitations (see IRM 4.75.10.6.1), audit cycle, conflict of interest possibilities, consecutive audits, repetitive or prior audits, a decision is made to survey the return, see IRM 4.75.16, Case Closing Procedures, for survey procedures.

  2. When a decision is made to audit the return, the pre-audit process consists of a number of phases:

    1. Initial analysis.

    2. Drafting the initial Form 4564, Information Document Request.

    3. Contacting the taxpayer.

    4. Completing and sending the appropriate audit letter.

    5. Reviewing taxpayer documents received in advance of the visit.

    6. Drafting the initial interview questions.

    7. Drafting the internal controls questions.

  3. As all cases are transmitted to and from the groups via RCCMS, all returns under audit can be provided as PDF files. Such cases are worked within RCCMS, and in certain situations, can be closed as paperless files. Certain types of cases, such as referrals and claims, have historically been sent to groups with the paper referral and the original return.

    Note:

    Certain procedures that were traditionally acceptable, such as handwritten notes on IDRS prints and Forms 5773, are not recommended. In order to ensure that a case can be closed as paperless, all workpapers need to be uploaded to RCCMS. Relevant copies of taxpayer documents and handwritten workpapers can be included, provided they are either scanned or digitally photographed and uploaded as PDF files.

  4. Time expended on pre-audit analysis must be commensurate with actions taken. The explanation and need for each step should be clear. Workpapers and conclusions relative to issues discovered during the pre-audit analysis become part of the case file.

  5. An important thing to remember is there is a difference between a preplan and planning. Planning continues throughout the audit even though pre-audit analysis has been performed and a preplan completed. The initial plan may be amended and supplemented several times during the conduct of a typical audit.

4.75.10.6  (08-12-2014)
Initial Analysis

  1. A good pre-audit analysis saves time during the on-site audit by helping the examiner to:

    • Organize the work

    • Recognize and concentrate on significant issues

    • Prepare for the initial appointment

    • Document the audit's course

    • Ensure the application of quality audit standards

  2. The pre-audit analysis helps identify the facts that need to be developed during the audit to resolve the identified issues.

  3. The initial analysis steps as outlined below can also be found on the Form 5773, EO Workpaper Summary Continuation Sheet. The steps are:

    1. Determining the statute.

    2. Requesting the determination administrative file from Cincinnati (optional).

    3. Reviewing information from IDRS.

    4. Analyzing the referral package, project checksheet and any documents received with the case.

    5. Identifying the organizational requirements.

    6. Reviewing the return(s) and any attached schedules.

    7. Conducting research using additional sources.

  4. Consider whether a specialist needs to be consulted on a particular issue.

4.75.10.6.1  (08-12-2014)
Statute of Limitations

  1. The protection of the statute of limitations is a high priority for all employees. Once assigned, you are primarily responsible for properly identifying the statute of limitation period in order to protect the government's interests. You are responsible for protecting the statute of limitations on:

    1. Any assigned returns.

    2. Any prior or subsequent year returns if the adjustments to the audit year create adjustments for the prior or subsequent year and an audit of the prior or subsequent year is justified.

    3. Any income, employment, or excise tax returns filed or required to be filed by the organization if the audit of a primary return may result in an adjustment to the tax liability on such tax returns.

    4. Any income or excise tax returns filed or required to be filed by related individuals or entities, if the audit of a primary return may result in an adjustment to the tax liability on such returns.

    Caution:

    Be familiar with situations where the filing of a primary return by an exempt organization, a private foundation or a non-exempt charitable trust can start the running of the statute of limitations for other returns. Protect the statute of limitations on these returns as necessary.

  2. As soon as a case is assigned, verify the statute of limitations date. Ensure there is sufficient time to conduct a quality audit. Verify the statute of limitations date even if the physical return is not present in the case file. Review the following sources, as appropriate, and document in the case file:

    • IDRS

    • AIMS

    • Received date stamped by the campus on the face of the original return

    • Postmark date on the envelope in which the return was mailed, if attached

    Caution:

    If unable to determine the actual postmark date and/or received date, use the most conservative date.

    Reminder:

    If the statute date on AIMS is erroneous, request correction in RCCMS.

  3. Do not initiate an audit of a return:

    • With less than 12 months remaining on the statute of limitations

    • That cannot be expected to be completed within the current audit cycle

  4. If the criteria in (3) applies, but failure to conduct an audit may result in:

    1. Serious criticism of the Service's administration of the tax law

    2. Inconsistent treatment of similarly situated taxpayers

    3. The establishment of a precedent that seriously hampers subsequent attempts by the Service to take corrective action

    4. The loss of a substantial amount of tax revenues

    Secure your group manager's approval if you determine an audit should be initiated. Document the approval and the basis for the decision in the CCR, the Form 5773, or a separate workpaper.

  5. Control the statute of limitations on each return assigned. Per IRM 25.6.23.6, Statute Controls in Examination and TE/GE Groups, perform the following procedures for returns with less than 180 days prior to the statute expiration date. For EO purposes, perform these actions when 270 days remain on the statute of limitations. They include:

    1. Verifying the statute date.

    2. Flagging the case.

    3. Completing Forms 895, Notice of Statute Expiration.

    4. Notifying the group manager and taxpayer, as necessary.

    5. Securing a consent to extend the statute when appropriate.

    6. Updating AIMS.

  6. If you request a consent to extend the statute, advise the taxpayer of their rights to:

    1. Decline to extend the statute date.

    2. Request that any extension be limited to a specific period of time.

    3. Request that any extension be limited to specific audit issues.

    Provide the taxpayer with a copy of Publication 1035, Extending the Tax Assessment Period. Document these actions in the case file.

  7. If you discover a potentially expired statute of limitations, complete Form 3999, Statute Expiration Report. If the statute expires after the case was assigned to you, complete Form 3999 explaining the facts and circumstances. If the statute expired before you received the return, prepare a preliminary Form 3999. Give it to your group manager. Group manager: forward the preliminary Form 3999 to the group/area that had possession of the return when the statute expired.

    Exception:

    Do not complete Form 3999 in the following instances:

    • The total lost revenue, including tax, interest, and penalty is less than $1,000.

    • A case is no change.

    • A case is opened on AIMS after the statute has expired.

4.75.10.6.1.1  (08-12-2014)
Determining the Statute of Limitations Expiration Date

  1. Exempt organizations required to file a primary return must file the return by the 15th day of the 5th month (4th month for Forms 5227 and 1065) after the close of their business year. See IRC 6033 to identify exempt organizations required to file primary returns.

  2. The general rule for the statute of limitations expiration date is three years from the due date of the return or the date filed, whichever is later.

  3. IRC 7502 sets forth the guidelines for determining the three year statute of limitations for assessment. The law states that a timely mailed return is treated as timely filed. The Assessment Statute Expiration Date (ASED) is computed as shown below:

    If the return is postmarked: And the return is received: The statute date is based on:
    On or before the normal due date Before, on or after the normal due date Normal due date
    After the normal due date (No extension) After the normal due date Service Center received date
    On or before the extension date (After the normal statute date) On or before the extension due date Service Center received date
    On or before the extension date (After the normal statute date) After the extension due date Postmark date
    After the extension date After the extension due date Service Center received date
  4. For purposes of the statute of limitations, IRC 6501(b)(2) provides a "deemed" filing date for taxes imposed by the following chapters of the Internal Revenue Code:

    • Chapter 3 - Withholding of Tax on Nonresident Aliens and Foreign Corporations

    • Chapter 4 - Taxes to Enforce Reporting on Certain Foreign Accounts

    • Chapter 21 - Federal Insurance Contributions Act

    • Chapter 24 - Collection of Income Tax at Source on Wages

  5. Any Form 941, Form 943, Form 944, Form 945 or Form 1042 is deemed filed on April 15 of the succeeding year (IRC 6501(b)(2)). If the return is filed after April 15 of the succeeding calendar year, the period of assessment is three years from the date the return is filed (Treas. Reg. 301.6501(b)-1(b)).

  6. The statute of limitations expiration date is extended from three years to six years in the following circumstances:

    1. Income Taxes: If the taxpayer omits from gross income an amount properly includible therein that is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed without obtaining an extension, at any time within six years after the return was filed. See IRC 6501(e)(1) and Treas. Reg. 301.6501(e)-1(a).

    2. IRC 4940 Tax: If a private foundation omits from its primary return with respect to the tax imposed by IRC 4940 an amount of tax properly includible therein which is in excess of 25 percent of the amount of tax imposed by IRC 4940 which is reported on the return, the tax may be assessed at any time within six years after the return was filed. If a private foundation discloses in its return (or in a schedule or statement attached thereto) the nature, source, and amount of any income giving rise to any omitted tax, the tax arising from such income shall be counted as reported on the return in computing whether the foundation has omitted more than 25 percent of the tax reported on its return. See Treas. Reg. 301.6501(e)-1(c)(3)(i).

    3. IRC Chapter 41 and 42 Excise Taxes (Other than IRC 4940): If a public charity or a private foundation, trust, or other organization, as the case may be, fails to disclose an item subject to tax under IRC 4911, IRC 4912, IRC 4941(a), IRC 4942(a), IRC 4943(a), IRC 4944(a), IRC 4945(a), IRC 4951(a), IRC 4952(a), IRC 4953, and/or IRC 4958 in its primary return (or a schedule or statement attached thereto), the tax arising from any transaction not disclosed may be assessed at any time within six years after the return was filed. See IRC 6501(e)(3), Treas. Reg. 301.6501(e)-1(c)(2) and Treas. Reg. 301.6501(e)-1(c)(3)(ii).

      Caution:

      Never rely on the existence of a six-year statute without the concurrence of Area Counsel, as documented in a Counsel memorandum or secured e-mail (attached to Form 895).

  7. As a general rule if no return is filed, the statute of limitations does not start to run. Primary returns filed by a public charity, private foundation, or non-exempt charitable trust are an exception to the general rule as the filing of a primary return by these entities starts the running of the statute of limitations for some income and excise tax returns in the circumstances described below:

    1. The filing of a primary return which discloses sufficient facts to apprise the Service of the potential existence of unrelated business taxable income commences the running of the period of limitations on assessment of tax on Form 990-T. Rev. Rul. 69-247, 1969-1 C.B. 303.

    2. The filing of a primary return which discloses sufficient facts to apprise the Service of the potential existence of tax on political expenditures may commence the running of the period of limitations on assessment of tax on Form 1120-POL even though Form 1120-POL was not filed based on the rationale applied to unrelated business income in Rev. Rul. 69-247.

    3. A primary return filed by a public charity, a private foundation, a non-exempt charitable trust, or a IRC 501(c)(4) starts the running of the period of limitations on the assessment of excise tax on a Form 4720 filed or required to be filed by the organization, private foundation or trust and on Forms 4720 filed or required to be filed by foundation managers and/or disqualified persons. The filing of the primary return starts the running of the period of limitations on assessment of excise tax on Form 4720 even if the transaction, act, or failure to act that gives rise to the excise tax on Form 4720 is not disclosed on the primary return. The filing of a Form 4720 by the organization, foundation manager or disqualified person does not start the running of the statute of limitations. See IRC 6501(l)(1) and Treas. Reg. 301.6501(n)-1.

    4. The filing of a primary return by a taxpayer, who determines in good faith that they are an exempt organization under IRC 501(c), starts the running of the statute of limitations, if the organization is later held to be a taxable organization. See IRC 6501(g)(2) and Treas. Reg. 301.6501(g)-1(b). (Applies to both organizations ruled as exempt by EO Determinations and to AIMS status 36 cases.)

  8. The filing of a Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, does not start the running of the statute of limitations. The Form 990-N is recorded on BMFOLT with a Transaction Code (TC) 150 and a Document Locator Number (DLN) sequence that begins with "93489" . The Form 990-N is not actually a form, and does not constitute a return for statute purposes. However, for disposal code purposes, Form 990-N is treated as a primary return.

  9. An "amended return" does not extend the statute expiration date unless the return meets both of the following conditions:

    1. An income tax return received within 60 days before the ASED.

    2. The amended return shows the taxpayer owes additional tax.

    In such cases, the assessment period is extended to 60 days after the receipt of the amended return. See IRC 6501(c)(7).

  10. A "substitute for return" prepared by the Internal Revenue Service (Service), under the authority of IRC 6020(b), is treated as if no return was filed. If a taxpayer signs a return prepared by the Service, it becomes a regular return, and the statute of limitations begins on the signature date.

    Note:

    See IRM 4.75.22.7.1, Substitute for Return Package, for instructions on the preparation of a substitute for return package.

  11. An "incomplete" return may not start the running of the statute of limitations. Under the present case law, the following factors must exist in order for the return to be "valid" :

    1. There must be sufficient data to calculate the tax liability.

    2. The document must purport to be a return.

    3. There must be an honest and reasonable attempt to satisfy the requirements of the tax law.

    4. The taxpayer must execute the return under penalties of perjury.

    Caution:

    These factors do not take into account the processing concerns that an incomplete return presents for the Service. Therefore, approach any question concerning the validity of a return missing a form or schedule with the presumption that there is sufficient data to calculate the tax liability.

  12. See IRM 25.6.23, Examination Process - Assessment Statute of Limitations Controls, for additional guidance concerning statutes.

4.75.10.6.2  (08-12-2014)
Request the Determination Administrative File

  1. When an organization applies for exempt status, the application, related paperwork, and the disposition of the application are retained. This file is referred to as the "determination administrative file." In the pre-audit planning stage, secure and request a copy of the organization's determination administrative file, if necessary. This assists in determining whether the organization is operating in the manner for which it was originally given exemption.

    Note:

    Securing the determination administrative file may be necessary in revocation or unagreed cases.

  2. See Exhibit 4.75.10-9 for the request form.

  3. Cincinnati will send the determination administrative file via OCS, CD-ROM, or secured email.

  4. Receipt of the determination administrative file is not necessary prior to the initial contact. When the file is received see IRM 4.75.10.10.1.

4.75.10.6.3  (08-12-2014)
Request and Review of IDRS Information

  1. For basic information regarding EO audits and researching the IDRS account information, see Exhibit 4.75.10-2. Agents without direct access to IDRS are to use the form(s) listed in the exhibit to request basic information from IDRS, and submit the forms to management for approval. The manager then forwards the form to any individual with IDRS access that has been designated to perform the research.

    Caution:

    Become familiar with restrictions regarding access of taxpayer information and the applicable penalties for misuse. See Exhibit 4.75.10-2 for a summary.

  2. At a minimum, internal research requests should include AMDISA, BMFOLO/INOLES, BMFOLI, and BMFOLT. BMFOLR, BRTVU, and BMFOLU can be used as needed to provide supplemental information. For assistance with specific command codes, use the IDRS Command Code Job Aid, located at http://serp.enterprise.irs.gov/databases/irm-sup.dr/job_aid.dr/command-code.dr/idrs_command_codes_job_aid.htm.

  3. Use the table below to see what information is to be reviewed using the particular specified command code:

    Use Command Code: Verify These Items:
    AMDISA
    1. Establishment of the case on AIMS

    2. Name

    3. Address

    4. Return received date

    5. Status code

    6. Source code

    7. Activity code

    8. Project code

    9. Statute date

    BMFOLO/INOLES
    1. Current name of the organization

    2. Address of the organization

    3. Group exemption number (GEN)

    4. Exemption subsection

    5. Foundation status (if applicable)

    6. Ruling date of the determination letter

    7. Lobbying election

    8. Filing requirements

    Note:

    INOLES additionally provides the previous fiscal year month and any cross reference Taxpayer Identification Numbers.

    BMFOLO
    1. Activity codes

    2. Pension plan indicator

    3. Deductibility code

    4. National Taxonomy of Exempt Organizations (NTEE) code

    Note:

    The NTEE codes can be found at http://nccs.urban.org/classification/NTEE.cfm, which provides an overview of the NTEE system, a search engine, and a full list of the NTEE codes.

    BMFOLI
    1. Which returns were filed.

    2. Which returns have a current balance due.

    3. Which returns have been fully paid.

    4. Which returns are delinquent.

    5. The existence of civil penalties.

    Note:

    If the organization filed related returns, secure and review BRTVU or BMFOLR printouts of the related returns if available on-line.

    BMFOLT
    1. Return received date.

    2. Amount of tax paid.

    3. Determine if there is an amended return available.

    4. Whether penalties have been assessed.

    5. Whether there is a representative on file in the Central Authorization File (CAF).

    Note:

    If there is a CAF indicator, request the detailed information.

    Note:

    If a Form 990-N was filed, the DLN starts with "93489" .

  4. To obtain NMF transcripts, send a fax request using Form 10321, Fax Transmission Cover Sheet, to the IRS Accounting Operations Department, 201 W. Rivercenter Blvd, Covington, KY, 41011, 859-669-2959. To follow-up on a request, call 859-669-5498. An NMF account in IDRS is identified by the taxpayer identification number (TIN) followed by the letter "N"

  5. The explanation of the codes displayed in BMFOLO and INOLES can be found in Document 6379, Exempt Organizations Management Information Systems Codes.

  6. Verification must be obtained to show all returns for which the taxpayer is liable have been filed, including prior and subsequent year returns.

  7. Determine if the organization has any past due balances. If they do, this might be something to investigate further during the audit. Consider whether inurement or private benefit played a role in the organization being unable to pay the balance.

  8. Consider all returns filed by the taxpayer. Some may not necessarily appear under filing requirements. These include related entity returns, employment tax returns, information returns, excise tax returns, pension plan returns, and political returns. This is important when drafting the initial IDR.

  9. Three additional command codes can be queried depending on the issue(s) presented in the case file. These command codes are BMFOLU, PMFOLS, and IRPTRR. BMFOLU provides the Combined Annual Wage Report information, matching the Forms 941 to the Form W-3 and the Forms W-2. If Forms 941 have been filed, the second through fifth screens give the tax amounts reported each quarter, and the sixth screen provides the total number of Forms W-2 filed. PMFOLS displays the total amounts reported on the Payor Master File system, presenting the total compensation paid on Forms 1099. IRPTRR is used to request transcripts of any and all information returns, such as Forms W-2 and 1099.

  10. IRPTRR prints can be sent to the RICS (Return Inventory Control System) using destination code R. For assistance in retrieving IRPTRR prints sent to RICS, contact an Exam Planning and Review analyst.

  11. Document the pertinent information reviewed and conclusions reached. This information may be documented in a pre-audit workpaper prepared by the agent, on the IDRS/AIMS printouts, or in the appropriate sections of Form 5773. If marked on the IDRS printouts, the documents can be scanned and uploaded to RCCMS, unless the markup is performed within a PDF file.

  12. EO Examinations Special Review has prepared an IDRS Focus on Issues and Technology (FIT) tool to assist EO agents in reviewing IDRS information. To obtain a copy of this tool, refer to the SharePoint site at https://organization.ds.irsnet.gov/sites/tege-eo/Staying%20Informed/Forms/AllItems.aspx?RootFolder=%2Fsites%2Ftege%2Deo%2FStaying%20Informed%2FAudit%20Hour%20Materials%2C%20FIT%20Sheets%2FFIT%20Sheets%20%28Guidesheets%2C%20Checksheets%29.

    Note:

    FIT tools are simplified guidesheets. To review detailed current and accurate information on IDRS command codes, refer to the IDRS Command Codes Job Aid indicated in paragraph (2). Usage of FIT tools are not mandatory.

4.75.10.6.4  (08-12-2014)
Review of the Classification Sheet, Referral Package, or Project Checksheet

  1. Review other documents that accompany the return, including:

    1. Classification sheets.

    2. Other information, such as referral packages.

    3. Project checksheets and any project guidelines.

  2. If items are identified on the Classification sheets, document the decision as to whether to audit the item(s).

  3. If the audit is a referral, consider what information must be obtained to address the issue(s) raised and determine the viability of the referral. Consider a third-party contact with the informant if it appears warranted.

  4. If it is a project case, consider what items need to be analyzed in order to complete the checksheet, if applicable. Review any project guidelines.

  5. If a fed/state referral case is received in a group in accordance with IRM 4.75.5.3:

    1. The group manager will immediately evaluate the case, and in accordance with the Annual Examination Program Priority Memorandum, assign it to a revenue agent.

    2. The examination group manager and agent will determine the appropriate examination technique.

    3. A referring official may invite the Service to review and copy documents contained in the fed/state official investigative files. The assigned agent will coordinate with the EO Fed/State Liaison to accomplish this task.

4.75.10.6.5  (08-12-2014)
Organizational Requirements

  1. Prior to review of a primary return, or Form 990-T, it is important for an agent to become familiar with the requirements for exemption for that entity, as well as any related issues of a taxable nature (employment taxes, unrelated business income, excise taxes, etc.).

  2. In addition to researching the Internal Revenue Code and Treasury Regulations, obtain additional guidance by reviewing the appropriate sections of the IRM 7.25, Exempt Organizations Determinations Manual, and IRM 4.76, Exempt Organization Examination Guidelines.

  3. While it is recommended that the agent create a workpaper documenting briefly the various requirements and audit guidelines for the type of organization under audit, include a brief summary of the key requirements noted by the agent on the Form 5773.

4.75.10.6.6  (08-12-2014)
Review of the Return

  1. The return should be reviewed for completeness to determine if all required line items and attachments are present. If information is missing, make a note to question the organization and organization's representative and obtain it.

  2. Review schedules, statements, extensions and return attachments for questions and possible issues:

    • Do the yes/no questions raise any issues?

    • If the organization is a public charity, is the public support schedule complete?

    • Was the return filed on a timely basis? If not, was an approved extension obtained?

  3. Review the organization's statement of accomplishing its program services.

  4. Analyze the income sources such as "other revenue."

  5. Review the compensation section.

  6. Consider any LUQ items (see IRM 4.75.10.2 (6)). The definition of LUQ items depends on the perception of the return as a whole and the separate items that make up the return. These include income, disbursements, assets, liabilities and fund balance. Document the reason for any LUQ item that was not considered an issue. LUQ items fall into at least four categories:

    1. Dollar amount - The item may be a large dollar amount or it may be unusual or disproportionate to the income or disbursements shown on the return. It might be a large or unusual expense for the type of organization.

      Example:

      If the return shows total disbursements of $30,000, $6,000 paid in legal fees might be significant.


    2. Description on the return - It may not be possible to determine the validity of the item based on the way it is described on the return.

      Example:

      The return shows $30,000 of disbursements classified as "miscellaneous."


    3. Presence on the return - Some items shown on the return invite close scrutiny simply because they are there.

      Example:

      The balance sheet for liabilities lists $50,000 under "Loans from Officers."


    4. Absence from the return - An item may be unusual because it does not appear on the return.

      Example:

      The balance sheet for assets of an IRC 501(c)(7) organization lists $75,000 in cash but shows no interest or dividend income.

  7. Review the return for missing items. Are items that you would expect to find on the return not there? Check the arithmetic. What appears to be an error may actually indicate a missing item.

  8. Determine whether tax liability, where applicable, has been accurately computed.

  9. Look for indications of activities that may affect exempt status or tax liability.

    Example:

    If the return reports substantial expenses for "publications," look for advertising income.

  10. Obtain the prior and subsequent years' returns from On-Line SEIN, either by direct authorized access, or via a request to management, who assigns the request to an authorized employee to retrieve the files and print them to PDF. Options for retrieval, if internal means are not readily available, include external sources, such as Guidestar, http://www.guidestar.org and Foundation Center, http://dynamodata.fdncenter.org/990s/990search/esearch.php. Externally obtained Forms 990 have certain portions redacted.

  11. Using the Forms 990, complete an analysis, comparing the changes in the revenues, expenses, assets, and liabilities over the three-year period, looking to identify any large or questionable differences. Discern if there appears to be any trends, either positive or negative, that are present or developing during the three years.

  12. Make note of any items identified that should be incorporated into the initial interview.

  13. Prepare a summary in the comparative balance sheet portion of the Form 5773.

4.75.10.6.6.1  (08-12-2014)
Issue Focused Audits

  1. Agents are expected to use the issue focused audit process on most EO audits unless:

    • Assigned as a directed single-issue audit.

    • Part of a market segment study or other project requiring a broader audit scope.

    • There are compelling considerations (for example, fraud and abusive tax avoidance transactions).

  2. Use risk analysis in determining the initial scope of the audit and update the risk analysis, as appropriate throughout the audit.

  3. The scope should include:

    1. Pre-identified issue(s).

    2. Package audit requirements.

    3. Only the most significant LUQ items identified during the audit.

    Note:

    Items affecting exempt status or foundation status will always be considered a significant item.

  4. For package audit requirements, see IRM 4.75.12, Required Filing Checks.

  5. Perform a risk analysis on the LUQ items that were identified in IRM 4.75.10.6.6 (6).

4.75.10.6.6.1.1  (08-12-2014)
Risk Analysis

  1. Risk analysis is a subjective process that compares the potential benefits to be derived from auditing an item to the resources required to audit the item.

  2. There is no standard format for a risk analysis. However, any risk analysis includes the consideration of the following:

    Key element Description
    Workpaper reference This ties the risk analysis to the audit plan and/or workpapers.
    Description of the LUQ A brief, but clear description of the issue should be provided.
    Materiality of the issue An assessment of the various relevant materiality factors considered.
    Estimated time to complete An estimate of the time it may take to audit the issue.
    Estimated completion date The estimated date by which the audit of the item should be completed.
    Prioritization The prioritization of the LUQs, often from lowest to highest priority based upon materiality.
    Decision to or not to audit an LUQ A clear yes or no as to whether the issue is to be audited.
    Reasons for selection or non-selection of LUQ for audit Comments and information on why an issue was or was not selected for audit. This is also an excellent place to provide any materiality thresholds that are to be applied to LUQs selected for audit.
  3. Both the agent and the manager have responsibility to ensure that a risk analysis is performed on every field audit case. The level of the sophistication of risk analysis depends upon the size and complexity of the case as well as resources being considered for the audit. Depending upon the circumstances, this may range from notations in the CCR or workpapers to a formal risk analysis document.

  4. Materiality is used in risk analysis to prioritize the issues and LUQ items being considered, and to focus on the items of greatest compliance concern. Materiality is both a qualitative and quantitative assessment used in identifying those items which are most relevant and consequential in determining:

    1. Continued tax exempt status.

    2. Overall accuracy and completeness of the primary EO information return (Form 990, 990-PF, etc.).

    3. Correct tax liability (income, employment, excise).

  5. The process of evaluating materiality should be consistently applied, but the result is different for each case. Absolute parameters cannot be established or used for every case because of the differences in size, complexity, and exempt status of the organization’s returns being audited, as well as the differences in the experience and professional judgment of the agents and managers.

  6. In assessing the materiality of an issue or LUQ, the factors listed below should be considered. This is not an exhaustive list and there may be other relevant materiality factors that should be considered.

    Factor Consider
    Significant dollar impact
    • Dollar value of item (sheer size of an item often has a direct impact on materiality)

    • Relative dollar value of an item (% of assets, income, expenses, etc.)

    Compliance impact
    • The item’s potential to affect tax exempt status.

    • The item’s potential to affect the overall accuracy of the return being audited.

    • Adjustments in tax (990-T, 990-PF, 940, 941, etc.).

    • Future compliance impact (immaterial in the current year, but significantly more material in future years – for example, a net operating loss).

    Duration of issue
    • Does the issue extend to years beyond the year being audited, or is it a one time event?

    • Permanency - is the adjustment permanent or will it reverse itself in the future?

    • Timing (for example, items of income or deduction reported in the wrong year).

    Sensitivity or industry issue
    • Abusive tax avoidance transactions

    • Industry or emerging issues

    • Market segment study or compliance project issues

    Estimated time to develop issues
    • Outline approach to develop issue

    • Estimated hours to develop issue

    • Black and white issue

    Other
    • Not material, but failure to audit would be contrary to public or service policy (for example, discrimination)

    • Fraud

  7. For examples of the use of risk analysis, see Exhibit 4.75.10-7. For a sample risk analysis workpaper, see Exhibit 4.75.10-8.

4.75.10.6.6.2  (08-12-2014)
Direct Single Issue Audits

  1. Only the pre-identified issue(s) are to be audited. Audit scope is limited to the pre-identified issue(s) and not expanded further unless a separate and significant LUQ item comes to the agent’s attention.

  2. The group manager's approval is required for any expansion of the audit beyond the original pre-identified issue(s).

4.75.10.6.7  (08-12-2014)
Research

  1. All issues that appear likely to arise based on the review of the return and determination administrative file should be researched to the extent necessary to develop the pre-audit plan. Although it is important to become familiar with identified issues, especially issues that have not been previously audited, it is equally important not to expend a large amount of time researching an issue that may become a non-issue once the audit is in process.

    Note:

    See IRM 4.75.13, Issue Development, for a detailed discussion of researching and citing the tax law.

  2. In addition to the hardcopy research materials available in the agent's post of duty, he/she has access to a number of electronic research resources. The following is an overview of some of the electronic research tools currently available:

    1. Westlaw Tax™ service provides access to resources for performing tax law research, for example, the Internal Revenue Code, the IRM, Legal Decisions, News, etc.

    2. Accurint™ Discovery and Probe services provide resources for finding people and businesses and their assets. Through automated searches of a variety of databases (Real Property, Motor Vehicle, Social Security, Coast Guard, etc.), the system generates reports giving information regarding addresses and property owned.

    3. Commercial Clearing House's U.S. Master Tax Guide Plus: IRS Edition, a Windows CD product, for use by employees on laptop computers. It contains the Internal Revenue Code, IRS regulations and publications, Letter Rulings, Revenue Rulings and Procedures, the IRM, and Tax Treaties. The CD ROM is specifically intended for employees who need to perform tax research from off-site locations. Updates are distributed quarterly.

    4. Commercial Clearing House's U.S. Master Tax Guide Plus: IRS Edition, on-line Intranet product, which contains all of the above information in addition to court cases, information on exempt organizations, human resources, and pension and welfare benefits.

    5. The Service's Internet site, www.irs.gov not only provides current tax information, tax forms and publications but it also has other information including "Select Check" , http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check, which is an on-line searchable version of organizations eligible to receive tax-deductible contributions, and "Tax Stats." "Tax Stats" is an area that gathers all exempt organization information from the Martinsburg master file by district office, state and region and is updated monthly.

    6. The Statistics of Income Division of the Internal Revenue Service manages the scanning of all Form 990, 990-EZ, 990-PF, 990-T and related tax returns. The images are available to internal users and to the public in various formats. For internal retrieval, authorized requesters are to use the On-Line SEIN system at http://sein.osc.irs.gov. On-Line SEIN gives internal IRS users access to the original 990, 990-EZ, 990-PF, and related tax return images, both paper and E-filed, from 2002 - present. Access to On-Line SEIN must be requested via the Online 5081 system.

    7. TE/GE Connect, http://tege.web.irs.gov/home.asp, provides interim guidance.

  3. State Agencies - In certain audits, it is prudent to check state, county and local departments that have jurisdiction over exempt organizations, particularly those recognized as exempt under IRC 501(c)(3). Many state agencies maintain internet web sites that provide access to public records such as corporations and property. Also, an increasing number of states and/or counties have departments with which exempt organizations must register if they solicit charitable donations or engage third-party fund-raisers to solicit for them.

  4. Many organizations maintain their own internet web sites. These web sites can provide useful information concerning an organization. You can retrieve images of previous web pages from http://www.archive.org.

4.75.10.6.8  (08-12-2014)
Requesting Assistance from Specialists

  1. If it is determined during the pre-audit phase that the assistance of a field specialist in TE/GE or another operating division is needed, submit a request as soon as possible to avoid unnecessary delay in resolving the issue(s). These may include:

    • Computer Audit Specialists (IRM Chapter 4.47 )

    • Economists (IRM 4.49.1)

    • Employee Plans Agents (IRM 4.71.6)

    • Engineers (IRM Chapter 4.48)

    • Federal, State, and Local Government Specialists (IRM Chapter 4.90)

    • Financial Products and Transactions Specialists (IRM 4.37.1)

    • Indian Tribal Governments Specialists (IRM 4.86.1 and IRM 4.88.1)

    • International Specialist (IRM 4.60.6)

    • Tax Exempt Bonds Agents (IRM Chapter 4.81)

    • Art Appraisal Services (IRM 4.48.2)

  2. Agents and group managers must use the online Specialist Referral System at https://srs.web.irs.gov to request assistance from a field specialist.

  3. Referrals to Employee Plans, when the agent is unsure of whether a related plan merits a request for assistance, or should merely be referred for EP Classification to determine the merits of an audit, can be referred to EP Examination via Form 4632, Employee Plans Referral. When completing Form 4632, use Form 4632-A, Employee Plans Referral Checksheet, or Form 4632–B, Employee Plans Referral Checksheet-For EO IRC 403(b)/457 Plans, as appropriate. Special Review has prepared a EP audit tool to assist in determining if a referral is necessary. To obtain a copy of this tool, contact Manager, Special Review.


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