4.75.28  Discrepancy Adjustments

Manual Transmittal

July 15, 2013

Purpose

(1) This transmits revised IRM 4.75.28, Exempt Organizations Examination Procedures, EO Discrepancy Adjustments.

Material Changes

(1) This manual has been reorganized, with many sections either removed or reintroduced from prior manuals.

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

(3) Unless otherwise stated, all actions are performed by examiners.

(4) Where appropriate, terms such as examiner, examination, and examine were changed to agent, audit, and audit, in connection with the Plain Writing Act. The term "agent" is deemed to include Tax Compliance Officers.

(5) Removed reference to Rev. Proc. 94-68, and inserted Rev. Proc. 2005-32, which modifies and supersedes Rev. Proc. 94-68. See IRM 4.75.28.1(4).

(6) Added returns not subject to discrepancy adjustment: Specialized Form 1120 series returns, consistent with IRM 4.75.31. Also added returns involving complex credit carry backs and capitalized pension and profit-sharing costs, consistent with IRM 4.71.4. See IRM 4.75.28.2(3).

(7) Added common EO transactions that result in a discrepancy adjustment. See IRM 4.75.28.3.

(8) Added pertinent IDRS research procedures. See IRM 4.75.28.3.1.

(9) Added detailed case establishment procedures. See IRM 4.75.28.3.2.

(10) Corrected the source code for discrepancy adjustments from '87' to '50'. See IRM 4.75.28.3.2(4).

(11) Added pertinent statute procedures. See IRM 4.75.28.3.3.

(12) Added pertinent time reporting procedures. See IRM 4.75.28.3.4.

(13) Added new subsection on preparing and issuing discrepancy adjustment package. See IRM 4.75.28.4.

(14) Added pertinent penalty and interest procedures. See new IRM 4.75.28.4.1. Form 3198-A and Form 4549-E must indicate whether or not IRC 6404(g) interest abatement applies.

(15) Added installment agreement procedures. See new IRM 4.75.28.4.4.

(16) Added a bulleted summary of replies to a 30-day letter package. See new IRM 4.75.28.5.

(17) Updated faxing threshold from $25,000 to $250,000 per Deputy Commissioner Memo dated 9/23/2011. See IRM 4.75.28.5.2(2) and (3).

(18) Created a new subsection for each type of reply the examiner receives (or does not receive) in response to a proposed discrepancy adjustment. See new IRM 4.75.28.5.1 through IRM 4.75.28.5.6.

(19) Added partial agreement procedures. See new IRM 4.75.28.5.4.

(20) Added case file assembly instructions. See new IRM 4.75.28.6.

(21) Added case closing procedures for discrepancy adjustments. See new IRM 4.75.28.7.

(22) Added new IRM 4.75.28.8, Simultaneous Closing with Related Cases. Closing a discrepancy adjustment case with a related agreed EO case is recommended but not required.

(23) Added Exhibit 4.75.28-2 to show an example of how to prepare Form 5599.

(24) Added five exhibits presenting discrepancy adjustment letters. Existing Letters 3605, 3619 and 3603 are modified in this IRM to reflect proper enclosures, the group manager's name and phone number, plain language, and to update the TAS paragraph.

(25) The following table provides a list of subsections from the prior version, and the redistribution of their contents:

Previous Manual Section Renumbered to Current Manual Section
IRM 4.75.28.1, Overview IRM 4.75.28.1, Overview
IRM 4.75.28.1.1, Referrals to Other Operating Divisions IRM 4.75.28.2, Referrals to Other Operating Divisions
IRM 4.75.28.1.2, Examination Activities by Other Operating Divisions IRM 4.75.28.2.1, Examination Activities by Other Operating Divisions
IRM 4.75.28.2, Identifying Discrepancy Adjustments IRM 4.75.28.3, Identifying Discrepancy Adjustments
IRM 4.75.28.3, Processing Discrepancy Adjustments Each paragraph was redistributed throughout manual to its appropriate subsection.
IRM 4.75.28.3.1, Case Processing Instructions Contents reorganized and redistributed to IRM 4.75.28.4, Preparation and Issuance of the Discrepancy Adjustment Package, and IRM 4.75.28.5, Taxpayer's Reply
IRM 4.75.28.3.2, Special Processing Instructions Contents redistributed to IRM 4.75.28.7, Case Closing Procedures; IRM 4.75.28.8, Simultaneous Closing with Related Cases ; IRM 4.75.28.5.4, Taxpayer Partially Agrees ; IRM 4.75.28.5.5, Taxpayer Does Not Reply.
IRM 4.75.28.3.3, Relief from Joint & Several Liability IRM 4.75.28.4.2, Relief from Joint & Several Liability.
IRM 4.75.28.3.4, Claims IRM 4.75.28.4.3, Claim Filed
IRM Exhibit 4.75.28-1, Discrepancy Adjustment Letters and Forms This table is modified and updated

Effect on Other Documents

This material supersedes text currently contained in IRM 4.75.28, dated May 1, 2010.

Audience

The Tax Exempt and Government Entities Operating Division and primarily Exempt Organization Examinations employees will use this IRM.

Effective Date

(07-15-2013)

Kenneth C. Corbin
Acting Director, Exempt Organizations
Tax Exempt and Government Entities (EO)

4.75.28.1  (07-15-2013)
Overview

  1. The discrepancy adjustment program was established in order to reduce the number of referrals by TE/GE to Large Business & International Division (LB&I), Small Business/Self-Employed Division (SB/SE), and Wage and Investment Division (W&I) for what may essentially be a minor recalculation of tax. This program allows Exempt Organization (EO) examiners to make certain line item adjustments to federal income tax returns for issues arising from an examination of a return of an exempt organization with respect to tax adjustments to:

    1. Form 1040, U.S. Individual Income Tax Return; and

    2. Form 1120, U.S. Corporation Income Tax Return.

  2. An adjustment may arise when there is a discrepancy between a filed income tax return and facts developed during an examination of an exempt organization, or during other EO compliance activities such as compliance projects.

  3. Alternatives to a discrepancy adjustment include:

    1. Soliciting and securing amended tax returns

    2. Making a referral to the appropriate examination functional unit on Form 5666 (or Form 5346). See IRM 4.75.28.2.

    3. A combination of subparagraphs (a) and (b)

    4. Requesting a collateral examination. See IRM 4.75.21.9.

  4. Discrepancy adjustments fall within the scope of Rev. Proc. 2005-32. Discrepancy adjustments do not constitute examinations, inspections, or re-openings under IRC 7605(b). See also Policy Statement 4-3, IRM 1.2.13.1.1(4).

  5. The adjustments and penalties are reported on Form 4549-E, Income Tax Discrepancy Adjustments. See IRM 4.10.8.3.1 for instructions for the completion of Form 4549, which is substantially the same for Form 4549-E.

    Note:

    See IRM 20.1, Penalty Handbook, for detailed information concerning penalty considerations.

4.75.28.2  (07-15-2013)
Referrals to Other Operating Divisions

  1. A discrepancy adjustment does not preclude you from making a referral to one of the other operating divisions.

  2. If the adjustment does not fall within the guidelines of the discrepancy adjustment program, a referral should be made to the appropriate examination functional unit.

  3. For referrals to examination functional units, prepare Form 5666, TE/GE Referral Information Report, (or Form 5346) for income tax adjustments when the related income tax return:

    1. Is a Form 1120S, U.S. Corporation Tax Return for an S-Corporation; or other specialized Form 1120 series tax returns, such as Form 1120-L, 1120-PC, etc.

    2. Is a Form 1065, U.S. Partnership Return of Income;

    3. Shows a net operating loss;

    4. Was filed by a taxpayer that has filed for bankruptcy;

    5. Was filed by a taxpayer that was dissolved, merged or sold;

    6. Is under the jurisdiction of LB&I;

    7. Is under the jurisdiction of LB&I as a Coordinated Industry Case;

    8. Was never filed and no delinquent Form 1040 or Form 1120 will be secured;

    9. Involves complex credit carry backs;

    10. Involves capitalized pension or profit sharing costs;

    11. Is currently under examination by another operating division.

    Exception:

    Situations described in (a) through (d) above may be processed as discrepancy adjustment cases by EO examiners with the concurrence of the Director, EO Examinations. If the Director, EO Examinations, approves the exception, the concurrence of the affected operating division Director will be requested before the discrepancy adjustment is processed.

  4. In completing Form 5666 (or Form 5346 ) include or attach all pertinent information and/or supporting documentation to solidify the income tax adjustment. Refer to instructions at IRM Exhibit 4.75.16-8, Exhibit 4.5.1-13, and on the back of the form.

  5. Under certain circumstances it may be advisable to refer discrepancy adjustment issues to the examination functional units (e.g., if the related income tax return is complex or a more detailed inspection of income tax books and records is necessary to resolve the potential income tax issue).

  6. Consider the support of a cooperating agent from another operating division on Form 6229, Collateral Examinations, if:

    • The related return is to be worked in cooperation with the audit of the original return,

    • The discrepancy adjustment involves specialized or complex income tax returns, or

    • A more detailed inspection of the taxpayer's books and records is necessary to resolve an income tax issue.

    See IRM 4.75.21.9, Collateral Examination.

4.75.28.2.1  (07-15-2013)
Examination Activities by Other Operating Divisions

  1. If you find a potential discrepancy adjustment on a return that:

    1. Is currently under examination by another operating division, refer the discrepancy adjustment issue to the examiner. Identify the income tax examiner by contacting the examining group (EGC) on the AMDISA print. Refer to http://mysbse.web.irs.gov/exam/mis/contacts/empgroupcode/default.aspx for employee group codes (EGC).

    2. Is assigned to another operating division but is in an inactive status, contact the other operating division and make the referral to the examination functional unit as soon as possible.

    3. Has been examined and closed by another operating division, process the discrepancy adjustment provided that case was not previously closed after consideration by Appeals or Area Counsel

    Note:

    The income tax return must be closed off of the other operating division’s AIMS before it can be established on AIMS as a discrepancy adjustment. Although it can take up to 365 days to drop off the other operating division’s AIMS from the time they closed their case, the tax return (or amended return) may still be secured. It may, however, be preferable to secure an amended return. See IRM 4.75.22, EO Delinquent, Amended and Substitute for Return Procedures, for delinquent return procedures.

  2. If the taxpayer submits additional information in response to your proposed discrepancy adjustment that requires a referral for examination, see IRM 4.75.28.5.3.6.

4.75.28.3  (07-15-2013)
Identifying Discrepancy Adjustments

  1. The following are some examples of discrepancy adjustments that may result from an examination of an EO return:

    1. Compensation to employees not included on Form W-2 or Form 1099;

    2. Payments to an independent contractor, for services rendered, which were not reported on a Form 1099;

    3. Distributions for certain grants, scholarships and prizes that are not excludable from gross income;

    4. Payments to others classified incorrectly as debt payments (or loan proceeds), where there is no bona-fide debt;

    5. Disallowing the exclusion from gross income of a housing allowance or a parsonage allowance;

    6. Capital gains or interest to a seller when an exempt organization purchases real property;

    7. Adjustments to the return of a taxable subsidiary of an exempt organization;

    8. Payments made on behalf of officers of the organization, including, and not limited to non-accountable items (personal use of the organization’s vehicle or other assets), and personal paid expenses (inurement), and which were not reported on a Form W-2 or 1099;

    9. Denial of charitable deductions taken under IRC 170(c);

    10. Denial of business deductions under IRC 162(e) for contributions (or dues paid) for lobbying or political purposes

4.75.28.3.1  (07-15-2013)
IDRS Research

  1. When it is determined that a possible discrepancy adjustment exists, conduct IDRS research.

  2. Obtain an AMDISA print to determine if a Form 1040 or 1120 return has been established on AIMS by any examination functional unit (i.e. Wage & Investment (W&I) or Small Business Self Employment (SB/SE)).

  3. Secure and review transcripts for each affected income tax return to determine the time remaining on the statute of limitations. Transcripts include IMFOLT (Form 1040) or BMFOLT (Form 1120) prints. Review these transcripts to determine:

    1. The statute of limitations

    2. If the return has already been examined by the Service

    3. If the return was amended since it was initially filed

    4. If the Campus has already made an assessment of tax related to the discrepancy adjustment under consideration

    5. If the Campus has made any other adjustments to the return that was initially filed by the taxpayer. Refer to Document 6379, Exempt Organizations Management Information Systems Codes for an explanation of Transaction Codes (TC) and Action Codes.

  4. Obtain an IRPTRL print on the taxpayer (and taxpayer’s spouse if the applicable return is a joint return) to determine total income and total tax withheld.

  5. Obtain a RTVUE (Form 1040) or a BRTVU (Form 1120) print and review it to determine amounts taken into income, deductions taken, credits taken and tax withheld.

    Note:

    A RTVUE or BRTVU print will be accepted as the equivalent of a tax return if it provides sufficient detail to determine if there is a discrepancy, or if it gives sufficient line item detail to compute Form 1040 or 1120 income taxes.

  6. Include a copy of all IDRS research discussed in this section and include in the case file. See IRM 4.75.16.7.3

4.75.28.3.2  (07-15-2013)
Establishing the Case on AIMS, and RCCMS

  1. Discrepancy adjustments are controlled and processed within Exempt Organizations using AIMS, BMF, and IMF systems.

  2. Secure the group manager's approval before a discrepancy adjustment is initiated and document their concurrence in the case chronology (Form 5464).

  3. If a discrepancy adjustment is warranted, establish the tax return on AIMS and RCCMS. The case can be established using Form 5597 or RCCMS.

  4. If Form 5597 is utilized complete the following line items as follows:

    1. Item P7-8: Enter a source code of 50.

    2. Item P10-12: Enter the primary business code as follows:

      Primary Business Code Area
      401 Northeast
      402 Mid-Atlantic
      403 Great Lakes
      404 Gulf Coast
      406 Pacific Coast

    3. Item P20-23: Enter the agent’s group code (i.e., 79XX).

    4. Item P25-26: Enter an MFT of 30 for Form 1040. Enter an MFT of 02 for Form 1120.

    5. Item P28-29: Enter a status code of 12.

    6. Item P31: Enter 3 for return request indicator

    7. Item P33-36: Enter the project code of the related Form 990. If there is none, enter 0000.

    8. Item P48: Enter a flowthru indicator of 1.

    9. Item P1-12: Enter the taxpayer’s EIN/SSN.

    10. Item A: Enter the taxpayer’s name. For Forms 1040, the individual’s last name should appear first.

    11. Item P14-17: Enter the name control for the taxpayer.

    12. Item P19-24: Enter the tax period.

    13. Item P26-28: Enter the three digit activity code. Refer to Document 6379.

    14. Item B: Enter the taxpayer’s address.

    15. Item C: Enter the reason for the establishment of the Form 1040 or 1120.

    16. Item D: Enter the agent’s name, organization and date.

    17. Item E: Secure the group manager’s signature.

    18. Item 2: Enter the tax period and the applicable statute of limitations date. If the statute has been extended, also enter that date (statute update).

  5. You can also use the information on Form 5597 to establish the return on RCCMS and on AIMS through RCCMS.

4.75.28.3.3  (07-15-2013)
Statute of Limitations

  1. Ensure that the statute of limitations date on any Form 1040 and 1120 is correct and protected as necessary. Secure consents to extend the statutory period for assessment as needed.

  2. Refer to IRM 25.6, Statute of Limitations, for detailed instructions on income tax return statutes.

    Note:

    Restricted consents should rarely be accepted on discrepancy adjustment cases. See IRM 25.6.1.10.2.7.3 for the limited circumstances when restricted consents may apply and for special procedures to be followed.

  3. Ensure the correct statute of limitations date is reflected on AIMS and RCCMS.

  4. Prepare Form 895 for those returns where the statute of limitations for assessment will expire within 270 days. For Servicewide statute procedures, refer to the statute of limitations handbook, IRM 25.6. To the extent the procedures in this IRM impose tighter controls than those stated in IRM 25.6 use the procedures in this IRM.

    Example:

    IRM 25.6.23.4 requires statute controls for returns with assessment statutes that expire within 180 days. This IRM section for EO Examinations requires statute controls for returns with statutes that expire within 270 days. Follow the instructions with respect to statute controls from this IRM, because statute controls for EO Examinations take effect sooner than those stated in IRM 25.6.23.4.

  5. Agents may propose adjustments on returns with short statutes if the adjustments are significant. Obtain Group Manager approval prior to issuing a "30-day letter" on a return with less than 9 months left on the statute. Enclose Form 872, Consent to Extend the Statute, with the 30-day letter in such cases.

  6. Regarding the use of fax and signature stamps:

    1. Signature stamps are not permitted on Form 872.

    2. Forms 872 will not be accepted if sent by fax.

    3. The taxpayer’s original signature is necessary before you can accept a Form 872.

4.75.28.3.4  (07-15-2013)
Time Reporting

  1. Add discrepancy adjustment returns to your Form 6490, EP/EO Technical Time Report on WebETS as soon as established on RCCMS and AIMS.

  2. Charge any nominal time charges prior to RCCMS and AIMS establishment to the related return or activity.

  3. The appropriate activity code will depend on the type of return the adjustment applies to. See Document 6379, Exempt Organizations Management Information Systems Codes. Verify the AIMS generated activity code within RCCMS, and the code used on Form 6490, are in agreement, prior to closing the case.

  4. The project code should be the same as the code used on the related examination. If no other code is warranted, use "0000" .

4.75.28.4  (07-15-2013)
Preparation and Issuance of the Discrepancy Adjustment Package

  1. All discrepancy adjustment forms and letters are identified Exhibit 4.75.28-1.

  2. If you identify a discrepancy adjustment, use Form 4549-E, Income Tax Discrepancy Adjustments, as the basic report form to communicate the discrepancy adjustment to the taxpayer and to request taxpayer's agreement. Include the following comments on the "Other Information" section on page two of Form 4549-E:

    1. "This discrepancy adjustment does not constitute an examination of your tax return" , and

    2. "See the attached Form 886-A for an explanation of the issues"

    3. "IRC 6404(g) does not apply" or "IRC 6404(g) does apply" . See IRM 4.75.28.4.1 for specific notations.

    Note:

    RGS software may be used to generate Form 4549-E.

    Note:

    If prior to issuance of a 30-day letter, a signed Form 4549-E is secured from the taxpayer, it is not necessary to issue a 30-day letter; however, Publication 1 must be issued in these cases.

  3. Attach Form 886-A, Explanation of Items, which includes an explanation of the issue(s) being raised in the discrepancy adjustment package. Communicate the issue(s) in a Facts, Law and Government Position format.

  4. Use Modified Letter 3605, "30-Day Letter" , as the cover letter for the discrepancy adjustment package. See Exhibit 4.75.28-3 for an example of the letter, and a listing of its enclosures.

  5. Include the following in the package:

    1. Modified Letter 3605 (Exhibit 4.75.28-3)

    2. Two copies of Forms 4549-E

    3. Form 886–A

    4. Penalty calculations (if penalties are being assessed)

    5. Interest calculations

    6. Pub. 1, Your Rights as a Taxpayer

    7. Pub. 3498, The Examination Process

    8. Form 9465, Installment Agreement Request (if applicable)

  6. Issue the discrepancy adjustment package to the taxpayer by Certified Mail at the "last known address."

    1. For the purpose of obtaining the taxpayer’s last known address, secure an INOLES print. INOLES reflects the last address given to the Service through the most recent filing or other notification by the taxpayer.

    2. Use a subsequent address if other sources confirm that the taxpayer’s address has changed subsequent to the address reflected on INOLES.

      Note:

      If there is some doubt as to the validity of the subsequent address, send the certified letter to both addresses.

    3. If the applicable return is a jointly filed Form 1040, mail separate packages to each spouse, even if they live at the same address. Utilize the last known address of each spouse (or former spouse if no longer married). See IRC 6015. Refer to IRM 4.75.28.4.2, Relief from Joint & Several Liability, for detailed instructions.

      Note:

      When separate mailings to spouses is needed, prepare, address, and mail each letter individually. Use the primary social security number on both letters.

  7. If an amount subject to a discrepancy adjustment is the same amount subject to another issue, such as an inurement issue, the discrepancy adjustment can be proposed to the recipient at the same time the revocation issue is proposed to the organization.

  8. The 30-day letter notifies the taxpayer of their rights, including Appeal rights. It gives the taxpayer 30 days to respond.

  9. Refer to IRM 4.75.28.5 for actions to take based on a certain replies or non-replies.

  10. Once a 30-day letter is issued, update the AIMS and RCCMS status code to '13'.

4.75.28.4.1  (07-15-2013)
Penalties and Interest

  1. Make a determination as to whether any penalties are appropriate. See IRM 20.1, Penalty Handbook.

    1. Include a brief discussion on the applicability of penalties and whether or not penalties are being assessed in the workpapers.

    2. Apply any applicable penalties through the penalty menu in RGS. The program will automatically compute the penalties and provide an explanation of the penalties being included as part of the Form 4549-E report.

    3. The negligence penalty under IRC 6662(b)(1) is the most commonly applied penalty in discrepancy adjustment cases.

    4. Before certain penalties can be assessed, managerial approval is required (in writing). See IRC 6751(b)(1)

      Note:

      Penalties under IRC 6651, 6654, and 6655 are exempted from the approval requirement.

  2. When you determine that penalties should be imposed on a Form 1040 or Form 1120 discrepancy adjustment, the following requirements must be observed:

    1. Secure managerial approval of appropriate penalties before the 30-day letter package is mailed to the taxpayer. For this purpose, managerial approval should be documented on Form 5464, Case Chronology Record.

    2. When imposing penalties, notify the taxpayer in writing that penalties are being assessed.

    3. Provide the penalty name, Code section and a computation of the penalty to the taxpayer.

  3. Per IRC 6404(g), if the IRS does not provide a notice to the taxpayer (who has timely filed their tax return) specifically stating the taxpayer’s liability within a specified period of time, the IRS must suspend the imposition of any interest regarding certain failures relating to that return. See Treas. Reg. 301.6404-4(a), which identifies the specified period of time to be 36 months (or 18 months).

    Note:

    Section 3305 of the IRS Restructuring and Reform Act of 1998 was enacted to provide for the suspension of interest in certain cases. This provision was incorporated into IRC 6404(g). The Small Business and Work Opportunity Tax Act of 2007 amended section 6404(g) and applies to notices issued on or after November 26, 2007.

    1. For timely filed Forms 1040 covered by the 36-month notification deadline, interest will be suspended beginning on the day after the close of the 36-month period and ending on the date that is twenty-one days after the notice is provided. The suspension period begins 36 months after the later of (1) the date on which the return is timely filed, or (2) the due date of the return without regard to extensions.

    2. Refer to Treas. Reg. 301.6404-4(a) for the conditions requiring an 18-month period rather than a 36-month period before a suspension period can begin.

    3. In all instances where interest is suspended, the "suspension period" ends 21 days after the date on which the required notice is issued by the IRS. "Notice" is considered to be made when the 30-day letter is mailed.

    4. Suspension of interest under IRC 6404(g) applies only to timely filed returns (returns filed by the original due date or by the extended due date if a valid extension was filed).

    5. Suspension of interest under IRC 6404(g) applies only to individuals, not to corporations.

    6. The suspension of interest is granted whether or not Form 4549-E is signed or the tax is paid.

    7. IRC 6404(g) applies only if the "30-day letter" package is mailed to the taxpayer (or similar notice occurs) after the specified period has expired.

      Example:

      If on October 15, 2011, the 30-day letter is mailed for a discrepancy adjustment being proposed on a 2008 Form 1040 that is timely filed on April 15, 2009, IRC 6404(g) does not apply and interest should not be suspended for any period of time since the 30-day letter package is mailed before the end of the 36-month specified period.

    8. If IRC 6404(g) applies, interest should be calculated on Form 4549-E from the original due date of the Form 1040 return through the 36-month period (or 18-month period, if applicable).

    9. If IRC 6404(g) does not apply, interest should be calculated on Form 4549-E from the original due date of the return through 30 days after the date of the 30-day letter. In the "Other Instructions" section of Form 3198-A and in the "Other Information" section of Form 4549-E, include the following: "IRC 6404(g) does not apply."

    10. IRC 6404(g) applies to certain penalties as well as interest. However, IRC 6404(g) does not apply to any penalty imposed by IRC 6651, any case involving fraud, most listed transaction situations, any criminal penalty or to certain other situations noted in IRC 6404(g)(2).

    11. If interest is being suspended in accordance with IRC 6404(g), in the "Other Instructions" section of Form 3198-A, and in the "Other Information" section of Form 4549-E include the following: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)." On the file copy of Form 4549-E, add "Interest should be suspended beginning ____ (insert the date the suspension period begins) through ____ (insert the date the suspension period ends)" . ESS will input Transaction Code 971 with action code 064 and the "notice date" will suspend the interest as required by IRC 6404(g).

    12. For more information on interest abatements and suspensions, see IRM 20.2.7, Interest, Abatement and Suspension of Interest: IRC 6404 and 7508.

  4. For every notice of liability sent to an individual that includes an amount of interest due, include a detailed computation of the interest charged and a citation of the Code section under which the interest is imposed.

4.75.28.4.2  (07-15-2013)
Relief from Joint & Several Liability

  1. If a discrepancy adjustment is warranted with respect to a joint return under IRC 6015, follow these procedures:

    1. Verify the last known address for each spouse, confirm the current address for each spouse by researching IDRS and the Master File and update the file if the address has changed.

      Note:

      For detailed procedures on locating taxpayers and what constitutes proper notice, see IRM 4.75.10, EO Pre-Examination Guidelines and Procedures.

    2. Send a copy of the discrepancy adjustment report separately to each spouse, even if they live at the same address.

    3. In the case of multiple year adjustments where the taxpayers filed a joint return in one year and separate returns in the other, issue separate reports which must be mailed separately to each spouse, and must only contain information pertinent to the appropriate taxpayer.

  2. If Form 8857, Request for Innocent Spouse Relief, under IRC 6015, or a statement containing substantially the same information signed under penalty of perjury is submitted, check for an original signature and the identification of tax periods for which relief is requested. Stamp the receipt date on the request. Within 10 business days of receipt, fax Form 8857 and its attachments to the Cincinnati Centralized Innocent Spouse Operations (CCISO) at (859) 669-5256, Attn: Innocent Spouse AUR/SCEB Coordinator. :

  3. If the number of pages to be faxed is too large, make a copy for the case file and mail original Form 8857 and its attachments within 10 business days to:


    Internal Revenue Service
    Stop 840F, P.O. Box 120053
    Covington, KY 41012

  4. If innocent spouse relief is requested while the case is opened, you must include as an addendum to your 30-day letters to both spouses (and 90 day letters if necessary) an acknowledgment of receipt of a request for innocent spouse relief under IRC 6015, and that TE/GE Exempt Organizations is not making a determination of innocent spouse relief. The determination of innocent spouse relief will be made by the appropriate IRS business unit after the assessment of tax and the final conclusion of the discrepancy adjustment matter.

  5. Do not solicit tax payments from the requesting spouse while a request for spousal relief is pending. You may however solicit tax payments from the non-requesting spouse. You may refer the taxpayer to Pub. 971, Innocent Spouse Relief.

  6. Check the "Innocent Spouse" block in the Mandatory Review section of Form 3198-A.

    Note:

    The case is not subject to Mandatory Review solely on the basis of an innocent spouse request. See IRM 4.75.16.6.

4.75.28.4.3  (07-15-2013)
Claim Filed

  1. If a taxpayer files a formal claim with a service center on Form 843, Claim for Refund and Request for Rebate; Form 1040X, Amended U.S. Individual Income Tax Return; or Form 1120X, Amended U.S. Corporation Income Tax Return, while the income tax return is open on AIMS in an EO office, the service center will forward the claim to you for action.

    1. On receiving a formal or informal claim, contact the EO Classification office by secure e-mail at eoclass@irs.gov.

    2. You will either be given assistance in ruling on the claim or will be instructed to transfer the claim to the appropriate operating division for examination.

  2. If EO retains jurisdiction over the claim and the discrepancy adjustment is open, describe the disposition of the claim in the "Other Information" section of Form 4549-E. See IRM 4.75.37 which provides specific guidance on statements used to describe the disposition of claims. Since discrepancy adjustments do not constitute an "examination" the statements describing disposition of the claims should not make any reference to an "examination."

    1. If the claim is fully or partially allowed, enter the claim description and amount on the appropriate adjustment line of Form 4549-E.

    2. If a formal claim is fully or partially disallowed, the discrepancy adjustment report must also contain Form 2297, Waiver of Statutory Notification of Claim Disallowance.

  3. If a taxpayer who makes a credible claim that he or she is unable to manage his or her own affairs by reason of physical or mental impairment, and requests additional time to file a claim under IRC 6511(h), refer the matter to the appropriate operating division on Form 5666 (or Form 5346).

  4. Regarding claim matters, you can refer the taxpayer to Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.

4.75.28.4.4  (07-15-2013)
Installment Agreement Procedures

  1. If the taxpayer is unable to pay the full amount owed, and if the taxpayer is eligible (a situation where a balance cannot be paid within 120 days), offer an installment agreement by having the taxpayer complete Form 9465, Installment Agreement Request. See eligibility criteria at IRM 4.20.4.2(6). You can send Form 9465 to the taxpayer with the 30-day letter package or after you have received the taxpayer's reply to the 30-day letter.

  2. Do not offer an installment agreement if the taxpayer is in bankruptcy. See IRM 4.27.2.4(4). Indications of bankruptcy include:

    • -V Freeze on TXMOD

    • TC 520

    • -X Freeze on AIMS

    • The taxpayer or their representative indicates verbally or in writing that it is in bankruptcy

  3. A taxpayer may request an installment agreement by submitting Form 9465, a Form 433-D, Installment Agreement, or other methods identified in IRM 5.14.1.3(1).

  4. The taxpayer may also submit supporting financial information on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, Form 433-B, Collection Information Statement for Businesses, or Form 433-F, Collection Information Statement, which will accompany Form 9465 (or Form 433-D) for processing.

  5. If a taxpayer submits a request for an installment agreement (on Form 9465 or Form 433-D) or indicates that he/she would like to pay any resulting deficiency via installments:

    1. Stamp the receipt date on the request.

    2. Complete Form 3177, Notice of Action for Entry on Master File, with TC 971 AC 043, Pending Installment Agreements.

    3. Fax or secure e-mail Form 3177 to the Field Agent Support Team (FAST). Form 3177 must be input within 24 hours of the taxpayer's request.

    4. Forward the request for installment agreement forms and supporting collection information statements to the appropriate service campus address identified in the instructions to Form 9465.

  6. Keep a copy of all forms in the workpapers for information purposes.

  7. Examination functions do not have the authority to approve or reject installment agreements. EO examiners are not authorized to make ability-to-pay, acceptance, or hardship determinations for which the collection information statement forms were designed.

  8. You may proceed to close the discrepancy adjustment case. The Campus collection function will contact the taxpayer over the matter of "setting up" an installment agreement on Form 433-D, and will ultimately approve or reject an installment agreement.

  9. When closing the case, indicate on Item 42 of Form 5599, the appropriate ARDI code for the installment agreement. Check the installment agreement box in the Mandatory Review section of Form 3198-A.

    Note:

    The case is not subject to Mandatory Review solely on the basis of an installment agreement request. See IRM 4.75.16.6.

  10. See IRM 4.20.4, Examination Collectibility, Installment Agreements, and IRM 5.14.5 for more information on installment agreements.

  11. For situations where payments are secured from a taxpayer, see IRM 4.75.22.4.1, Payment Processing, for instructions on how to process a payment.

4.75.28.5  (07-15-2013)
Taxpayer's Reply

  1. The taxpayer may or may not furnish a reply to your proposed discrepancy adjustment within the 30-day period.

    • If the taxpayer requests more time to reply, see IRM 4.75.28.5.1.

    • If the taxpayer agrees, see IRM 4.75.28.5.2.

    • If the taxpayer disagrees, see IRM 4.75.28.5.3.

    • If the taxpayer partially agrees, see IRM 4.75.28.5.4.

    • If the taxpayer does not reply, see IRM 4.75.28.5.5.

    • If the discrepancy adjustment package was returned undeliverable, see IRM 4.75.28.5.6.

  2. If relief from joint and several liability or innocent spouse relief is requested, refer to IRM 4.75.28.4.2.

  3. If the taxpayer requests an installment agreement, refer to IRM 4.75.28.4.4.

4.75.28.5.1  (07-15-2013)
Taxpayer Requests Extension to Reply to 30-Day Letter

  1. In general, 26 CFR 601.105(d) does not provide for any extension of time to reply to a 30-day letter. However, as a matter of practice, extensions of time can be granted under reasonable circumstances such as:

    1. The taxpayer retains a representative and demonstrates a need for more time to prepare a meaningful protest.

    2. The taxpayer retains a new representative.

    3. Sickness or injury of the taxpayer or representative.

    4. Issues are complex and require extensive research.

  2. Requests for extensions of time to respond to the 30-day letter should be in writing and should state the reason(s) why additional time is needed. Since many requests are made by telephone, grant the extension verbally and confirm it in writing upon receipt of the written request. Do not grant an extension if the statute of limitations will expire within 150 days and the granting of an extension will not leave sufficient time to process the case.

  3. Extensions are approved by the group manager or a designated management official. Notify the taxpayer in writing of the extension and the specific extended response date. Extensions are normally granted for no more than 30 days unless a specific reason supports additional time

4.75.28.5.2  (07-15-2013)
Taxpayer Agrees

  1. Discrepancy adjustment cases are considered agreed if you secure a properly signed Form 4549-E from the taxpayer (and spouse for jointly filed returns) or from the power of attorney (if so authorized by Form 2848).

  2. Forms 4549-E reflecting additional tax of $250,000 or less can be accepted by fax if taxpayer contact has been made and the case chronology documents the date of contact and the desire of the taxpayer to submit the Form 4549-E by fax.

  3. Forms 4549-E reflecting additional tax in excess of $250,000 require original signatures.

  4. Stamp the received date on Form 4549-E.

  5. If the taxpayer (and spouse for jointly filed returns) agrees with the discrepancy adjustment, the 30-day letter will serve as the final letter. No closing letter is prepared for discrepancy adjustments for agreed tax changes.

  6. Make a reasonable effort to secure full payment of taxes, interest and penalties.

  7. If the taxpayer is unable to pay the balance owed within 120 days, consider offering an installment agreement. See IRM 4.75.28.4.4. EO Examination agents have the same authority with respect to installment agreements as SB/SE Examination agents.

  8. If payment is received, follow the check processing procedures outlined in IRM 4.75.22.4.1, Payment Processing.

  9. Proceed to case closing procedures at IRM 4.75.28.7.

  10. If the total discrepancy adjustment to one taxpayer results in an over-assessment, or an agreed unpaid deficiency of $10,000 or more (pursuant to the changes enacted under RRA 3103), process the case within 22 calendar days (16 business days) after the agreement is filed or the over-assessment is determined.

  11. Use disposal code "03" on AIMS and "102" on RCCMS when you prepare Form 5599. See Exhibit 4.75.28-2.

4.75.28.5.3  (07-15-2013)
Taxpayer Disagrees

  1. A taxpayer may reply to a 30-day letter by indicating disagreement with your proposed discrepancy adjustment in one of the following ways:

    • The taxpayer provides additional information showing no discrepancy adjustment is needed. IRM 4.75.28.5.3.1.

    • The taxpayer provides additional information that does not change the discrepancy adjustment. IRM 4.75.28.5.3.2.

    • The taxpayer provides additional information that changes the discrepancy adjustment. IRM 4.75.28.5.3.3.

    • The taxpayer indicates an intent to protest. IRM 4.75.28.5.3.4.

    • The taxpayer submits a written protest for appeal. IRM 4.75.28.5.3.5.

    • The taxpayer submits additional information that requires a referral for examination. IRM 4.75.28.5.3.6.

  2. Save a complete hard copy file and all relevant documents in Office Documents folder in RCCMS. See IRM Exhibit 4.75.16-18, Guidelines for Using EO Sub-Folders in RCCMS.

  3. If the taxpayer disagrees with the proposed adjustments, inform him/her of:

    1. The right to discuss the proposed adjustment with a supervisor.

    2. His/her appeal rights.

  4. Inform a taxpayer that does not agree with the proposed adjustment to file a written protest for the case to go to Appeals.

4.75.28.5.3.1  (07-15-2013)
Taxpayer Disagrees - Provides Additional Information Showing No Discrepancy Adjustment is Needed

  1. If additional information received during the 30-day period verifies that no adjustment is warranted, take the following actions:

    1. Retain a copy of the return (or applicable RTVUE or BRTVU print) in the case file.

    2. Include the original return (if secured) with the closed discrepancy adjustment case file.

    3. Explain on Form 5773 or in the supplemental workpapers why the case is being closed "no change" .

    4. Prepare and issue Letter 3604, Acceptance of Return after Consideration of Additional Information.

  2. Proceed to case closing procedures at IRM 4.75.28.7.

  3. Use disposal code (DC) "02" on AIMS and "107" on RCCMS when you prepare Form 5599. See Exhibit 4.75.28-2.

4.75.28.5.3.2  (07-15-2013)
Taxpayer Disagrees - Provides Additional Information that Does Not Change the Discrepancy Adjustment

  1. If the taxpayer submits additional information that does not change the original discrepancy adjustment report, modify the report to incorporate the taxpayer’s position and the government’s response to that position. Issue Letter 3603 along with a copy of the modified report via certified mail. See Exhibit 4.75.28-5 for an example of this 30-day letter.

4.75.28.5.3.3  (07-15-2013)
Taxpayer Disagrees - Provides Additional Information that Changes the Discrepancy Adjustment

  1. If the taxpayer submits additional information that changes the original discrepancy adjustment amount (but does not eliminate it) or penalties, issue Letter 3619 with a revised report to the taxpayer via certified mail. See Exhibit 4.75.28-4 for an example of this 30-day letter.

4.75.28.5.3.4  (07-15-2013)
Taxpayer Disagrees - Indicates Intent to Protest

  1. If the taxpayer does not furnish a written reply within the 30-day period but indicated his/her intent to file a protest, you can issue Letter 923 (DO) which grants an additional 15 days to respond. Issue Letter 923 (DO) no later than seven calendar days after the response due date of the original 30-day letter.

  2. Group managers at their discretion may establish group procedures for approving and issuing Letter 923 (DO).

4.75.28.5.3.5  (07-15-2013)
Taxpayer Disagrees - Submits Written Protest

  1. If the taxpayer submits a written protest (as distinguished from merely providing "additional information" in the previous subsections):

    1. Verify the protest is complete (See Pub 5). See also IRM 4.75.20.

    2. If further development is needed, make a referral on Form 5666 (or Form 5346) to the appropriate operating division for examination. IRM 4.75.28.5.3.6.

  2. Prepare a computer disk for Appeals, containing 30-day letters and reports. Do not include any prohibited ex parte communications to Appeals. See Rev. Proc. 2012-18 for guidance concerning ex parte communications. Conveying a password to enable Appeals to open data files on disk is not a prohibited ex parte communication. See section 2.03(2) of Rev. Proc. 2012-18.

  3. If the protest is complete and valid, update the AIMS and RCCMS status code to '12'.

  4. If the taxpayer files a protest and:

    The Protest Shows Issue the following:
    No discrepancy adjustment is necessary Letter 3604
    The original report is correct (no change needed) Rebuttal letter (Exhibit 4.75.28-6)
    A change should be made to the proposed discrepancy amount or penalties A revised report giving the taxpayer an additional 15 days to respond. A new 30-day letter is not required, unless the discrepancy amount is increased, which would require issuing a Modified Letter 3619 (Exhibit 4.75.28-4). See IRM 4.75.28.5.3.3.

  5. Proceed to case closing procedures at IRM 4.75.28.7.

  6. If you issue a rebuttal letter, use disposal code (DC) "07" on AIMS and "601" on RCCMS when you prepare the closing record on Form 5599. See Exhibit 4.75.28-2. If you issue Letter 3604, use DC 02 (107) when preparing the closing record.

  7. See sample rebuttal letter at Exhibit 4.75.28-6.

4.75.28.5.3.6  (07-15-2013)
Taxpayer Provides Additional Information that Requires a Referral for Examination

  1. If the taxpayer replies by furnishing information that raises technical income tax questions or further development is needed, make a referral on Form 5666 (or Form 5346) to the appropriate operating division for examination. IRM 4.75.28.2.

  2. Prepare and issue the letter indicated in Exhibit 4.75.28-7.

  3. Proceed to case closing procedures at IRM 4.75.28.7.

  4. Use disposal code (DC) "13" on AIMS and "501" on RCCMS when you prepare Form 5599. See Exhibit 4.75.28-2.

4.75.28.5.4  (07-15-2013)
Taxpayer Partially Agrees

  1. If agreement can be reached on one or more issues, encourage the taxpayer to enter into a partial agreement by executing a Form 4549-E covering the agreed issues. A typical situation might be where the taxpayer agrees to the discrepancy adjustment; however, he does not agree to the penalty associated with the adjustment to his tax liability.

  2. Partial agreement procedures are not appropriate if the taxpayer agrees to the proposed adjustments in a specific tax period but does not agree with proposed adjustments in a prior or subsequent tax period.

  3. For partial agreements, complete two separate Form 4549-E reports:

    1. Prepare one report showing only the agreed issues. Write "Partial Agreement" on top of the Form 4549-E.

    2. Prepare a second report that includes both the agreed and unagreed issues.

  4. You can present the agreed report to the taxpayer for signature on Form 4549-E. Issue the second report to the taxpayer with both agreed and unagreed issues with the 30-day letter. Include all enclosures listed on the 30-day letter.

  5. If the taxpayer signs only the Form 4549-E partial agreement report but does not sign the report containing both agreed and unagreed issues, prepare an explanation of which items and amounts were agreed to by the taxpayer. This explanation will accompany the file to EO Mandatory Review. Close the case as an Unagreed case as outlined above.

  6. Attach Form 3198-A with an entry in the Mandatory Review section that the discrepancy adjustment is partially agreed.

  7. Proceed to case closing procedures at IRM 4.75.28.7. Close the case to EO Mandatory Review as an Unagreed case.

  8. Depending on whether a protest was submitted, use disposal code (DC) "07" or "10" on AIMS and "601" or "604" respectively on RCCMS, when you prepare Form 5599. See Exhibit 4.75.28-2.

4.75.28.5.5  (07-15-2013)
Taxpayer Does Not Reply

  1. If you do not receive a reply to the 30-day letter, close the case to the EO Mandatory Review Staff for issuance of a statutory notice of deficiency.

  2. If the taxpayer does not furnish a written reply to the 30-day letter, but indicated an intent to protest during the 30-day period, see IRM 4.75.28.5.3.4.

  3. Close the case for issuance of a statutory notice of deficiency in the following instances:

    1. It appears reasonable that the taxpayer or authorized representative received the 30-day letter, and the taxpayer neither agrees (i.e., signs Form 4549-E) nor protests within the 30-day period.

    2. The 30-day letter was not received by the taxpayer, and the Service exercised due diligence in determining the taxpayer’s last known address.

    3. The taxpayer is temporarily away and is not expected to return within a reasonable period of time, or has not returned after a reasonable extension has been granted.

    4. Follow-up action was taken without success.

  4. Modify the discrepancy adjustment report to state that the taxpayer did not respond to the 30-day letter. Include a copy of the report in the case file and save in the Office Documents folder in RCCMS. See IRM Exhibit 4.75.16-18, Guidelines for Using EO Sub-Folders in RCCMS.

  5. A failure to reply to a 30-day letter is considered an unagreed case for processing purposes. Mark the unagreed case as subject to mandatory review in the "Mandatory Review" section of Form 3198-A. Notate: "Unagreed Discrepancy Adjustment" on Form 3198-A.

  6. Proceed to case closing procedures at IRM 4.75.28.7. Close the case to EO Mandatory Review as an Unagreed case.

  7. Use disposal code (DC) "10" on AIMS and "604" on RCCMS when you prepare Form 5599. See Exhibit 4.75.28-2.

4.75.28.5.6  (07-15-2013)
Discrepancy Adjustment Package Returned as Undeliverable

  1. If the 30-day letter is returned as undeliverable, make an attempt to obtain the correct address.

    1. If the taxpayer’s correct address is identified, re-mail the 30-day letter to the new address. The period in which the taxpayer may reply starts with the date the letter was re-mailed.

    2. If the taxpayer's correct address cannot be determined, close the case as unagreed using procedures in IRM 4.75.28.5.5, Taxpayer Fails to Reply.

4.75.28.6  (07-15-2013)
Case File Assembly

  1. When a case is closed unagreed to Mandatory Review, prepare and assemble a complete paper case file.

  2. Use a separate folder for each taxpayer’s income tax return established on AIMS and RCCMS.

  3. Label each folder with Taxpayer Name, EIN/SSN, Year and Return (Form 1040 or 1120).

  4. Use red folders to identify cases with less that 270 days remaining on the statute of limitations.

  5. For case file assembly instructions for the outside of the case file, see IRM 4.75.28.6.1, below.

  6. For the case file assembly for the inside of the case file, see IRM 4.75.16.7.2 and IRM 4.75.16.7.3.

4.75.28.6.1  (07-15-2013)
Case File Assembly - Outside of Case File

  1. Staple the following Forms (as applicable) to the outside of the file folder from top to bottom, as follows:

    1. Form 895, Notice of Statute Expiration

    2. Form 3198-A, TE/GE Special Handling Notice

    3. Form 5456, Reviewer's Memorandum - EP/EO

    4. Form 5457, Response to Reviewer's Memorandum - EP/EO

    5. Form 5599, TE/GE Examined Closing Record. See Exhibit 4.75.28-2

    Note:

    When using RCCMS, these documents must be placed directly into the Office Documents folder.

  2. Form 3198-A should be completed as follows:

    1. Check the box for EO.

    2. Complete your information in the "Required Entries" - Person to Contact, Employee ID#, Phone #, PBC, and Group.

    3. Complete the information related to the case file in the "Required Entries" section - EIN/SSN, MFT, Year and Taxpayer’s Name. Also mark any box that applies to the case.

    4. In the "Required Entries" section under "Earliest Statute Date Is: " enter the statute date of the case to which the Form 3198-A is attached.

    5. If the case is unagreed or otherwise subject to Mandatory Review, mark the case subject to mandatory review in the "Mandatory Review" section of the form. If unagreed, notate: "Unagreed Discrepancy Adjustment" .

    6. The case should be marked as a discrepancy adjustment in the "Special Features" section of the form.

    7. Notate in Other Instructions "IRC 6404(g) does not apply" or "IRC 6404(g) does apply" . See IRM 4.75.28.4.1 for specific notations. If interest abatement applies, ESS will input Transaction Code 971 with action code 064 and the "notice date" will suspend the interest as required by IRC 6404(g).

    8. In audits (or discrepancy adjustments) involving multiple case folders, ensure all case folders remain together. Attach a Form 3198-A to each case folder. Write on the bottom of the form in large red letters: “Multiple Returns/Case Folders Involved - DO NOT SEPARATE”.

      Note:

      See examples of permissible separation of case file folders at IRM 4.75.16.8.2(7).

    9. If the case is partially agreed, include an entry that the discrepancy adjustment is partially agreed.

    10. Check the Installment Agreement block in the Mandatory Review section of Form 3198-A if applicable.

    11. Check the Innocent Spouse block in the Mandatory Review section of Form 3198-A, if applicable. Fill in the appropriate blanks.

    12. Any other applicable part of the form must be completed.

4.75.28.6.2  (07-15-2013)
Case File Assembly - Inside the Case File

  1. The inside-left of the case file folder includes documents identified in IRM 4.75.16.7.2. If the case is protested to Appeals, a computer disk containing the RGS data must be included.

    Caution:

    Do not include any prohibited ex parte communications to Appeals. See Rev. Proc. 2012-18 for guidance concerning ex parte communications. Conveying a password to enable Appeals to open the data files on disk is not a prohibited ex parte communication. See section 2.03(2) of Rev. Proc. 2012-18.

  2. The inside-right of the case file folder should be organized from top to bottom in accordance with IRM 4.75.16.7.3. Examples of includible documents is provided as follows:

    1. Succeeding letters to a 30-day letter in chronological order, most recent on top.

    2. 30-day letter.

    3. Discrepancy adjustment report Forms 4549-E and 886-A.

      Note:

      If interest is being suspended in accordance with IRC 6404(g), record the IRC 6404(g) notice date in the "Other Information" section of the file copy ofForm 4549-E. Suggested language is as follows: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer). Interest should be suspended beginning ____ (insert the date the suspension period begins) through ____ (insert the date the suspension period ends)" . For agreed cases, Form 4549-E must be signed (by both spouses if return is a joint return).

      Note:

      If interest is not being suspended under IRC 6404(g), indicate in the "Other Information" section "IRC 6404(g) does not apply" .

    4. A copy of all Forms 1040/1120 (or RTVUE/BRTVU prints), serving as the working return, with attachments.

      Note:

      A copy of Form 3244-A and a copy of the check if payment is received, attached to the working return.

    5. Forms 5772, 5773, 5464 and supplemental workpapers. Save copies of all workpapers, forms and letters generated in the RCCMS Office Documents folder.

  3. Working return(s): Attach documents identified in IRM 4.75.16.7.4, such as a current AMDISA print, Form 2848 (if applicable), and Form(s) 872. An RTVUE or BRTVU print will be accepted as the equivalent of a tax return if it provides sufficient detail to determine if there is a discrepancy, or if it gives sufficient line item detail to compute 1040 or 1120 income taxes. For unagreed cases, obtain the original return before the case is sent to the Tax court or Appeals.

  4. All IDRS research discussed in IRM 4.75.28.3.1 must be included in the case file.

4.75.28.7  (07-15-2013)
Case Closing Procedures

  1. If the total discrepancy adjustment to one taxpayer results in an over-assessment, or an agreed unpaid deficiency of $10,000 or more (pursuant to the changes enacted under RRA 3103), process the case within 22 calendar days (16 business days) after the agreement is filed or the over-assessment is determined.

  2. Prepare Form 5599. See Exhibit 4.75.28-2.

    1. Close no-change cases using disposal code (DC) 02 (RCCMS disposal code 107).

    2. Close agreed tax changes using DC 03 (102).

    3. Close unagreed tax changes with protest to Appeals using DC 07 (601).

    4. Close unagreed tax changes without protest using DC 10 (604).

    5. Close referrals to other business operating divisions using DC 13 (501).

  3. For unagreed cases, identify the case subject to "Mandatory Review" and notate: "Unagreed Discrepancy Adjustment" on Form 3198-A. See IRM 4.75.28.6.1.

  4. If interest is being suspended in accordance with IRC 6404(g) as described in IRM 4.75.28.4.1, notify EO Examination Support Section (ESS) that interest is to be suspended:

    1. List the IRC 6404(g) notice date in the "Other Information" section of the file copy of Form 4549-E. Suggested language is as follows: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer)."

    2. In the "Other Instructions" section of Form 3198-A, include the following: "IRC 6404(g) does apply, and notice was provided on ___ (insert the date Form 4549-E was mailed to the taxpayer). Interest should be suspended beginning ____ (insert the date the suspension period begins) through ____ (insert the date the suspension period ends)" . ESS will input Transaction Code 971 with action code 064 and the "notice date" will suspend the interest as required by IRC 6404(g).Form 3198-A is attached to the outside of the case file.

  5. Prepare Forms 5772, EO Workpaper Summary, and Form 5773, Workpaper Continuation Sheet, along with any supplemental workpapers. The workpapers:

    1. Will be limited to the discrepancy adjustment issue(s).

    2. Must include a brief discussion on the applicability of penalties and whether or not penalties are being assessed

    3. Include all IDRS research. Ensure AMDISA (attached to the return), RTVUE, BRTVU, and INOLES prints are current (no more than 30 days old).

  6. Save a copy of Forms 5772, 5773, supplemental workpapers, and all other relevant documents prepared by the agent within RCCMS.

  7. Complete the closing tabs as required within RCCMS.

  8. Group Manager: Contact the manager of Mandatory Review if a case is closed to Review with less than 270 days on the statute of limitations. See communication requirements of group managers for short statute cases in IRM 4.75.16.4.2.

  9. Update the AIMS Status Code on RCCMS:

    1. For unagreed tax changes and cases otherwise subject to mandatory review, update the AIMS status code to '20', "Review" .

    2. For all other cases, update the AIMS status code to '51', "EO Examination Support Section (ESS)" .

  10. For unagreed cases (including cases where the taxpayer failed to reply to the 30-day letter) and cases otherwise subject to mandatory review, close the case to EO Mandatory Review on RCCMS and mail the paper case file to the following address:
    IRS
    EO Mandatory Review
    MC 4920DAL
    1100 Commerce Street
    Dallas, TX 75242

    EO Mandatory Review (or Appeals) will issue a 90-day statutory notice of deficiency for unagreed discrepancy adjustment cases.

  11. For all other cases, close the case to ESS on RCCMS and mail the paper case file to the following address:
    IRS
    EO Examination Support Section
    MC 4980DAL
    1100 Commerce Street
    Dallas, TX 75242

    EO ESS assess the taxes for agreed discrepancy adjustment cases.

4.75.28.8  (07-15-2013)
Simultaneous Closing with Related Cases

  1. Simultaneous closing with a related unagreed EO case (Form 990) is required if discrepancy adjustments are:

    • Set up because of an unagreed EO issue

    • Related to a TEP case

  2. Simultaneous closing with a related agreed EO case (Form 990) is recommended, but not required.

    Note:

    If the Form 990 file is closed separately, include copies of all relevant materials from the related EO file to document the discrepancy adjustment in the discrepancy adjustment file.

  3. In audits involving multiple case folders, ensure all case folders remain together. Attach a Form 3198-A to each case folder. Write on the bottom of the form in large red letters: “Multiple Returns/Case Folders Involved - DO NOT SEPARATE”.

    Note:

    See examples of permissible separation of case file folders at IRM 4.75.16.8.2(7).

Exhibit 4.75.28-1 
Discrepancy Adjustment Letters and Forms

LETTER/FORM TITLE EXHIBIT
F 4549-E Income Tax Discrepancy Adjustments Refer to instructions to Form 4549 at IRM 4.10.8.3.1
F 886-A Explanation of Items n/a
Modified L 3605 Initial 30-Day Letter for Discrepancy Adjustment Exhibit 4.75.28-3
Modified L 3619 30-Day Letter - After Consideration of Additional Information with Revised Proposed Adjustments Exhibit 4.75.28-4
Letter 3604 No Change Letter - After Consideration of Additional Information N/A
Modified L 3603 30-Day Letter - After Consideration of Additional Information with No Change to Original Proposed Adjustments Exhibit 4.75.28-5
Letter 923 (DO) Letter Extending Time to File Protest N/A
Rebuttal Letter Rebuttal Letter Exhibit 4.75.28-6
Notice of Recommended Examination Notice of Recommended Examination Exhibit 4.75.28-7

Exhibit 4.75.28-2 
Completion of Form 5599

Form 5599, TE/GE Examined Closing Record, should be completed for all discrepancy adjustment cases worked. The following table is an illustration of the items which must be completed upon closing of the case.

Item Explanation
P7-18—TIN Insert the EIN or SSN for the Taxpayer.
P21 - 22— MFT Form 1040 = 30; Form 1120 = 02
P24 -29 — Tax Period Insert the tax year being adjusted.
P31-34—Name Control Insert the first four letters of the last name for Form 1040 or the first four letters of the name for Form 1120.
C—Name Insert taxpayer’s name (last name first for Form 1040).
02—Penalty Reason Code No entry unless penalties previously assessed are being abated. See IRM 4.5.2, for applicable codes.
08— Agreement Date Insert the date the signed Form 4549-E is received.
12—Tax Liability Insert Code "300" and the amount of the increase in tax as shown on line 14 of Form 4549-E, OR Insert Code "301" and the amount of decrease in tax that resulted from the discrepancy adjustment.
12—Penalties Insert Code "320" for civil fraud penalty and amount of penalty. Insert Code "160" for the amount of any delinquency penalty to be assessed on late filed returns.

Note:

Accuracy related penalties should be reflected on item 15.

12—Interest Leave blank. Interest will be computed and input by the closing unit.
13—Disposal Code
02 = No Change
03 = Agreed Tax Change
07 = Unagreed - Protest to Appeals
10 = Unagreed - Without Protest
13 = Referral to Other Operating Division
14— Statute Extended to Insert current Statute of Limitations date if the statute has been extended. If the statute has not been extended, leave this item blank.
15— Increase in Adjustment Dollars Insert code "680" for accuracy related penalties being assessed under IRC 6662. Insert Code "806" to reflect tax withheld , but not previously claimed by the Taxpayer or credited to his/her account by the Service Center. This is the amount from line 15 of Form 4549-E (i.e., additional withholding).
15— Decrease in Adjustment Dollars Insert Code "765" if reducing an earned income credit.
28— Examiner’s Time Time can be entered in whole hours and in tenths of hours.
30— Technique Code Applicable codes:
1 = Office Interview Examination
2 = Office Correspondence Examination
4 = Field Examination
31— Examiner’s Grade Enter applicable grade level.
32— Case Grade Enter the grade of the case in the blocks from left to right as two digits
Grade 9 = 09
Grade 11 = 11
Grade 12 = 12
Grade 13 = 13
33— Examiner’s Name Last, first initial
40— Project Code Use same project code as used for Form 990
41a— No Change Issue Codes Enter "99999999" for 1040 with Disposal Code "02." Otherwise, no entry is required.
42— ARDI Code An entry is required only if the disposal code is "03" Leave blank if case is being closed" No Change" or is "Unagreed" .
Applicable Codes:
1— Fully Paid
2— Not Paid
3— Partially Paid
4— Installment Agreement with payment
5— Installment Agreement without payment
50— Employee Group Code Enter your group number
701— Principal Issue Code .See Document 6379. for the appropriate code .On "unagreed" cases leave line 701 blank.

Exhibit 4.75.28-3 
Modified Letter 3605, Initial 30-Day Letter for Discrepancy Adjustment

Internal Revenue Service Department of the Treasury

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
[Insert agent's street address]
[Insert city, state, and zip code]
 
  Date:


[Insert Name]
[Insert Address]
[Insert Address]
[Insert City], [State], [Zipcode]

Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax year(s) ended:
[Insert tax periods]
Person to contact/ID number:
[Insert name, ID number]
Contact numbers:
Telephone: [Insert phone number]
Fax: [Insert fax number]


Manager's name / ID number:
[Insert name, ID number]
Manager's contact number:
[Insert phone number]
Response due date: [Insert date]

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear [insert salutation]:
Why you are receiving this letter
We compared the records of a tax-exempt organization and items reported on your tax return. We are enclosing two copies of Form 4549-E, Income Tax Discrepancy Adjustments, explaining our proposed adjustment to the amount of income tax you owe for the tax year(s) shown above. Line 19 of the form includes a summary of taxes, penalties, and interest due. The enclosed Form 886-A, Explanation of Items, contains a detailed explanation for these adjustments. Also enclosed is a computation of interest and penalties, if applicable, we believe you owe. Interest will continue to accrue until you pay the balance due in full.
As required by law, if you filed a joint return, we sent a separate copy of this proposed notice to your spouse.
What you need to do if you agree
1. Sign and date the enclosed Form 4549-E and return one copy to the contact person at the address listed above by the response due date above. If you filed a joint return, both you and your spouse must sign the consent. Keep the other copy for your files.
2. Enclose payment of the tax, interest, and penalties. If you owe additional tax, it’s to your advantage to pay the full amount. Please make your check or money order payable to the United States Treasury. The enclosed Publication 3498, The Examination Process, provides additional payment information.
If you can’t pay the full amount, please call the contact person at the telephone number shown above to discuss different methods of paying, such as in installments. If you don’t enclose payment, we’ll bill you for any unpaid amounts. Publication 594, The IRS Collection Process, includes information about the collection process. You can access this publication on www.irs.gov/Forms-&-Pubs.
What you need to do if you disagree
1. Request a meeting or telephone conference with the manager listed on the first page of this letter.
2. Send any information you want us to consider.
3. File a protest with the Appeals office of the IRS. The enclosed Publication 3498 explains how to appeal an IRS decision and includes information on your rights as a taxpayer. The enclosed Publication 1, Your Rights as a Taxpayer, explains your rights as a taxpayer.
The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally. Please note that Fast Track Mediation referred to in Publication 3498 generally does not apply after issuance of this letter.
If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if you do not request an Appeals conference, you may file suit in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court after satisfying procedural and jurisdictional requirements.
In the event you filed a joint return for the year(s) listed above, but subsequently divorced or separated, see Publication 504, Divorced or Separated Individuals. The publication is available at www.irs.gov/Forms-&-Pubs.
If we don’t hear from you within 30 days from the date of this letter, we will assume you agree with the proposed adjustment(s). You will then receive a notice of tax deficiency followed by a final bill for the amount owed. At that point, you may still contest the decision in court if you believe you do not owe the additional tax.
Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. TAS helps taxpayers whose problems with the IRS are causing financial difficulties; who have tried but have not been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, call 1-877-777-4778, or for individuals who are deaf, hard of hearing, or have a speech disability, call TTY/TDD 1-800-829-4059. For more information, go to www.irs.gov/advocate.
For additional information
If you have any questions, call the contact person shown on the first page of this letter or you can write to the address at the top of this letter. If you write, provide a telephone number and the most convenient time to call.
Thank you for your cooperation.
  Sincerely,
 
 
  [Insert name]
Director, EO Examinations
Enclosures:
Form 4549-E
Form 886-A
Interest Calculation
Penalty Calculations, if applicable
Publication 3498
Publication 1
 
Modified Letter 3605

Exhibit 4.75.28-4 
Modified Letter 3619, 30-day Letter for Discrepancy Adjustment After Consideration of Additional Information with Revised Proposed Adjustments

Internal Revenue Service Department of the Treasury

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
[Insert agent's street address]
[Insert city, state, and zip code]
 
  Date:

[Insert Name]
[Insert Address]
[Insert Address]
[Insert City], [State], [Zipcode]

Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax year(s) ended:
[Insert tax periods]
Person to contact/ID number:
[Insert name, ID number]
Contact numbers:
Telephone: [Insert phone number]
Fax: [Insert fax number]



Manager's name / ID number:
[Insert name, ID number]
Manager's contact number:
[Insert phone number]
Response due date: [Insert date]
CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear [insert salutation]:
Why you are receiving this letter
We received your reply to our notice of proposed adjustments to your tax return. We used the information you provided to recompute your tax liability. We’re enclosing two copies of the revised Form 4549-E, Income Tax Discrepancy Adjustments, showing our adjustment(s). Line 19 of the form provides a revised summary of taxes, penalties, and interest due.
The enclosed Form 886-A, Explanation of Items, contains a detailed explanation of these adjustments. Also enclosed is a computation of applicable interest and penalties. Interest continues to accrue until you pay the balance due in full.
As required by law, we sent a separate copy of this proposed notice to your spouse if you filed a joint return.
What you need to do if you agree
1. Sign and date the enclosed Form 4549-E. Return one signed copy to the contact person at the address listed above by the response due date. If you filed a joint return, both you and your spouse must sign the consent. Keep the other copy for your files.
2. Enclose payment of the tax, interest, and penalties. If you owe additional tax, it's to your advantage to pay the full amount. Please make your check or money order payable to the United States Treasury. The enclosed Publication 3498, The Examination Process, provides additional payment information.
If you can’t pay the full amount, please call the contact person at the telephone number shown above to discuss different methods of paying, such as in installments. If you don’t enclose payment, we’ll bill you for any unpaid amounts. Publication 594, The IRS Collection Process, includes information about the collection process. You can access this publication at www.irs.gov/Forms-&-Pubs.
What you need to do if you disagree
1. Request a meeting or telephone conference with the manager listed on the first page of this letter.
2. Send any information you want us to consider.
3. File a protest with the Appeals office of the IRS. The enclosed Publication 3498 explains how to appeal an IRS decision and includes information on your rights as a taxpayer. The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally.
If you and Appeals don’t agree on some or all of the issues after your Appeals conference, or if you don’t request an Appeals conference, you may file suit in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court after satisfying procedural and jurisdictional requirements.
In the event you filed a joint return for the year(s) listed above, but subsequently divorced or separated, see Publication 504, Divorced or Separated Individuals. The publication is available at www.irs.gov/Forms-&-Pubs.
If we don’t hear from you within 30 days from the date of this letter, we’ll assume you agree with the proposed adjustment(s). We’ll send you a notice of tax deficiency followed by a final bill for the amount owed. At that point, you may still contest the decision in court if you believe you don’t owe the additional tax.
Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. TAS helps taxpayers whose problems with the IRS are causing financial difficulties; who have tried but have not been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, call 1-877-777-4778, or for individuals who are deaf, hard of hearing, or have a speech disability, call TTY/TDD 1-800-829-4059. For more information, go to www.irs.gov/advocate.
For additional information
If you have any questions, call the contact person shown on the first page of this letter or you can write to the address at the top of this letter. If you write, provide a telephone number and the most convenient time to call.
Thank you for your cooperation.
  Sincerely,
 
 
  [Insert name]
Director, EO Examinations
Enclosures:
Form 4549-E
Form 886-A
Interest Calculation
Penalty Calculations, if applicable
Publication 3498
 
Modified Letter 3619

Exhibit 4.75.28-5 
Modified Letter 3603, 30-Day Letter for Discrepancy Adjustment After Consideration of Additional Information with No Change to Original Proposed Adjustments

Internal Revenue Service Department of the Treasury

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
[Insert agent's street address]
[Insert city, state, and zip code]
 
  Date:
[Insert Name]
[Insert Address]
[Insert Address]
[Insert City], [State], [Zipcode]

Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax year(s) ended:
[Insert tax periods]
Person to contact/ID number:
[Insert name, ID number]
Contact numbers:
Telephone: [Insert phone number]
Fax: [Insert fax number]


Manager's name / ID number:
[Insert name, ID number]
Manager's contact number:
[Insert phone number]
Response due date: [Insert date]
CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear [insert salutation]:
Why you are receiving this letter
We received your reply to our notice of proposed adjustments to your tax return. We considered your information, but we're not changing the adjustment in our original report.
We’re enclosing two copies of the Form 4549-E, Income Tax Discrepancy Adjustments, showing our adjustment(s). Line 19 of the form provides a revised summary of taxes, penalties, and interest due.
The enclosed Form 886-A, Explanation of Items, contains a detailed explanation of these adjustments. Also enclosed is a computation of applicable interest and penalties. Interest continues to accrue until you pay the balance due in full.
As required by law, we sent a separate copy of this proposed notice to your spouse if you filed a joint return.
What you need to do if you agree
1. Sign and date the enclosed Form 4549-E. Return one signed copy to the contact person at the address listed above by the response due date. If you filed a joint return, both you and your spouse must sign the consent. Keep the other copy for your files.
2. Enclose payment of the tax, interest, and penalties. If you owe additional tax, it's to your advantage to pay the full amount. Please make your check or money order payable to the United States Treasury. The enclosed Publication 3498, The Examination Process, provides additional payment information.
If you can’t pay the full amount, please call the contact person at the telephone number shown above to discuss different methods of paying, such as in installments. If you don’t enclose payment, we’ll bill you for any unpaid amounts. Publication 594, The IRS Collection Process, includes information about the collection process. You can access this publication at www.irs.gov/Forms-&-Pubs.
What you need to do if you disagree
1. Request a meeting or telephone conference with the manager listed on the first page of this letter.
2. File a protest with the Appeals office of the IRS. The enclosed Publication 3498, The Examination Process, explains how to appeal an IRS decision and includes information on your rights as a taxpayer. The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally.
If you and Appeals don’t agree on some or all of the issues after your Appeals conference, or if you don’t request an Appeals conference, you may file suit in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court after satisfying procedural and jurisdictional requirements.
In the event you filed a joint return for the year(s) listed above, but subsequently divorced or separated, see Publication 504, Divorced or Separated Individuals. The publication is available at www.irs.gov/Forms-&-Pubs.
If we don’t hear from you within 30 days from the date of this letter, we’ll assume you agree with the proposed adjustment(s). We’ll send you a notice of tax deficiency followed by a final bill for the amount owed. At that point, you may still contest the decision in court if you believe you don’t owe the additional tax.
Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. TAS helps taxpayers whose problems with the IRS are causing financial difficulties; who have tried but have not been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, call 1-877-777-4778, or for individuals who are deaf, hard of hearing, or have a speech disability, call TTY/TDD 1-800-829-4059. For more information, go to www.irs.gov/advocate.
For additional information
If you have any questions, call the contact person shown on the first page of this letter or you can write to the address at the top of this letter. If you write, provide a telephone number and the most convenient time to call.
Thank you for your cooperation.
  Sincerely,
 
 
  [Insert name]
Director, EO Examinations
Enclosures:
Form 4549-E
Form 886-A
Interest Calculation
Penalty Calculations, if applicable
Publication 3498
 
Modified Letter 3603

Exhibit 4.75.28-6 
Sample Rebuttal Letter

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
[Insert agent's street address]
[Insert city, state, and zip code]
 
  Date:


[Insert name of entity]
[Insert street address]
[Insert city, state, and zip code]
Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax year(s) ended:
[Insert tax periods]
Person to contact/ID number:
[Insert name, ID number]
Contact numbers:
Telephone: [Insert phone number]
Fax: [Insert fax number]

Manager's name/ID number:
[Insert name, ID number]
Manager's contact number:
[Insert phone number]
 
Dear [insert salutation]:
We considered your protest and concluded that it does not alter our original determination.
We are enclosing Form 886-A, Explanation of Items, addressing the disputed items, law, and your position.
Your case is subject to a mandatory technical review. After the review, assuming there is sufficient time remaining on the statute of limitations for assessment, we will forward your case to the Office of Appeals for further consideration. An appeals officer will contact you. You do not need to take further action at this time.
In general, if there is a proposed unpaid tax adjustment, any applicable interest continues to accrue on the proposed tax while this case is in Appeals.
Thank you for your cooperation.
  Sincerely,
 
 
  [Insert agent's name]
[insert agent's title]
Enclosure:
Form 886-A

Exhibit 4.75.28-7 
Notice of Recommended Examination

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
1100 Commerce Street, MS 4920 DAL
Dallas, TX 75242–1100
 
            Date:      


[Insert name of entity]
[Insert street address]
[Insert city, state, and zip code]
Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax year(s) ended:
[Insert tax periods]
Person to contact/ID number:
[Insert name, ID number]
Contact numbers:
Telephone: [Insert phone number]
Fax: [Insert fax number]
 
   
Dear [insert salutation]:  
Thank you for your reply to our letter regarding the proposed tax adjustment for the tax year(s) and form indicated above.  
We've considered your reply and are forwarding your case for audit consideration, as our proposal didn't originate from an audit, but was based on information already available to us.  
If your return is selected for audit, we'll notify you. No further action by you is necessary at this time.  
Thank you for your cooperation.  
  Sincerely,  
   
   
  [Insert name]
Director, EO Examinations
 

 

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