4.75.13  Issue Development

Manual Transmittal

July 02, 2014

Purpose

(1) This transmits revised Table of Contents and text for IRM 4.75.13, Issue Development.

Scope

This manual merged with IRM 4.75.14, Concluding The Examination, dated August 16, 2006. Subsequently, IRM 4.75.14 became obsolete.

Material Changes

(1) With the sole exception of IRM 4.75.13.3.9, the authors converted this manual to plain English, to comply with Public Law 111–274, the Plain Writing Act of 2010. At the request of Chief Counsel, IRM 4.75.13.3.9 is specifically worded to ensure clarity in how to process the IRC 6707A penalty.

(2) The authors revised and rearranged this IRM in order to conform with the structure of related IRM 4.10.7, Issue Resolution, while maintaining consistency with EO audit instruction. Some of the information previously contained in this IRM is updated, modified, deleted or moved to other subsections and EO IRMs. The authors removed detailed information regarding research and citing tax law to avoid risk of error and duplication with IRM 4.10.7.2.

(3) The table below provides a listing of old sections and new sections. Where a section is removed, the table identifies where to go to find the information previously contained in that section.

Old Section: New Section:
IRM 4.75.13.1, Introduction IRM 4.75.13.1, Introduction
IRM 4.75.13.2, Developing and Documenting the Facts IRM 4.75.13.2, Developing the Facts
IRM 4.75.13.2.1, Collecting and Recording the Facts IRM 4.75.13.5, Collecting and Recording the Facts
IRM 4.75.13.2.2, Preparing and Issuing a Summons IRM 4.75.13.3.1, Summons
IRM 4.75.13.3, Sharing the Issues IRM 4.75.13.7, Proposing Changes in Tax or Status
IRM 4.75.13.4, Burden of Proof Removed. See IRM 4.10.7.6, Burden of Proof Shifts to the Service
IRM 4.75.13.4.1, Documenting the Case File Removed. See IRM 4.10.7.6.1.3 , Documentation of Case Files
IRM 4.75.13.4.2, Assessment of Penalties Removed. See IRM 4.10.7.6.3, Assessment of Penalties Burden of Proof—Overview of New Procedures
IRM 4.75.13.5, Specific Issues - Special Considerations and Procedures IRM 4.75.13.8, Specific Issues - Special Considerations and Procedures
IRM 4.75.13.5.1, Modification of Exemption - IRC § 501(c)(3) Organizations IRM 4.75.13.8.4, Modification of Tax-Exempt Status
IRM 4.75.13.5.2, Examination of Current Year Records IRM 4.75.13.8.2, Examination of Current Year Records
IRM 4.75.13.5.3, Effective Date of Revocation or Modification IRM 4.75.13.8.5, Revocation/Modification/Reclassification Effective Dates
IRM 4.75.13.5.4, IRC § 7805(b) Technical Advice Requirement IRM 4.75.13.8.6, IRC 7805(b) Technical Advice Requirement
IRM 4.75.13.5.5, Identifying Issues Requiring Technical Advice IRM 4.75.13.3.5, Requests for Technical Advice. See also IRM 4.75.36, Procedures For Processing Technical Advice Cases
IRM 4.75.13.5.6, Terminations Removed. See IRM 4.75.16.5.10, Terminations
IRM 4.75.13.5.7, Inadequate Records Removed. See IRM 4.75.16.5.6, Inadequate Records
IRM 4.75.13.5.8, Issues Subject to Declaratory Judgment Under IRC § 7428 IRM 4.75.13.8.9, Issues Subject to Declaratory Judgment Under IRC 7428
IRM 4.75.13.5.9, Procedures When the Examiner is Unable to Locate a Taxpayer Removed. See IRM 4.75.16.5.11, Unable to Locate
IRM 4.75.13.5.10, Identifying Technical Advisor Issues Removed. IRM 4.75.33, Exempt Organizations Technical Advisor Program is obsolete.
IRM 4.75.13.5.11, Identifying and Processing Suspended Issues IRM 4.75.13.8.10, Group Suspense
IRM 4.75.13.6, Researching an Issue and Citing the Law IRM 4.75.13.10, Researching an Issue and Citing the Law
IRM 4.75.13.6.1, Internal Revenue Code Removed. See IRM 4.10.7.2.1, Internal Revenue Code
IRM 4.75.13.6.2, Committee Reports Removed. See IRM 4.10.7.2.2, Committee Reports
IRM 4.75.13.6.3, Code of Federal Regulations Removed. See IRM 4.10.7.2.3, Code of Federal Regulations
IRM 4.75.13.6.4, Internal Revenue Bulletin Removed. See IRM 4.10.7.2.4, Internal Revenue Bulletin
IRM 4.75.13.6.5, Cumulative Bulletin Removed. See IRM 4.10.7.2.5, Cumulative Bulletin
IRM 4.75.13.6.6, Revenue Rulings and Procedures Removed. See IRM 4.10.7.2.6, Revenue Rulings and Procedures
IRM 4.75.13.6.7, IRS Publications Removed. See IRM 4.10.7.2.8, IRS Publications
IRM 4.75.13.6.8, Court Decisions and Case Law Removed. See IRM 4.10.7.2.9, Court Decisions and Case Law
IRM 4.75.13.6.9, Private Letter Rulings and Technical Advice Memorandums Removed. See IRM 4.10.7.2.10, Private Letter Rulings and Technical Advice Memorandums
IRM 4.75.13.6.10, General Counsel Memorandums Removed. See IRM 4.10.7.2.11, General Counsel Memorandums
IRM 4.75.13.6.11, Technical Memorandums Removed. See IRM 4.10.7.2.12, Technical Memorandums
IRM 4.75.13.6.12, Engineering Citator Removed. See IRM 4.10.7.2.13, Engineering Citator
IRM 4.75.13.6.13, Other Research Sources IRM 4.75.13.10.2, Other Research Sources
IRM 4.75.13.6.14, Electronic Tax Research IRM 4.75.13.10.3, Electronic Tax Research
IRM 4.75.13.6.14.1, IRM On-Line IRM 4.75.13.10.3.1, IRM On-Line
IRM 4.75.13.6.14.2, NEXIS® Removed. Information presented was obsolete.
IRM 4.75.13.6.14.3, Public Records IRM 4.75.13.10.3.3, Public Records
IRM 4.75.13.6.14.4, Guidestar IRM 4.75.13.10.3.4, Guidestar and Foundation Center
IRM Exhibit 4.75.13-1, Draft Termination Letter IRC § 501(c)(3) Removed. See IRM 4.75.16-15, Draft Examination Termination Letter IRC 501(c)(3)
IRM Exhibit 4.75.13-2, Draft Termination Letter IRC § 501(c)(other) Removed. See IRM 4.75.16-16, Draft Examination Termination Letter IRC 501(c)(other)
IRM Exhibit 4.75.13-3, Draft Examination Closing Letter Termination Removed.
IRM Exhibit 4.75.13-4, Notice of Inadequate Records Removed. See IRM 4.75.16-20, Modified Letter 4095, Inadequate Records Notice
IRM Exhibit 4.75.13-5, Closing Procedures for "Unable to Locate" Situations Removed. See IRM 4.75.16-17, Closing Procedures for Unable to Locate Situations
IRM Exhibit 4.75.13-6, Form 4844, Request for Terminal Action Removed. See IRM 4.75.16-19, Form 4844, Request for Terminal Action
IRM Exhibit 4.75.13-7, Court of Appeals Jurisdictions Removed. See IRM 4.10.7-1, Court of Appeals Jurisdictions

(4) IRM 4.75.13.1, Introduction, was updated to include verification of foundation classification as an examiner's responsibility.

(5) IRM 4.75.13.2, Developing and Documenting the Facts, was retitled, Developing the Facts, and was updated to include reconciliation of return amounts to books as part of a comprehensive examination.

(6) Added paragraph 4.75.13.2(2) defining "organization status."

(7) Added paragraph 4.75.13.2(4) regarding "transactions." Added types of reportable transactions.

(8) Added new IRM 4.75.13.3, Special Case Development Procedures.

(9) Revised IRM 4.75.13.3.1, Summons to add new paragraphs to reflect updated delegation order, and summons implications on churches and political organizations, and summons that requires pre-issuance review from Area Counsel.

(10) Added IRM 4.75.13.3.2 through IRM 4.75.13.3.4, to provide information regarding sampling techniques, referrals, and requests for collateral examinations.

(11) Added IRM 4.75.13.3.5 through IRM 4.75.13.3.9, regarding requesting tech advice, requesting assistance, special case development rules for churches and credit counseling organizations, and processing IRC 6707A penalties.

(12) Added IRM 4.75.13.3.10 to introduce the IRC 45R credit for small employers.

(13) Added new IRM 4.75.13.4, Evidence, based on IRM 4.10.7, suitable for Exempt Organizations (EO) examinations.

(14) Added new IRM 4.75.13.4.1, Evidence Defined, based on IRM 4.10.7, suitable for EO examinations.

(15) Added new IRM 4.75.13.4.2, Oral Statements, based on IRM 4.10.7, suitable for EO examinations.

(16) Added IRM 4.75.13.4.3, regarding documentary evidence, based on IRM 4.10.7 and suitable for EO examinations.

(17) Updated content of IRM 4.75.13.5, Collecting and Recording the Facts, to require consistent workpaper index numbering between Forms 5772 and 5773 and to include information regarding Fast Track.

(18) Deleted IRM 4.75.13.5.10, Identifying Technical Advisor Issues, because the Technical Advisor position as discussed no longer exists. Added information about Technical Specialists and Coordinators in section IRM 4.75.13.3.7.

(19) Removed most of the previous IRM 4.75.13.6, Researching an Issue and Citing the Law, including all subsections, to eliminate duplication and risk of update error. Readers must now refer to IRM 4.10.7.2, Researching Tax Law, for this topic. EO relevant content remains in this IRM at IRM 4.75.13.10, of the same title.

(20) Added IRM 4.75.13.6, Arriving at Conclusions, to mirror portions of IRM 4.10.7.4, Arriving at Conclusions.

(21) Added IRM 4.75.13.7, Proposing Changes in Tax or Status, to provide procedures for concluding the examination.

(22) Added IRM 4.75.13.7.1 through IRM 4.75.13.7.4, formerly in obsolete IRM 4.75.14.2.

(23) Modified IRM 4.75.13.8.1, Revocation of Tax-Exempt Status. Clarified that organizations described in IRC 501(c) and (d) are subject to revocations within the meaning Section 12 of Rev. Proc. 2012-9 because they are subject to an application and determination letter process in IRM 7.20.1.4.1 and IRM 7.21.3.3.1.

(24) Modified IRM 4.75.13.8.3, Disqualification from Tax-Exempt Status, in order to address those organizations under EO jurisdiction that declare tax-exempt status under IRC 501(c) without receiving a ruling or determination letter, as well as IRC 501(c)(12) and IRC 501(c)(15) organizations.

(25) In IRM 4.75.13.8.4, Modification of Tax-Exempt Status, clarified restrictions to proposing a modification based on types of exempt organizations.

(26) Added IRM 4.75.13.8.7, Converted Returns, to include information regarding the conversion of returns after revocation, and to add a reference to IRM 4.75.31. Formerly located in obsolete IRM 4.75.14.4.

(27) Restored IRM 4.75.13.8.11 from obsoleted IRM 4.75.14.2.4, to include information regarding foreign grants and terrorism, IRC 501(p) and employee protection, in order to provide guidance to examiners.

(28) Added IRM 4.75.13.8.12, Restricted Interest Cases.

(29) Added IRM 4.75.13.8.12.1, Processing Restricted Interest Cases Requiring a Form 2285.

(30) Updated IRM 4.75.13.10.1 to identify citator research sources.

(31) Updated IRM 4.75.13.10.3 to reflect Accurint, which replaces Choicepoint.

(32) Added IRM 4.75.13.10.3.5, On-Line SEIN.

(33) Added new Exhibit 4.75.13-1, Restricted Interest Examples.

Effect on Other Documents

This material supersedes IRM 4.75.13, Issue Development, dated March 14, 2006 and obsoletes IRM 4.75.14, Concluding The Examination, dated August 16, 2006. This manual incorporates the Interim Guidance Memorandum dated July 22, 2013, Guidance for Using AIMS Status Code 39, and Interim Guidance Memorandum IRC 45R Credit for Small Tax Exempt Employers (currently pending publication).

Audience

Tax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(07-02-2014)

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

4.75.13.1  (07-02-2014)
Introduction

  1. This manual focuses on an agent's audit responsibilities in developing the issues present in the audit. Agents assigned to work the case may be in the GS-512, GS-526, or GS-987 series.

  2. Agents: you are responsible for determining whether the organization under audit:

    1. Meets the requirements for exemption.

    2. Has the proper foundation classification (IRC 501(c)(3) organizations only).

    3. Filed all required tax and information returns.

    4. Reported information and tax liabilities correctly and accurately.

  3. Issue identification and resolution are vital attributes to a quality audit. See IRM 4.75.26 for Tax Exempt Quality Measurement System (TEQMS) standards. Agents: when identifying a potential issue:

    1. Determine if there are any unique considerations or procedures applicable to the issue.

      Example:

      You identify a prohibited tax shelter transaction (PTST), which may require imposition of IRC 4965 excise tax.

    2. Develop and document thoroughly all of the facts pertaining to the issue.

    3. Conduct research to identify the applicable law, as needed, to interpret its meaning in light of congressional intent.

    4. Apply the law based on the facts and circumstances in a fair and impartial manner.

    Note:

    "Issue resolution" : The identification of material issues throughout the audit, and the development of the issue to the point that pertinent facts and data gathered support the conclusions reached. Issue resolution includes correctly interpreting and applying tax law.

  4. Thus, a well-developed audit is one where:

    • Technical positions are well thought out.

    • The facts are appropriately developed.

    • Audit conclusions are well supported.

    • The case file is well documented.

  5. This IRM addresses:

    • Development and documentation of the facts

    • Rules of evidence

    • Special considerations or procedures for specific issues

    • Arrival at a conclusion of the audit

    • Research of tax law

4.75.13.2  (07-02-2014)
Developing the Facts

  1. A quality audit includes obtaining evidence bearing upon the organization's status or tax liability by:

    1. Inspecting its premises.

    2. Examining its books and records.

    3. Questioning directly the organization's representatives and management.

    4. Contact third parties to corroborate taxpayer statements and obtain information the taxpayer fails to provide.

    Note:

    Collect information, if possible, directly from the taxpayer to whom it relates. However, you may need to contact a third party for the purpose of collecting or determining a tax liability. See IRM 4.75.21.14, Third Party Contacts.

    Note:

    Office/Correspondence Examination Program (OCEP) cases do not include inspections of the premises.

  2. The term "organization's status" refers primarily to exempt status, but also includes:

    1. Foundation status, including type of public support status (for IRC 501(c)(3) organizations)

    2. Operating foundation status under IRC 4942(j)(3) (for private foundations)

    3. Type of supporting organization (for IRC 509(a)(3) organizations)

    4. Deductibility status

    5. Filing requirement status

  3. A comprehensive audit of an organization's books and records includes, but is not limited to, the following:

    1. Determining whether the books reflect and explain the organization's activities, income, expenditures, assets, and liabilities.

    2. Identifying and documenting the purpose of large, unusual and questionable transactions (or return items).

      Note:

      You may obtain this information from the adjusting entries in the general journal or from the minutes of meetings.

    3. Commenting on large, unusual and questionable transactions (or return items).

      Example:

      You list several highly compensated employees of an organization in your workpapers along with their salaries. Your listing of questionable salaries is not relevant by itself in developing facts unless you also analyze the duties and responsibilities of the salaried individuals. Perform this analysis on a facts and circumstances basis.

    4. Reconciling amounts reported on returns to amounts totaled in the books and records.

    5. Testing the organization's books and records for reliability and documenting these tests in the workpapers.

    6. Evaluating how the organization is using its assets and resources.

    7. Determining the source and nature of the organization's gross receipts.

    8. Determining on a case by case basis, the relationships of persons doing business with the exempt organization.

    9. Determining whether private interests are being served at the expense of the organization's exempt purposes.

    10. Evaluating transactions, such as purchases, sales, gifts, grants, leases, investments, loans, expense reimbursements, and sharing arrangements.

    11. Securing an accurate valuation of property included in these transactions.

  4. Identify transactions that result in:

    • Inurement (Treas. Reg. 1-501(c)(3)-1(c)(2)). See IRM 4.76.2.3, Inurement, Excess Benefit Transactions, Private Benefit.

    • Impermissible private benefit (Treas. Reg. 1-501(c)(3)-1(d)(1)(ii)). See IRM 4.76.2.3, Inurement, Excess Benefit Transactions, Private Benefit.

    • Excess benefit transactions (IRC 4958). See IRM 7.27.30, Taxes on Excess Benefit Transactions.

    • Self-dealing transactions (IRC 4941). See IRM 4.76.4.2.2.2, IRC 4941: Self-Dealing, and IRM 7.27.15, Taxes on Self-Dealing.

  5. Determine whether a transaction is also a listed or reportable transaction. Such transactions warrant specialized audit procedures. A single transaction can transcend the various types of transactions below:

    1. Reportable Transactions. See IRC 6707A(c) .

    2. Listed Transactions. See Treas. Reg. 1.6011-4, IRC 4965(e)(2).

    3. Abusive Tax Avoidance Transactions. See IRM 4.32, Abusive Transactions, and IRM 4.75.35, EO ATAT Committee Operating Procedures.

    4. Prohibited Tax Shelter Transactions. See IRC 4965.

    5. Foreign grants. See the TE/GE intranet site, Foreign Grants and Anti-Terrorism . See IRM 4.75.21.8, Forensic Investigation Unit.

    6. Prohibited Transactions. Applicable to IRC 501(c)(17) organizations, IRC 501(c)(18) organizations, and IRC 4948 foreign private foundations. See IRC 503 and IRC 4948.

    7. Large unusual or questionable transactions (LUQs).

4.75.13.3  (07-02-2014)
Special Case Development Procedures

  1. For general audit guidelines for all audits, refer to IRM 4.75.11, On Site Examination Guidelines.

  2. For audit guidelines applicable to specified audit types, refer to the following IRMs:

    1. IRM 4.76, Exempt Organizations Examination Guidelines, for audits of specific types of organizations.

    2. IRM 4.75.27, Office/Correspondence Examination Program (OCEP).

    3. IRM 4.75.29, Exempt Organizations Team Examination Program Procedures.

    4. IRM 4.23.5, Technical Guidelines for Employment Tax Issues.

  3. You may need to apply special procedures not normally conducted in all audits in order to confirm an exempt purpose (or a tax liability) for activities and transactions. Special case development procedures are listed and described below.

4.75.13.3.1  (07-02-2014)
Summons

  1. Attempt to obtain information voluntarily from taxpayers and third parties. However, in certain circumstances you may need a summons to obtain the records or testimony needed to conduct a quality audit. See IRM 25.5, Summons for summons procedures.

  2. Delegation Order 25-1, Summonses, Oaths, Certifications, and Related Functions provides the delegated authority to issue a summons. See IRM 1.2.52.2, Delegation Order 25-1 (formerly DO-4, Rev. 23). The group manager or other supervisory official above that level must authorize the issuance of the summons in advance.

  3. Consult with your group manager when considering the need to issue a summons. Refer to IRM 25.5, Summons.

  4. Consider all surrounding circumstances before issuing a summons. Analyze each situation in the light of its particular facts and circumstances, and then weigh the importance of the desired information.

  5. Consult with Area Counsel regarding any questions relating to a summons. See IRM 1.54.1.7.2, Issues to Bring to Counsel's Attention.

  6. Not all summonses require consultation with Area Counsel. The following types of summonses require pre-issuance review from Area Counsel:

    • Any summons involving a church or church records.

    • Any "John Doe" summons, or "dual purpose" summons. See IRM 25.5.4.4.1, Relevancy and Materiality of Summoned Information.

    • Summons issued in connection with a promoter investigation.

    • Summons issued in connection with Abusive Tax Avoidance Transactions (ATAT) or Listed Transactions.

    • Any summons issued to another federal agency or Indian Tribal Government (ITG must also be consulted).

    • FBAR Title 31 Summons. See IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures.

    • Requests for audit or tax accrual workpapers, tax reconciliation workpapers, or any other document that might be considered privileged information.

    • Summons involving potential trade secrets, protected information, software codes, and international transactions.

    • Any summons where the audit group is unsure whether it was prepared properly.

    Note:

    Counsel is required to review all non-routine summonses (usually means all non-bank summonses) that the IRS issues on behalf of treaty partners. See CCDM 34.6.3.6.6 for further explanation of this process.

  7. Refer to IRM 4.75.11, On Site Examination Guidelines, for more information regarding summonses.

4.75.13.3.2  (07-02-2014)
Sampling Techniques

  1. The process of auditing the taxpayer's books and records can be substantially enhanced and improved through the appropriate use of sampling techniques. See IRM 4.75.11.12.1, Sampling Techniques.

4.75.13.3.3  (07-02-2014)
Referrals for Specialists

  1. See IRM 4.75.10.20, Requesting Assistance from Specialists, (05-01-2004) for procedures for requesting referrals and using the Specialist Referral System (SRS). For TEP cases, see IRM 4.75.29.13.1. This includes requests for engineers, economists, financial products specialists, computer audit specialists, and other specialists. Referrals to specialists such as engineers or economists may be necessary in order to confirm the value of property and business enterprises.

  2. See IRM 4.75.12.13, Employee Benefit Plan Returns, for referrals regarding employee benefit plans.

  3. See IRM 4.75.21.6, EO Fraud Referral Procedures, for fraud referral procedures.

  4. If a proposal to revoke an IRC 501(c)(3) organization is imminent, and if it is an organization that issued tax-exempt bonds, a referral to Tax Exempt Bonds (TEB) is required. See IRM 4.75.31.7.4.1, Referral to Tax Exempt Bonds (TEB).

  5. See IRM 4.75.28.2.1, Examination Activities by Other Operating Divisions, regarding referrals for audits within the jurisdiction of other operating divisions.

  6. See IRM 4.75.35, EO ATAT Committee Operating Procedures, regarding referrals relating to abusive tax avoidance transactions (ATAT).

4.75.13.3.4  (07-02-2014)
Requests for Collateral Examinations

  1. See IRM 4.75.21.9, Collateral Examination, for procedures for requesting a collateral audit.

4.75.13.3.5  (07-02-2014)
Requests for Technical Advice

  1. When an issue is identified, determine whether the issue is subject to mandatory technical advice, or otherwise warrants a request for technical advice. Refer to IRM 4.75.36, Procedures For Processing Technical Advice Cases.

    Note:

    Technical advice means advice or guidance in the form of a memorandum furnished by Exempt Organizations Technical, in response to any technical or procedural question that develops during any proceeding on the interpretation and proper application of tax law, tax treaties, regulations, revenue ruling, notices, or other precedent, to a specific set of facts. Such proceedings include the audit of a taxpayer’s return, the consideration of a taxpayer’s claim for refund or credit, or any other matter involving a specific taxpayer.

  2. The authority for technical advice procedures is Rev. Proc. 2014-5 (updated annually).

  3. Review the list of mandatory technical advice issues in IRM 4.75.36, and review interim guidance memorandums issued after the IRM published date to determine if any additional technical advice issues have been identified.

  4. Given a specific set of facts, request technical advice when:

    1. The law and regulations are not clear on the issue under consideration, and there is no published precedent for determining the proper treatment of the issue.

    2. There is a lack of uniformity regarding the disposition of an issue.

    3. A doubtful or contentious issue is involved in a number of cases.

    4. The issue is unusual or complex.

    5. Securing technical advice would be in the best interest of the Service.

    Note:

    A revocation or modification involving the types of organizations in IRM 4.75.13.8.4 at a minimum requires consultation with Exempt Organizations (EO) Technical over the prospect of requesting Technical Advice.

  5. Do not request technical advice on frivolous issues. A "frivolous issue" is one without basis in fact or law, or that espouses a position, which has been held by revenue rulings, case law, or the courts to be frivolous or groundless.

  6. If you determine that technical advice should be requested, discuss the issue with your group manager and the taxpayer as soon as possible.

4.75.13.3.6  (07-02-2014)
Requesting Technical or Procedural Assistance

  1. Submit inquiries regarding technical and procedural matters to the EO Examinations Mandatory Review mailbox at *TEGE EO Review Staff. Mandatory Review provides a response to agents within three business days. Before presenting questions to the mailbox:

    1. Seek answers to questions from your group manager or from senior agents.

    2. Identify the research already conducted. State the research materials used, and the tax law considered. See IRM 4.10.7.2, Researching Tax Law.

    3. Provide only relevant information to furnishing a reply. Avoid excessive distracting information.

    Note:

    There is no need to reveal taxpayers identities.

    Note:

    Ask questions about a specific case directly of the reviewer assigned to the case.

  2. Seek assistance from EO Technical regarding difficult issues not clearly settled by tax law. Obtain approval from your group manager before contacting EO Technical. See a list of Subject Matter Experts by code section at http://counsel.web.irs.gov/etools/phone_directory/csmd.asp.

  3. Other business operating divisions have Technical Specialists. Technical Specialists assist the field with domestic, international, industry-specific, and crossindustry issues. Refer to http://lmsb.irs.gov/TAHome.asp.

  4. Consult or refer to Area Counsel those instances in which legal advice is needed to properly interpret and apply the Code. Refer to IRM 1.54.1.7, Referral to or Consultation with Counsel. Formal legal advice involves a taxpayer specific matter, where a TIN and address is required in the written request. Informal requests are generally non-taxpayer specific.

4.75.13.3.7  (07-02-2014)
Special Case Development Rules for Churches

  1. For church audit procedures, see IRM 4.76.7, Churches.

4.75.13.3.8  (07-02-2014)
Special Case Development Rules for Credit Counseling Organizations

  1. For development and issue resolution procedures for credit counseling organizations, see IRM 4.75.21.15, Procedures for Resolution of Credit Counseling Cases, and IRM 4.75.21-1, Credit Counseling Core Analysis Tool (CAT).

4.75.13.3.9  (07-02-2014)
Procedures for Processing an IRC 6707A Penalty

  1. IRC 6707A provides for a monetary penalty for failing to include on any return or statement, any information required to be disclosed under IRC 6011 and associated regulations regarding "reportable transactions." (Currently a taxpayer’s participation in a "reportable transaction," including a "listed transaction," is disclosed on Form 8886.) This penalty may be imposed in addition to any other penalty that may be imposed (e.g., IRC 6662, accuracy related penalties) and applies without regard to whether the transaction ultimately results in an understatement. Refer to IRM 20.1.6.17, Penalty Handbook, Preparer, Promoter, Material Advisor Penalties, and IRM 4.32.4, Abusive Transactions, IRC 6707A Penalty for Failure to Include Reportable Transaction Information with Return. Refer to IRM 4.32.4.9 for information regarding rescission of the IRC 6707A penalty for failure to disclose participation in a "reportable transaction" that is not a "listed transaction."

    Note:

    A reportable transaction is any transaction with respect to which information is required to be included with a return or statement under IRC 6011 because the IRS and the Treasury Department have determined that the transaction has the potential for tax avoidance or evasion.

  2. Technical information about the IRC 6707A penalty, including how to identify reportable transactions, the grounds for imposing the penalty, and the statute of limitations, is contained in the associated technical guidance. For additional information please refer to http://mysbse.web.irs.gov/exam/tip/ajca/default.aspx. You should request assistance from SB/SE Counsel to determine if a transaction should have been disclosed pursuant to Treas. Regs. 1.6011-4, 53.6011-4, or 56.6011-4.

  3. If the normal statute has expired under section 6501(a), written approval from SB/SE Counsel is required for support of the extended statute for a "listed transaction" under IRC 6501(c)(10).

4.75.13.3.10  (07-02-2014)
IRC 45R Credit for Small EO Employers

  1. The Affordable Care Act (March 23, 2010), Public Law No. 111-148 added IRC 45R to the Internal Revenue Code. The law provides a tax credit to eligible small employers, including tax-exempt organizations that provide health insurance coverage to their employees. Find definitions and background information in Proposed Regulations sections 1.45R-0 through 1.45R-5 (78 FR 52719; 2013-38 IRB 211); Notice 2014-06, Rev. Proc. 2013-35, Notice 2010-82, Notice 2010-44, and Rev. Rul. 2010-13.

  2. For tax-exempt employers, the tax credit under IRC 45R is a refundable credit based on premiums paid. If a tax-exempt employer appears to be eligible for the tax credit, you must inform the employer of its potential eligibility. If the employer wants to claim the tax credit it can file with you Form 990-T, Exempt Organization Business Income Tax Return, and attach Form 8941, Credit for Small Employer Health Insurance Premiums. If Form 990-T has already been filed, the tax-exempt employer must file an amended Form 990-T with Form 8941 attached.

  3. You can refer tax-exempt employers to the online Estimator in order to allow them to get an estimate of the tax credit. This tool, developed by the Taxpayer Advocate Service , is located online at: http://www.taxpayeradvocate.irs.gov/calculator/SBHCTC.htm#StartCalculator.

    Caution:

    This calculation will only provide an estimate of the credit. Neither you nor tax-exempt employers may rely on the correctness of this calculation. To determine the exact amount of the Small Business Healthcare Tax Credit, tax-exempt employers must complete the Form 8941 and attach it along with the other appropriate forms and file it together with Form 990-T.

  4. In order to ensure accuracy in verifying eligibility and computation of the credit, do not propose allowance, disallowance or adjustment of the tax credit without first obtaining technical consultation. Consult with Mandatory Review by submitting an e-mail to the mailbox at *TEGE EO Review Staff. Include the following information in the e-mail:

    • A preliminary number of full-time equivalent employees (FTE) during the tax year.

    • A preliminary estimate of the average annual wages.

    • For tax years beginning on or after 2014, whether the health insurance was offered through a Small Business Health Options Program (SHOP) Marketplace.

  5. Mandatory Review will then provide further instructions to you on how to proceed and whom to contact. Use principal issue code (PIC) 24E for any case where the issue of applicability of the tax credit is raised in an audit.

  6. According to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic sequestration reductions to credits began March 1, 2013. These required sequestration reductions include a reduction to the refundable portion of the IRC 45R credit for small tax-exempt employers. The sequestration reduction rate for the refund portion of this credit is 7.2% for refunds processed in the fiscal year ending September 30, 2014. This sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester.

4.75.13.4  (07-02-2014)
Evidence

  1. Gather facts to correctly determine an organization's status and tax liability. Make this determination on the basis of all available facts, including facts supporting the taxpayer’s position. For this reason, you should determine all the facts supporting both sides of an issue.

  2. Conduct the audit to a point where you can make a reasonable determination of the organization's status and tax liability.

  3. For more detailed information regarding evidence, see IRM 4.10.7.3, Evaluating Evidence.

4.75.13.4.1  (07-02-2014)
Evidence Defined

  1. Evidence is something which tends to prove a fact or point in question.

  2. Evidence is distinguished from proof, in that proof is the result or effect of evidence.

4.75.13.4.2  (07-02-2014)
Oral Statements

  1. When you interview the taxpayer or a third party, and you learn information that is pertinent to your case, summarize the interview in writing, and send the memorandum of interview to the interviewee for his/her comment. The written interview memorandum should include the names of all persons present, the date and place, and a full description of what was said. If the interviewee is later a witness in the case, and denies having made the oral statement, this document can be used to impeach the witness.

  2. If the interviewee was not the taxpayer, after the interviewee confirms the accuracy of the memorandum, send the written memorandum of interview to the taxpayer. Doing so ensures that it will become part of the administrative record. If not, the memorandum of interview likely will not be admissible evidence in court.

  3. If an interviewee provides helpful information in an oral interview that you think may not be entirely accurate, attempt to corroborate that information from other sources, such as public records, a third party, etc.

  4. See IRM 4.75.11.5, Initial Interview and IRM 4.75.11.5.1, Interview Techniques.

4.75.13.4.3  (07-02-2014)
Documentary Evidence

  1. Documents are another form of evidence. Send documents you obtain from a source other than the taxpayer to the taxpayer for comment, so that those documents become part of the administrative record.

  2. In litigation, the court likely will admit both documentary evidence and oral testimony (in addition to the administrative record). To the extent possible, getting both documents and memoranda of interviews into the administrative record will ensure that the court sees the relevant evidence

4.75.13.5  (07-02-2014)
Collecting and Recording the Facts

  1. Use judgment when gathering facts to support a given position. Case file weight and thickness are not indicative of effective fact development.

  2. Every document appearing in the file should have some relevance or it should be omitted.

  3. If you find a document that shows the taxpayer is not operating in accordance with exempt purposes, request a copy of the document for the case file. Such a copy may include copies of minutes, financial statements, leases, newsletters, etc. Also secure:

    1. The annual report and/or brochures describing the activity.

    2. Copies of checks, contracts and agreements directly relating to the exemption issue.

  4. Index secured documents to the Form 5773, EO Workpaper Summary Continuation Sheet. Include an analysis or statement in the workpapers showing how the documents support a specific issue or conclusion. Indexing should be consistent with indexing on Form 5772, EP/EO Workpaper Summary.

  5. The degree to which you collect and record facts depends on the facts and circumstances of each case.

    Example:

    You discover an organization engaging in substantial legislative activity through its publications and must defend an unagreed issue. Secure copies of all newsletters, minutes, or publications reflecting the legislative activities, regardless of the volume. Keep in mind, that should the case reach Appeals (or if Fast Track Settlement is requested), the Appeals Officer must have adequate documentation to uphold the Service’s position.

4.75.13.6  (07-02-2014)
Arriving at Conclusions

  1. Fact gathering comes to an end after:

    • Interviewing taxpayers and third parties, if needed

    • Auditing the books, records, and supporting documents

    • Touring facilities (unless performing an OCEP audit)

    • Researching questionable items

    From the facts that you’ve gathered, use your professional judgment to arrive at a conclusion.

  2. Your professional judgment should include a balanced and impartial evaluation of all of the evidence. Recommend the proper disposition of all identified issues, as well as any issues raised by the taxpayer. Demonstrate fairness by:

    1. Making decisions impartially and objectively based on consistent application of procedures and the applicable tax law.

    2. Treating organizations and their related persons fairly.

    3. Being open-minded and willing to seek out and consider all relevant information, including opposing perspectives.

    4. Correcting mistakes made by the Service.

    5. Refusing to take unfair advantage of taxpayer mistakes or ignorance.

    You seldom have all of the information you would like to resolve an issue. Therefore, decide when you have substantially enough information to make a determination. The sooner this point is reached, the more timely you can complete the case and the less burdensome the audit is on the taxpayer.

  3. Once you reach your conclusion(s) for an issue, discuss it with the taxpayer and/or the taxpayer's authorized representative. Provide copies of workpapers to the taxpayer and/or the taxpayer's authorized representative, if requested. Attempt to resolve issues as the audit progresses.

  4. For more detailed information on arriving at conclusions within the context of income tax audits, see IRM 4.10.7.4, Arriving at Conclusions.

4.75.13.6.1  (07-02-2014)
Tolerances

  1. Find tolerances observed for deficiencies in IRM 4.10.2.3.1, Large Unusual Questionable Items (LUQs) Defined. For tolerances relating to converted returns, see IRM 4.75.31.5. Tolerances for IRC 4962 abatements require special disposal codes 18 (301) and 54 (304), unless higher disposal codes apply, and are subject to Mandatory Review.

4.75.13.6.2  (07-02-2014)
Significant Items

  1. The definition of "significant" or "material" depends on your evaluation of a return as a whole and the items on the return. There are several factors to consider when determining whether an item is significant. These factors include:

    1. Comparative size of the item

    2. Absolute size of the item

    3. Inherent character of the item

    4. Evidence of intent to mislead

    5. Beneficial effect of the manner in which an organization reports an item

      Example:

      A taxpayer reports an item as a program service expenditure rather than a fund-raising expenditure in Part IX of Form 990.

    6. Relationship to/with other item(s) on a return

4.75.13.6.3  (07-02-2014)
Collectibility

  1. Do not take collectibility into consideration when determining:

    • The continuation of tax-exempt status.

    • The appropriate foundation status.

  2. Tax-exempt status and foundation status are based strictly on the laws that govern qualification for those statuses. Consider collectibility for certain types of tax audits, such as the audit of a converted return. See IRM 4.75.31.5. For collectibility guidelines on income tax audits, see IRM 4.10.7.4.6, Collectibility.

4.75.13.7  (07-02-2014)
Proposing Changes in Tax or Status

  1. Communication with the taxpayer or the taxpayer's authorized representative on an on-going and continuous basis is a critical part of the audit process. Generally, the taxpayer and the taxpayer's authorized representative should feel involved in the audit process and informed of the status of the audit. Discuss the progress of the audit and proposed issues with the taxpayer and/or the taxpayer's authorized representative at frequent intervals as the audit continues. This can lead to an early resolution of both the issues and the case.

  2. In field audits, discuss issues upon conclusion. This allows the resolution process to begin as the audit continues. Discuss each issue upon completion and resolution so that at the conclusion of fieldwork the taxpayer and the taxpayer's authorized representative knows the status of each issue. Then take the appropriate steps to close the case.

  3. Consider providing the taxpayer and the taxpayer's authorized representative with a written summary of potential issues on Form 5701, Notice of Proposed Adjustment. Form 5701 should include the issues, facts, law, and your position.

    Reminder:

    Providing the taxpayer or the taxpayer's authorized representative with a summary of the issues on Form 5701 does not relieve you of the responsibility for discussing the potential issues with the taxpayer or the taxpayer's authorized representative.

  4. With respect to potential revocation cases, keep the taxpayer and the taxpayer's authorized representative informed of the issues encountered that jeopardize its tax-exempt status, and the income tax consequences resulting from a loss of tax-exempt status.

  5. Use tact when explaining proposed changes to the taxpayer (and the taxpayer's authorized representative) and/or pointing out errors in the taxpayer's books or records.

  6. Be patient in explaining the provisions of the law, bearing in mind that what is clear to you is not readily understandable by one who does not deal with exempt organizations in his/her occupation.

  7. Generally, propose and discuss substantive issues with the taxpayer and/or the taxpayer's authorized representative in a face-to-face meeting. In some circumstances, a telephone conference or call may suffice.

  8. Solicit a tentative agreement from the taxpayer or the taxpayer's authorized representative on issues that require a change in tax or status. You may use Form 5701 for this purpose.

  9. Accurately calculate any deficiency or overassessment on the appropriate basic report forms. However, if there is an error, you may mail a revised report of audit (RAR) to the taxpayer and the taxpayer's authorized representative rather than present the report in a face-to-face meeting.

  10. In the audits of complex tax returns, numerous issues are commonly proposed. Fully develop adjustments before presenting them to taxpayers and the taxpayers' authorized representatives for review. Maintain records of proposed adjustments, and take every effort to secure taxpayers’ or the taxpayers' authorized representatives responses in a timely manner.

  11. In all change cases, provide the taxpayer and the taxpayer's authorized representative with a written explanation of all changes as soon as you fully develop the issues. Prepare a summary of each issue in the initial RAR. However, the initial RAR should contain sufficient information to allow the taxpayer and the taxpayer's authorized representative to understand the issues. See IRM 4.75.15, EO Closing Letters and Reports of Examination, for further instructions on the initial and formal report procedures.

4.75.13.7.1  (07-02-2014)
Proposing Alternative Positions

  1. If proposing an alternative position or approach in an unagreed case, discuss this alternative position or approach with the taxpayer and/or the taxpayer's authorized representative, and present it to the taxpayer and the taxpayer's authorized representative . This includes any additional basis or reasons for the proposed adjustment(s).

  2. If Form 990-T for an affected tax year is open for audit and a proposed revocation is imminent, incorporate the unrelated business income tax issue in the revocation report as an alternative issue. The proposed revocation letter will include Forms 990-T at the heading. See IRM 4.75.31.13, Effect on Form 990-T and Other EO Tax Examinations.

  3. Normally, present the alternative position on the report forms that are appropriate for the alternative position. If the alternative position or approach results in a different income tax computation, prepare an alternative computation of tax on Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed). See IRM 4.75.15, EO Closing Letters and Reports of Examination.

  4. Mark on the top of the forms "ALTERNATIVE ISSUES" and insert them in the report of audit after the conclusion of the primary issue.

    Example:

    You discover an excessive amount of unrelated business income which places the main purpose of the taxpayer into jeopardy . Propose revocation as the primary issue and UBI as an alternative issue in the report. If the revocation position fails in Appeals, the Service can pursue the UBI issue.

4.75.13.7.2  (07-02-2014)
The Closing Conference

  1. Your responsibilities do not end when the audit of the books and records is completed. Conclude the audit in a manner that protects not only the interests of the Service, but also assures the taxpayer and the taxpayer's authorized representative a fair and factually supported finding. Carefully protect the taxpayer's rights while following the intent of the law. Hold a closing conference. See IRM 4.75.16.4.3, Closing Conference.

4.75.13.7.3  (07-02-2014)
Issuing a Report

  1. Generally, do not mail a formal report of audit to the taxpayer and the taxpayer's authorized representative prior to discussing findings and proposed issues with the taxpayer and/or the taxpayer's authorized representative. Exceptions to this rule would be for the following:

    1. No-show/ no-response appointments.

    2. Uncooperative taxpayers.

    3. The taxpayer provides additional records for your consideration.

  2. Refer to IRM 4.75.15, EO Closing Letters and Reports of Examination, for instructions on preparing reports of audit and closing letters.

4.75.13.7.4  (07-02-2014)
Errors in Computation

  1. If the amounts on a signed waiver form are incorrect due to an error in computation, rewrite the RAR to reflect the corrected amounts and reissue it to the taxpayer. Enter the explanation on the revised basic report form (or the attached Form 886-A). Secure a newly signed waiver form reflecting the corrected amounts. If unable to secure the new waiver, treat the case as unagreed.

    Example:

    The Form 870-E you signed on March 31, 2012, lists an additional tax of $5,000 for the tax year ended 12/31/2010. We have corrected an error in the computation of the additional tax. The recomputed tax is $10,000. This report reflects the corrected tax.

    Note:

    If the signed Form 870-E shows an overassessment, use the same paragraph by substituting "overassessment" for "additional tax" .

  2. For further directions on corrected reports, see IRM 4.75.15, EO Closing Letters and Reports of Examination.

4.75.13.8  (07-02-2014)
Specific Issues - Special Considerations and Procedures

  1. This subsection provides procedures and other information for identifying and properly resolving specific issues you may encounter during an audit.

4.75.13.8.1  (07-02-2014)
Revocation of Tax-Exempt Status

  1. The term, "revocation of tax-exempt status," for purposes of EO audits, means revocation of a ruling or determination letter granting tax-exempt status because an organization failed to meet the statutory requirements for continued recognition of tax-exempt status. See Section 12 of Rev. Proc. 2014-9 (updated annually). This includes revocation by issuance of a proposed (30-day) adverse determination letter (non-501(c)(3) cases) and the final adverse determination letter (501(c)(3) cases).

    Note:

    A termination of tax-exempt status is not a revocation. A termination for purposes of audit is a voluntary dissolution of an entity, effectively terminating its existence. See IRM 4.75.16.5.10, Terminations for procedures to recognize a proper termination.

  2. Organizations can also automatically lose exemption. IRC 6033(j) provides that failing to file annual EO information returns or Form 990-N, e-Postcard, for three consecutive tax years results in automatic revocation. For more information, see IRM 4.75.16.5.2, Auto Revocations Under IRC 6033(j).

    Note:

    Automatic revocations do not confer appeal rights. Automatic revocation is an operation of law, not a determination made by the IRS.

  3. Treat examined organizations described in IRC 508(c) that don't apply for tax-exempt status and fail to qualify for exemption as revocations for disposal code purposes. Refer to IRM 4.75.13.8.3, Disqualification from Tax-Exempt Status, for information on these cases.

    Note:

    Special rules apply for IRC 527 political organizations and IRC 4947 trusts.

  4. Organizations described under IRC 501(c)(12) and IRC 501(c)(15) can either be revoked or disqualified. If proposing a revocation, seek technical advice. See IRM 4.75.36, Procedures For Processing Technical Advice Cases. See IRM 4.76.20 for more information on IRC 501(c)(12) organizations and IRM 4.76.23 for more information on IRC 501(c)(15) organizations.

  5. Seek technical advice for any organization in receipt of an EO Technical issued exemption ruling letter if the case meets technical advice criteria.

  6. Regarding revocations involving organizations in a group ruling, see IRM 4.75.24.4, Revocations.

  7. When proposing revocations, perform the following:

    1. Keep the taxpayer informed of activities or transactions encountered that jeopardize tax-exemption.

    2. Advise the taxpayer of their appeal rights. See IRM 4.75.15, Closing Letters and Reports of Examination, Pub 3498, The Examination Process, and Pub 892, How to Appeal an IRS Decision on Tax Exempt Status, for more details on taxpayer appeal rights.

    3. Estimate income taxes for all affected tax years (audited years and non-audited subsequent tax years).

    4. Secure your group manager's approval to propose a revocation.

    5. Establish annual EO information returns for all subsequent tax years not barred for assessment (including the current year if necessary).

    6. Create the administrative record for proposed IRC 501(c)(3) revocations. See IRM 4.75.32, Declaratory Judgment Cases And The Administrative Record.

    7. Prepare and issue an initial report. See IRM 4.75.15.9, Initial Reports of Examination. Present this during the closing conference.

      Note:

      Do not issue an initial report for church cases, subject to IRC 7611. See IRM 4.76.7, Churches.

    8. Determine the course of action based on the taxpayer's reply to the initial report. See IRM 4.75.15.9, Initial Reports of Examination.

    9. Close all proposed revocation cases to Mandatory Review (except TEP cases).

  8. See IRM 4.75.31.3, Revocation Case for guidance concerning subsequent years.

  9. Agreed revocations become final upon Mandatory Review concurrence. Protested revocations become final when sustained by Appeals.

  10. For revocations resulting from inadequate records, see IRM 4.75.16.5.6.3, Revocation Due to Inadequate Records or Failure to Provide Requested Information.

  11. For revocations resulting from inability to locate a taxpayer, see tables at IRM 4.75.16-17, Closing Procedures for Unable to Locate Situations.

4.75.13.8.2  (07-02-2014)
Examination of Current Year Records

  1. When proposing a revocation, establish annual EO information returns for all subsequent tax years. If necessary, this includes the current uncompleted tax year during which the audit is taking place. You do not need to wait for taxpayer to file the current year's return before establishing that tax year on AIMS. There is no statutory requirement to have a posted return prior to the audit of the current year. See IRM 4.75.31.3, Revocation Case.

4.75.13.8.3  (07-02-2014)
Disqualification from Tax-Exempt Status

  1. Disqualification (or denial) of tax-exempt status applies to certain organizations under EO audit jurisdiction who have:

    1. Not applied for tax-exempt status.

    2. Not received a ruling or determination letter granting such status.

  2. Treat disqualification of IRC 508(c) organizations as revocations for all purposes:

    1. Churches, their integrated auxiliaries, and conventions or associations of churches.

    2. Subordinate organizations in a group exemption ruling. See Treas. Reg. 1.508-1(a)(3).

    3. Other organizations not required to apply for tax-exempt status under IRC 508(c).

  3. Status 36 organizations are IRC 501(c) organizations (other than IRC 501(c)(3), IRC 501(c)(9), and IRC 501(c)(17)) that declare tax-exempt status by filing Form 990 or Form 990-EZ. If they fail to meet the qualifications of tax-exempt status, disqualify them for the audited tax years for which they declared exemption. See IRM 4.75.16.5.9, Status 36 Cases, and IRM 4.75.16-12, Status 36 Case Scenarios, IRM 4.75.16-13, Status 36 Case: Form 6018-A Instructions, and IRM 4.75.16-14, Status 36 Case: Form 2363-A Instructions.

    Note:

    Use the closing tables in IRM 4.75.16-12, Status 36 Case Scenarios to identify the appropriate closing letters and disposal codes. Status 36 cases are not subject to Mandatory Review unless they are unagreed with a valid formal protest. Treat these disqualifications as revocations for business master file purposes only (EO BMF Status 22).

  4. Disqualification also applies to IRC 501(c)(12) and IRC 501(c)(15) organizations (whether or not granted tax-exempt status by ruling or determination letter). Disqualification occurs when they fail computational tests to qualify for exemption for specified tax years.

    Note:

    Use DC 13 (501), Referrals to Other Operating Divisions, for agreed disqualifications unless a higher priority disposal code applies. IRC 501(c)(12) and IRC 501(c)(15) disqualifications are not subject to Mandatory Review unless they are unagreed with protest. Never treat these disqualifications as revocations.

    Note:

    Revocations of IRC 501(c)(12) and IRC 501(c)(15) organizations require technical advice. See IRM 4.75.36, Procedures For Processing Technical Advice Cases.

4.75.13.8.4  (07-02-2014)
Modification of Tax-Exempt Status

  1. The term, "modification of tax-exempt status" means, for purposes of EO audits, modifying an existing ruling or determination letter. Modification occurs when an organization that no longer qualifies under one paragraph of IRC 501(c) qualifies for another, thereby preserving the continuity of tax-exempt status. See Section 12 of Rev. Proc. 2014-9 (updated annually).

  2. The tax-exempt status of an organization described in IRC 501(c)(3) cannot be modified to another type of IRC 501(c) organization. If the organization does not meet the requirements of IRC 501(c)(3), its exempt status must be revoked. (Treas. Reg. 1.501(c)(3)-1(a)(1)) Similarly, an organization that wants tax-exempt status under IRC 501(c)(3) must apply by filing Form 1023. (IRC 508(a))

  3. You can't modify a Status 36 organization because the organization has no ruling or determination letter to modify. The same applies to IRC 527 political organizations and IRC 4947 trusts.

  4. You can't modify subordinate organizations in group exemption rulings that do not meet the requirements for tax-exempt status because there is no ruling or determination letter to modify. Also, note that all subordinates in a group ruling must be exempt under the same IRC 501(c) paragraph. Thus, modification of one subordinate in a group ruling is not permissible. If the non-qualifying organization qualifies for tax-exempt status under another IRC 501(c) paragraph, revoke its exemption. The former subordinate must apply for tax-exempt status with a user fee in order to secure its own ruling or determination letter.

  5. The following types of organizations must apply for tax-exempt status. Modification to these types of organizations is not available:

    1. IRC 501(c)(3), charitable, educational and religious organizations. See IRC 508(a).

    2. IRC 501(c)(9), voluntary employees beneficiary associations (VEBA). See IRC 505(c).

    3. IRC 501(c)(17), supplemental unemployment beneficiary organizations. See IRC 505(c).

    4. IRC 501(c)(20), group legal services plan organizations. See IRC 505(c).

  6. A modification only becomes final upon Mandatory Review concurrence. Protested modifications become final when sustained by Appeals.

4.75.13.8.5  (07-02-2014)
Revocation/Modification/Reclassification Effective Dates

  1. The following types of actions require determining an effective date:

    • Exemption revocation

    • Code section modification

    • Foundation status reclassification

  2. The effective date depends on whether the act triggering the revocation/modification is ongoing from a prior year, or an act (or set of acts) that occur during the audit year. For ongoing acts, the effective date is the first day of the first tax year under audit. For a specific act (or set of acts), the effective date is the date of the first act triggering the change.

    Note:

    Special rules apply to reclassifications of IRC 509(a)(1)/IRC 170(b)(1)(A)(vi) and IRC 509(a)(2) charities. (See IRM 7.26.3, Private Foundations Defined — IRC 509(a)(1) and 170(b)(1)(A)(vi) Exclusion, and IRM 7.26.4, Private Foundations Defined IRC 509(a)(2) Exclusion.)

  3. A revocation or modification may qualify for relief from retroactive effect under IRC 7805(b). If the organization qualifies for relief under IRC 7805(b), the effective date of the revocation or modification is prospective. See IRM 4.75.13.8.5.2 below.

4.75.13.8.5.1  (07-02-2014)
Determining the Revocation/Modification/Reclassification Effective Date

  1. Attempt to establish the date the organization first fails to qualify for its particular status. Do so by:

    1. Interviewing the officers, employees, or members of the organization.

    2. Inspecting the prior year returns.

    3. Reviewing the determination file, if available.

  2. Determine whether the qualification failure is due to a single act or a continuing on-going activity. For single acts, document the date of the act. For on-going activities, determine when the activity first triggers the qualification failure. Document the nature of the act(s) causing the qualification failure.

  3. If the organization probably ceased to qualify for exemption during a prior year, expand the audit to include the prior year.

    Exception:

    In most instances, do not expand the audit to a prior year if the assessment statute expiration date (ASED) expired.

    Caution:

    Secure your manager's approval before expanding the audit.

    Note:

    A revocation effective the date of inception precludes a reclassification of a IRC 501(c)(3) charity to a private foundation. A private foundation (other IRC 4947 trusts) must first be a IRC 501(c)(3) organization.

  4. In all instances, substantiate the effective date of the revocation or modification. If not expanding the audit to prior years, the effective date of the revocation or modification is the date of the first act or the first day of the first tax year under audit, depending on whether the activity continued from a prior year.

    Note:

    Revocations effective for a date other than the first day of the tax year trigger a short return filing requirement. When preparing the converted return, compute the taxable income starting from the effective date. For this reason, obtain the electronic accounting records. After converting the records to MS Excel, identify all revenues and expenses occurring after the effective date. See IRM 4.75.31, Conversion of Returns Upon Revocation of Exemption.

    Note:

    When completing field 22 on Form 2363-A, input the status code followed by the year and month of the effective date of revocation.

  5. For public charity reclassifications involving IRC 509(a)(1)/IRC 170(b)(1)(A)(vi) and IRC 509(a)(2), verify the amounts on Form 990 Schedule A, Public Charity Status and Public Support. If incorrect, redo the schedule. Determine whether the entity meets the various tests. If the entity fails the test for two successive years, the effective date of reclassification is the first day of the second tax year.

4.75.13.8.5.2  (07-02-2014)
Effective Date In IRC 7805(b) Relief Cases

  1. IRC 7805(b) provides discretionary authority to determine the extent to which any ruling may apply without retroactive effect. IRC 7805(b) relief applies to:

    • Revocations

    • Modifications

    • Determinations of liability for unrelated business income (UBI)

    • Determinations of liability for excise taxes

    • Private letter rulings

    • Technical advice issues

  2. When an entity validly receives a determination letter or ruling, and later loses exemption due to a change in facts or law, revocation is effective the first day of the first tax year in which the change occurs. Under these circumstances, there is no need to request application of IRC 7805(b) relief.

  3. When an entity erroneously receives a determination letter or ruling due to an omission or misstatement of material facts, the effective date of revocation is the first day of the first tax year. In such cases, do not recommend relief under IRC 7805(b). It’s generally not available.

  4. When an entity erroneously receives a determination letter or ruling due to a Service misinterpretation of the law, recommend IRC 7805(b) relief.

  5. The following table recaps the situations described above:

    Situation Revocation Effective Date IRC 7805(b) Applicability
    Change in tax law or organization alters its operation subsequent to initial recognition of exemption First day of first tax year in which organization altered its operations or the law changed Not necessary, but taxpayer may request a TAM if disputing whether it altered its operations.
    Omission or misstatement of material facts by the applicant organization Retroactive to the first day of the first tax year Not Available
    Misinterpretation of law by Service Determined by IRC 7805(b) relief Applies. Recommend requesting relief.
  6. You or the organization may raise the question of IRC 7805(b) relief.

    Note:

    In revocation cases, advise the organization of the provisions of IRC 7805(b) as an appeal right, if only to relate why you are not recommending relief. In particular, explain that the organization can seek a TAM on whether IRC 7805(b) applies when determining the effective revocation date. For further information on IRC 7805(b), see http://www.irs.gov/file_source/pub/irs-tege/eotopice82.pdf.

4.75.13.8.6  (07-02-2014)
IRC 7805(b) Technical Advice Requirement

  1. Section 4.04 of Rev. Proc. 2014-5 (updated annually), provides that requests for IRC 7805(b) relief are mandatory technical advice memos with respect to all exempt organizations matters.

  2. However, this section also states a "request for a TAM is not required if the Director, EO Examinations proposes to revoke or modify a letter recognizing tax-exempt status issued by the Service." See IRM 4.75.13.8.5.2 for situations where EO Examinations should request 7805(b) relief.

  3. For appealed unagreed proposed revocations/modifications/reclassifications, the Appeals Office forwards the request for IRC 7805(b) relief to EO Technical.

  4. EO Technical, after considering IRC 7805(b) relief, prepares a memo to the Area Office (or the Appeals Office) transmitting the technical advice memo. The TAM gives the effective date of the revocation/modification/reclassification and the reasons. The TAM normally excludes EO Technical's reasoning in cases where EO Technical agrees with the Area Office's recommendation for relief and effective date of revocation. The transmittal memo will include any differences of opinion between EO Technical and the Appeals Office or the Area Manager.

  5. If the recommended relief under IRC 7805(b) is denied, EO Technical fully explains such decision in the memorandum to the Area Manager (or to the Appeals Office).

  6. IRM 4.75.36, Procedures For Processing Technical Advice Cases provides complete processing instructions for technical advice requests. The IRM:

    1. Defines technical advice.

    2. Identifies issues subject to mandatory technical advice.

    3. Lists items that must be included in the request for technical advice.

    4. Describes how to initiate a request for technical advice.

    5. Explains what to do when a taxpayer initiates a request for technical advice.

    6. Discusses requests for a pre-submission conference.

    7. Explains the process for a formal request for technical advice.

    8. Discusses the effect of the technical advice memorandum.

    9. Outlines procedures for a withdrawal of a technical advice request.

    10. Provides instructions for receipt and management of the TAM.

    11. Discusses what to do when EO Examinations concurs/does not concur with a TAM.

    12. Outlines procedures for when mandatory review and the area manager disagree over whether to protest.

    13. Provides instructions for concluding the case.

4.75.13.8.7  (07-02-2014)
Converted Returns

  1. For proposed revocations, bring the taxpayer current by either:

    • Preparing Form 5666 for later enforcement by SB/SE or LB&I

      Note:

      Not applicable for private foundations

    • Securing substantially correct and complete converted income tax returns for all affected tax years.

      Note:

      Solicit converted returns only after the revocation is agreed or final.

    • Creating a converted return case file (NMF) for later EO enforcement of income tax.

  2. Refer to IRM 4.75.31, Conversion of Returns Upon Revocation of Exemption, for specific procedures.

4.75.13.8.8  (07-02-2014)
Inadequate Records

  1. If the taxpayer fails to maintain adequate books and records, discuss the inadequacies with your group manager. Determine whether to pursue issuance of an "Inadequate Records Notice" . See IRM 4.75.16.5.6, Inadequate Records.

4.75.13.8.9  (07-02-2014)
Issues Subject to Declaratory Judgment Under IRC 7428

  1. Revocations and foundation status reclassifications of IRC 501(c)(3) organizations are subject to declaratory judgment under IRC 7428. Refer to IRM 4.75.32, Declaratory Judgment Cases And The Administrative Record, for specific information.

  2. For issues subject to declaratory judgment under IRC 7428, share all documentation of the issue with the taxpayer. The case may be decided solely on the basis of the Administrative Record.

  3. We can't change a private foundation to a public charity, unless the initial classification was erroneous at the time of classification. The organization must terminate its private foundation status under IRC 507. See IRM 7.26.7, Termination of Private Foundation Status.

4.75.13.8.10  (07-02-2014)
Group Suspense

  1. Examination groups may place certain cases in group suspense pending a needed administrative or judicial action or decision. Managers may place cases in AIMS Status Code 39, Suspense in Group, only under the following conditions:

    • Requests for Technical Advice Memorandum. See IRM 4.75.36.8, Formal Request For Technical Advice.

    • Examinations interrupted by federally declared disasters impacting the organization. IRM 25.16.1, Program Guidelines.

    • By agreement of the Manager, Examination Program and Review (EPR), in response to a request by the Area Manager. The written request must include a listing of all of the related cases to be placed in status 39, an explanation of reason the cases have been delayed, as well as an estimated closure date.

  2. Do not place a case in Status 39 solely due to taxpayer delays.

  3. Other reasons for group suspense include the following:

    • Cases transferred to Area Counsel. (AIMS Status Code 25)

    • Cases transferred to Joint Committee. (AIMS Status Code 21)

    • Criminal referral cases accepted by Criminal Investigations. (AIMS Status Code 18)

    • Grand Jury Suspense. (AIMS Status Code 36)

  4. For any return placed in suspense, the group charged with the return is responsible for protecting the statute of limitations for assessment.

4.75.13.8.10.1  (07-02-2014)
Form 1254 Suspense Issues

  1. Cases involving issue(s) having nationwide ramifications or those within a particular judicial jurisdiction are, at times, suspended to ensure uniform and consistent treatment of the issue(s). This includes cases in which the issue is the same or similar to an issue(s) in a case awaiting final action by EO Technical or the Office of the Chief Counsel (Tax Exempt and Government Entities).

  2. Mandatory Review places Form 1254, Examination Suspense Report, cases in suspense using AIMS Status Code 30.

  3. Send to Mandatory Review cases involving issues which have been identified as Form 1254 suspense cases. Complete the audit with regard to all other issues prior to forwarding the case to Mandatory Review.

  4. Advise the Manager, Mandatory Review of any statutes that expired prior to receipt of returns being suspended.

  5. Follow the following procedures before forwarding the case to Mandatory Review:

    • Ensure the statute is protected for at least one year.

    • Prepare the Form 1254. (Change references to Examination to TE/GE using the Adobe Touch Up Text Tool.)

      Note:

      For a group of cases with an identical issue, prepare a Form 1254 for each one of the cases.

    • Prepare and mail Letter 3617, Letter to Taxpayer advising him of the reason for suspended action on his return.

  6. Mandatory Review places the Forms 1254 in a special suspense file maintained and controlled in Mandatory Review. Until in receipt of advice, take no action to close the case, except as may be necessary to protect the Government's interest such as protecting the statute.

  7. When a final decision arrives on any issue in suspense, Mandatory Review returns the case files to the originating Area. Mandatory Review prepares a synopsis of the decision and provides any other guidelines available at that time.

4.75.13.8.11  (07-02-2014)
Procedures for Disposition of IRC 501(p) Cases

  1. Refer to IRM 4.75.34, Procedures for Disposition of IRC 501(p) Cases, for specific procedures.

  2. Regarding guidance on certain foreign grants and the potential support of terrorism, refer to the Foreign Grants - Anti Terrorism intranet website. See also IRM 4.75.21.8, Forensic Investigation Unit.

  3. For information relating to employee protection, see IRM 25.4.1, Potentially Dangerous Taxpayer, and IRM 25.4.2, Caution Upon Contact Taxpayer.

4.75.13.8.12  (07-02-2014)
Restricted Interest Cases

  1. Restricted interest situations involve those where the amount of interest charged (deficiencies) or paid (refunds) is limited by IRC 6601(d) or IRC 6611(f).

  2. Restricted interest transactions include:

    • Net Operating Loss (NOL) Carrybacks under IRC 172(b)

    • Capital Loss Carrybacks under IRC 1212

    • Business Credit Carrybacks under IRC 39

    • Foreign Tax Credit Carryback IRC 904 as amended by P.L. 94-455 Sec. 1901(a)(114)

  3. Prepare a Form 2285 when:

    • Loss and/or credit carrybacks from more than one year are carried back to the same year.

    • Current year adjustments result in more than $100 in tax and there is a carryback loss or credit from at least one subsequent year.

      Note:

      Current year adjustments are adjustments made to the year in which the carryback deduction(s) and/or credit(s) are allowed. Current year adjustments do not include any adjustments made to the carryback losses or credits. For examples, see Exhibit 4.75.13-1.

  4. Do not prepare Form 2285 when:

    • A taxpayer protests an unagreed case to Appeals.

    • A taxpayer petitions tax court.

    • The only adjustment on the RAR is a single year carryback.

  5. If after reviewing the examples in Exhibit 4.75.13-1, you can't determine whether a case requires a Form 2285, please contact the Restricted Interest Coordinator.

  6. For further information on restricted interest, see IRM 20.2.8, Restricted Interest.

4.75.13.8.12.1  (07-02-2014)
Processing Restricted Interest Cases Requiring A Form 2285

  1. After deciding to survey a claim or completing an audit, process the case per Exhibit 4.75.13-1.

  2. Secure current BMFOLT printouts for all years involved and include them in the case file with the restricted interest workpaper prepared in IRM 4.75.13.8.12.1 (3) below.

  3. Prepare a restricted interest workpaper showing:

    • The taxable income before the specific deduction or carrybacks for each taxable year to which you allow a carryback loss or apply a credit.

    • The amount of each loss or credit being carried back by type and year of origination.

    • The computation of any remaining carryforwards by type and year of origination if there are carryforward losses and/or credits remaining after allowing the carrybacks.

    Caution:

    Apply the carrybacks to the correct years as per the Internal Revenue Code or Treasury Regulation. See IRM 4.75.13.8.12 (2). Do not survey a claim if the losses or credits are not carried back to the correct years. Making this determination before surveying a claim or preparing an audit report.

  4. Prepare the case for closing using the normal case closing procedures. See IRM 4.75.16, Case Closing Procedures.

    Reminder:

    Prepare a Form 5599, TE/GE Examined Closing Record, for surveyed claims.

  5. Contact the Restricted Interest Coordinator for mailing instructions.

  6. Prepare Form 3210, Document Transmittal.

  7. When closed, the manager updates the case to Special Review on RCCMS.

  8. Fax a copy of the Form 3210 to Special Review, attention Systems Analyst. (On the fax cover sheet, note "Restricted Interest Case Closed to Special Review" .)

  9. Mail the case as instructed.

  10. If there are any questions, contact the Restricted Interest Coordinator.

4.75.13.9  (07-02-2014)
Inactive Organizations

  1. Inactive organizations do not currently conduct activities. Whether or not the lack of activity is immediately apparent rests on facts and circumstances. Frequently, you determine the extent of inactivity only in the course of an audit or a compliance check.

    Example:

    While many inactive organizations fail to file Form 990 series returns, some classes of organizations are not required to file such returns. As such, determining whether or not they are inactive requires making contact with the organization.

  2. Inactive organizations present unique processing challenges. Depending on the situation, you may have:

    1. An organization subject to IRC 6033(j) auto revocation. See IRM 4.75.16.5.2, Auto Revocations Under IRC 6033(j) .

    2. A terminated organization. See IRM 4.75.16.5.10, Terminations.

    3. An unable to locate organization. See IRM 4.75.16.11, Unable to Locate.

  3. Determine whether the inactive organization is subject to an operational test, such as Treas. Reg. 1.501(c)(3)-1(a)(1). For those subject to such operational tests, propose revocation if the organization has no concrete plans to resume operations in the near future. For those not subject to such operational tests, recommend dissolution/termination to the organization's officers if there are no plans to resume operations. Failure to operate for exempt purposes constitute grounds for revocation and a failure to satisfy such operational tests.

  4. If the inactive organization will retain exemption, pursue securing any delinquent returns. IRM 4.75.22.3.5, Inactive Organizations.

  5. If proposing revocation for the inactive organization (not terminated) and the organization:

    1. Is described under IRC 170(b)(1)(A)(vi) or IRC 509(a)(2).

    2. Is in existence for more than five years.

    3. Has failed the public support test for two consecutive tax years (including zero public support).

    4. Does not otherwise qualify for one of the other exclusions from private foundation status.

    Reclassify it as a private foundation. Revoked private foundations become taxable private foundations.

  6. If unable to close the inactive organization as an auto revocation, revocation, or termination, close the case as a no change or no change with advisory.

4.75.13.10  (07-02-2014)
Researching an Issue and Citing the Law

  1. Refer to IRM 4.10.7.2, Researching Tax Law, for information on researching and citing federal tax law. The profiles of various tax authorities in IRM 4.10.7.2 are intended to help you become familiar with the most common, but by no means all, sources or available research techniques. The sources presented include:

    • IRM 4.10.7.2.1, Internal Revenue Code

    • IRM 4.10.7.2.2, Committee Reports

    • IRM 4.10.7.2.3, Code of Federal Regulations

    • IRM 4.10.7.2.4, Internal Revenue Bulletin

    • IRM 4.10.7.2.5, Cumulative Bulletin

    • IRM 4.10.7.2.6, Revenue Rulings and Procedures

    • IRM 4.10.7.2.7, Bulletin Index-Digest System

    • IRM 4.10.7.2.8, IRS Publications

    • IRM 4.10.7.2.9, Court Decisions and Case Law

    • IRM 4.10.7.2.10, Private Letter Rulings and Technical Advice Memorandums

    • IRM 4.10.7.2.11, General Counsel Memorandums

    • IRM 4.10.7.2.12, Technical Memorandums

4.75.13.10.1  (07-02-2014)
Citators: Researching Case History

  1. For those using the http://tax.westlaw.com or http://www.westlaw.com services (in lieu of Lexis-Nexis,) review a citation list through http://www.westcheck.com (same password and username). Use Westcheck to verify the citations, and identify those that have been modified, made obsolete, or overruled. Refer to IRM 4.10.7.2.9.7, Citators: Researching Case History, for general information on citators.

4.75.13.10.2  (07-02-2014)
Other Research Sources

  1. A wide range of tax literature is available to EO Examination personnel. Monthly publications such as The Exempt Organization Tax Review, published by Tax Analysts, provide articles pertaining exclusively to tax matters relating to exempt organizations.

  2. A number of tax services are available from commercial publishers that provide explanations and annotations on a variety of exempt organization as well as other tax issues. Well known examples include CCH "Exempt Organization Reports" , Bloomberg BNA "Tax Management Portfolios" , and the RIA "Federal Tax Handbook" .

  3. Although these services may not be available in office libraries, they may be available through other library systems, i.e. public libraries or universities. You can also research these using Lexis-Nexis or Westlaw as described below.

4.75.13.10.3  (07-02-2014)
Electronic Tax Research

  1. The primary means of research is electronic, either through compact discs or online services. Using such services provides quick access to relevant information.

  2. The Service contracts with commercial vendors such as Reed Elsevier (Lexis Nexis, Accurint), Thomson Reuters (Westlaw) and Wolters Kluwer (CCH). These vendors supply electronic access to databases containing extensive legal research libraries.

  3. Access Lexis through both the Internet site at http://www.lexisnexis.com or though the IRS intranet site at http://www.lexisnexis.com/clients/irshome/. These two addresses access the same Lexis Nexis database, use the same customer ID number, and have the same basic features. The main difference is the IRS intranet site provides quick links to commonly used sources.

  4. Access Westlaw through either the Internet site at http://www.westlaw.com, or http://tax.westlaw.com. These two addresses access the same Westlaw database, use the same customer ID number, with a slightly different emphasis in the search features provided. The main difference is the tax website provides a search feature that searches multiple commonly used separate databases at the same time.

  5. Employees who require Lexis Nexis, Westlaw, or other electronic research must receive a user profile in order to use the service(s).

  6. Obtain user profiles by contacting the ID Administrator by selecting the appropriate research service at http://rnet.web.irs.gov/.

  7. Access the following web site for training and other assistance at http://rnet.web.irs.gov/Training/.

  8. Direct general questions about the electronic research contracts to spder@irs.gov.

4.75.13.10.3.1  (07-02-2014)
IRM On-Line

  1. The IRS Office of Servicewide Policy, Directives and Electronic Research (SPDER) teamed with Lexis Nexis to provide employees with a complete IRM in an easy to research electronic format.

  2. Find additional tutorials and help using the on-line version of the IRM at http://irm.web.irs.gov.

4.75.13.10.3.2  (07-02-2014)
Westlaw

  1. Westlaw provides access to electronic databases that includes many of the major newspapers, magazines, news wires, and reference works. Access requires obtaining a user-profile at http://rnet.web.irs.gov/Westlaw/id.asp.

4.75.13.10.3.3  (07-02-2014)
Public Records

  1. Accurint, a Lexis Nexis product, is available to EO agents. It provides online access to asset/locator information through an easy to use interface. The product provides customized reports with:

    • Real and personal property data

    • Motor vehicle information

    • State corporation data

    • Personal credit header data

    • Business credit reports

    • Other information

  2. Accessing Accurint requires an ID and password. Request an Accurint® ID by completing an "Accurint ID Request Spreadsheet" and submitting it to your manager for approval.

  3. A variety of low cost and no cost training methods and educational handouts offer agents numerous options to obtain training on Accurint. Any one of these courses provides enough information to successfully use Accurint.

    Note:

    The Accurint® ID Request Spreadsheet and training materials are available on the IRS Intranet at http://rnet.web.irs.gov/Accurint/id.asp.

4.75.13.10.3.4  (07-02-2014)
Guidestar and Foundation Center

  1. The GuideStar web site provides the Form 990, 990-PF, and other useful information about the operations and finances of nonprofit organizations.

  2. Access GuideStar at http://www.guidestar.org/index.html.

  3. GuideStar access to Forms 990 requires a user profile and a password. Access is limited to the three most recently filed returns.

  4. The Foundation Center web site also provides the Form 990 and Form 990-PF images as PDF documents. Images are available as far back as 2001, when Ogden Service Campus began scanning the Form 990 series.

  5. Access the Foundation Center search engine at http://dynamodata.fdncenter.org/990s/990search/esearch.php.

4.75.13.10.3.5  (07-02-2014)
On-Line SEIN

  1. The On-Line SEIN system, an internal web site provided by the Statistics of Income Division, provides the original, unredacted images of the Forms 990, 990-EZ, 990-PF, 990-T , 1120-POL, 4720, 8871, and 8872.

    Note:

    Do not provide the unredacted copies to anyone outside the IRS other than an authorized officer or representative of the organization whose imaged return you are auditing. The public may request copies through the regular disclosure channels for redacted copies of the returns. Certain fields and schedules, such as Schedule B are not open to public inspection in an unredacted format. (IRC 6103)

  2. Due to site license limitations, access to On-Line SEIN may be limited. Access to the system requires an approved request via Online 5081.

  3. For those groups where only one or two people may access the system, research requests require management approvals. Management forwards the approved requests to those with access for document retrieval. Print retrieved images directly to PDF, by setting the default printer to PDF before accessing the system. Transmit the files within the groups by secure e-mail.

4.75.13.10.3.6  (07-02-2014)
PACER

  1. PACER (Public Access to Court Records) provides case and docket information from Federal Appellate, District and Bankruptcy courts, and the U.S. Party/Case Index. PACER is a product of the Administrative Office of the U.S. Courts.

  2. Access PACER at https://pacer.login.uscourts.gov/cgi-bin/login.pl. To obtain an ID and password, submit a request via Online 5081.

Exhibit 4.75.13-1 
Restricted Interest Examples

Example 1
Organization X timely filed a Form 990-T, Exempt Organization Business Income Tax Return, for the taxable year ended 12/31/2012 reporting $15,000 taxable income with taxes due of $2,250.
As a result of an audit of the Form 990-T for the taxable year ending 12/31/2012, you reduce deductible expenses by $20,000. You compute corrected taxable income as follows:
  Income as shown on the return 15,000
  Plus decrease in expenses 20,000
  Corrected taxable income 35,000
The audit results in a deficiency of $3,000.
This is not a restricted interest case. The reduction in expenses is a current year adjustment.
A Form 2285 is not required.
You are not required to enter any statements regarding interest on a Form 3198-A, TE/GE Special Handling Notice.
Example 2
Organization X timely filed a Form 990-T, Exempt Organization Business Income Tax Return, for the taxable year ended 12/31/2012 reporting $15,000 taxable income with taxes due of $2,250.
As a result of an audit of the Form 990-T for the taxable year ended 12/31/2012, you allow a NOL carryback of $4,000 from the year ended 12/31/2013. You make no other adjustments. You compute corrected taxable income as follows:
  Income as shown on the return 15,000
  Minus the NOL carryback from 2013 (4,000)
  Corrected taxable income 11,000
The NOL carryback adjustment results in an over-assessment of $600.
This is a restricted interest case.
A Form 2285 is not required because the NOL carryback was from a single subsequent year and there were no current year adjustments or other carrybacks.
Form 3198-A is required. Prepare a Form 3198-A and notate in bold letters in the "Other Instructions" section "Restricted Interest IRC §6611(f). No Form 2285 is required."
Example 3
Organization X timely filed a Form 990-T, Exempt Organization Business Income Tax Return, for the taxable year ended 12/31/2011 reporting $15,000 taxable income with taxes due of $2,250.
As a result of an audit of the Form 990-T for the taxable year ended 12/31/2011, you allow NOL carrybacks of $4,000 and $6,000 from the years ended 12/31/2012 and 12/31/2013, respectively. You make no other adjustments. You compute corrected taxable income as follows:
  Income as shown on the return 15,000
  Minus the NOL carryback from 2012 (4,000)
  Minus the NOL carryback from 2013 (6,000)
  Corrected taxable income 5,000
The adjustments result in an over-assessment of $1,500 in taxes, a decrease of $600 from the NOL carryback from the year ended 12/31/2012 and a decrease of $900 from the NOL carryback from 12/31/2013.
This is a restricted interest case.
A Form 2285 is required because there are carrybacks from 2 succeeding years.
Form 3198-A is required. Prepare a Form 3198-A and notate in bold letters in the "Other Instructions" section "Restricted Interest IRC §6611(f). Form 2285 is required."
Example 4
Organization X timely filed a Form 990-T, Exempt Organization Business Income Tax Return, for 201212 reporting $15,000 taxable income with taxes due of $2,250.
As a result of an audit of the Form 990-T for the taxable year ended 12/31/2012, you reduce deductible expenses by $20,000 and allow a NOL carryback of $4,000 from the year ended 12/31/2013. You compute corrected taxable income as follows:
  Income as shown on the return 15,000
  Plus decrease in expenses 20,000
  Minus the NOL carryback from 2013 (4,000)
  Corrected taxable income 31,000
The adjustments result in a deficiency of $2,400 in taxes, a $3,000 increase from the decrease in expenses in the audit year and a decrease of $600 from the NOL carryback from 12/31/2013.
A Form 2285 is required because there is a current year adjustment and a restricted interest adjustment from a succeeding year.
In restricted interest cases, like the one in this example, involving current year adjustments and a restricted interest adjustment, prepare a Form 3198-A and notate in bold letters in the "Other Instructions" section "Restricted Interest IRC 6601(d). Form 2285 is required."
Example 5
Organization X timely filed a Form 990-T, Exempt Organization Business Income Tax Return, for the taxable year ended 12/31/2012 reporting no taxable income.
As a result of an audit of the Form 990-T for the taxable year ended 12/31/2012, you reduce deductible expenses by $20,000 and allow a NOL carryback of $20,000 from the year ended 12/31/2013. You compute the corrected taxable income for the year ended 12/31/2012 as follows:
  Income as shown on the return 0
  Plus current year adjustments 20,000
  Minus the NOL carryback from 2013 (20,000)
  Corrected taxable income 0
The current year adjustment, the decrease in expenses, is offset by the NOL carryback from 12/31/2013 so there is no tax as a result of the adjustments. However, the current year adjustments create a phantom tax until the NOL is available for carryback. Interest is due on this phantom tax even though there is no tax deficiency.
A Form 2285 is required because there is a current year adjustment and a carryback loss from a succeeding year.
Form 3198-A is required. On the Form 3198-A notate in bold letters in the "Other Instructions" section "Assess restricted interest only - no tax deficiency. See Form 2285."

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