4.75.31  Conversion of Returns Upon Revocation of Exemption

Manual Transmittal

February 7, 2012

Purpose

(1) This transmits new text and exhibits for IRM 4.75.31, Conversion of Returns Upon Revocation of Exemption

Material Changes

(1) This section contains procedures for revocations of tax-exempt status; for processing converted income tax returns of revoked tax-exempt organizations, and if necessary, initiating deficiency procedures for Federal income tax purposes.

(2) This IRM is re-introduced after a prior version was obsoleted for additional approvals.

(3) This IRM differs from the IRM 4.73.31 (version 6/20/2010) as follows:

4.75.31.1(2) Restated the introduction subsection to emphasize the need to bring income tax obligations current.
4.75.31.1(3) Added a statement that examiners must keep taxpayer informed of issues that jeopardize tax-exempt status, and the tax consequences of a revocation.
4.75.31.1(4) Updated procedure that all revocation cases result in either the preparation of Form 5666 or enforcement by EO examiner, depending on EO enforcement criteria in IRM 4.75.31.5.
4.75.31.2 Added the "FAST Envelope" and "Final Revocation" among definitions.
4.75.31.2(6) Updated definitions. Distinguished between "Enforcement" in general and "EO Enforcement."
4.75.31.2(8) Updated definitions. The term, "Protective (AIMS) Establishment" and "suspended tax case."
4.75.31.2(10) Updated to reflect a revocation is final within the Service when Mandatory Review or Appeals issues a final revocation letter, including a Final Adverse Determination Letter.
IRM 4.75.31.3 and 4.75.31.4 Reformatted from an "Agreed Revocations" - "Unagreed Revocations" format to a "Revocations Case" - "Converted Return Case" format.
4.75.31.3 Retitled, "Revocation Case"
4.75.31.3(3) and 4.75.31.2 Updated procedure where only Mandatory Review or Appeals can approve a proposed revocation.
4.75.31.3(3) and 4.75.31.3(7) Added references to IRC 6104(c) where State notification requirements must be followed.
4.75.31.3(6) and 4.75.31.6(1) Added a statement that all annual EO information returns (not barred by statute) affected by a potential revocation must be established on AIMS Master-File.
4.75.31.3(9) Updated procedure where automatic revocations under IRC 6033(j) are not subject to these procedures.
4.75.31.3(9) Updated procedure where IRC 501(c)(12) and 501(c)(15) organizations that are "disqualified" from exemption for specific tax years solely by failing their respective computational test are not subject to these procedures.
4.75.31.3.1 Retitled "Proposed Revocations - Agreed"
4.75.31.3.1(6) Updated procedure where EO Examiners are no longer authorized to submit Form 2363-A for revocations.
4.75.31.3.1.1 Created new sub-subsection specifically for instructions to Form 3198-A for revoked organizations, agreed.
4.75.31.3.1.2 Created new sub-subsection specifically for instructions to Form 5666.
4.75.31.3.1.2(1) Updated procedure that Form 5666 package to be processed will be included on the inside-left of the EO information return case file.
4.75.31.3.2 Retitled, "Proposed Revocations - Unagreed" ; and clarified the required conditions before a tax return can be solicited.
4.75.31.3.3 Contents moved to 4.75.31.3.1, 4.75.31.4.1 and 4.75.31.4.4
4.75.31.3.4 Contents moved to 4.75.31.3.1, 4.75.31.4.2 and 4.75.31.4.4
4.75.31.4 Retitled as "Converted Returns Case"
4.75.31.4(2) Securing converted returns alone do not require an AIMS establishment.
4.75.31.4(4) Updated procedure where examiners may establish a converted return case on AIMS Non-Master File, and transfer to Mandatory Review for suspense, pending outcome of the revocation.
4.75.31.4(4) Clarified that suspended tax cases on AIMS NMF are only necessary for certain cases that meet EO enforcement criteria.
4.75.31.4(4) Updated procedure where, if the statute of limitations for assessment bars within 270 days, Mandatory Review will transfer the suspended tax case back to the examination group for group suspense.
4.75.31.4.1 Added new subsection, "Converted Return Secured (Prior to Transfer to Mandatory Review)"
4.75.31.4.1(1) Changed procedure where securing a converted return by itself does not require an AIMS establishment for the converted return. Previously, all secured converted returns required an AIMS establishment, even if EO enforcement criteria were not met.
4.75.31.4.2 Added new subsection, "Substitute for Converted Return (Prior to Transfer to Mandatory Review)"
4.75.31.4.3 Added new subsection, "Converted Return Received After TC 150 (SFCR) Posts." Formerly located in 4.75.31.3.2.
4.75.31.4.4 Added new subsection, "Revocation Sustained"
4.75.31.4.4(2) Updated procedure where all converted returns secured will be forwarded to the FAST by either Mandatory Review or Appeals.
4.75.31.4.4(2) Updated procedure where, if a revocation is final, Form 2363-A will include the Reviewer's approval.
4.75.31.4.4(2) Updated procedure where, If a revocation is final, Mandatory Review will send approved Form 2363-A to the FAST.
4.75.31.4.4(2) Updated procedure where, If a revocation is final, Mandatory Review will transfer the suspended tax case back to the examination group for AIMS Master File establishment and enforcement.
4.75.31.4.4(2) Updated procedure where, If a revocation of an IRC 501(c)(3) organization is final, Mandatory Review will inform the EO Fed/State Liaison.
4.75.31.4.4.1 Added new subsection, "Revocation Sustained - No Converted Return Case"
4.75.31.4.4.1 Updated procedure where, if a revocation is final, Mandatory Review will send Form 5666 to Classification.
4.75.31.4.4.2 Added new subsection, "Revocation Sustained - Converted Return case in Suspense"
4.75.31.4.4.2 Updated procedure where case closure and processing of a tax deficiency case will generally be no different than other tax cases.
4.75.31.4.5 Added new subsection, "Revocation NOT Sustained"
4.75.31.4.5(1) Updated procedure where, if a revocation is not sustained, Mandatory Review will send the suspended tax case back to the examination group for deletion.
4.75.31.4.5(1) Updated procedure where, if a revocation of an IRC 501(c)(3) organization is not sustained, Mandatory Review will inform the EO Fed/State Liaison.
4.75.31.4.5(1) Updated procedure where, if a revocation is not sustained, Mandatory Review or Appeals will send the FAST envelope back to the examination group. The group will send the tax return back to the taxpayer with courtesy letter that it is not required.
4.75.31.4.5(1) Updated procedure where, if a revocation is not sustained, Mandatory Review or Appeals will destroy any documents prepared on the assumption that revocation would be sustained, such as Forms 2363-A, 5666.
4.75.31.5 Retitled from "Enforcement Criteria" to "EO Enforcement Criteria"
4.75.31.5(3) 4.75.31.5(6) Updated procedure to reflect Area Managers have greater discretion in determining whether EO enforcement criteria are met.
4.75.31.5(6)f Inserted new criteria where EO enforcement is not necessary, such as when SB/SE or LB&I have indicated they will work the tax case.
4.75.31.6 Retitled from "Extent of Enforcement" to "Scope of EO Enforcement" to reflect a scope of examination context.
4.75.31.6 Updated to make parts of this subsection restricted information.
4.75.31.7 Retitled from "Determination of Income Tax Liability" to "Determination of Tax Liability" to include other types of taxes for future consideration.
4.75.31.7.1(11) Regarding tax determinations, added information regarding taxpayer's request to change accounting method.
4.75.31.7.2 Created new 4.75.31.7.2, Gift Tax Consequences, originally located in 4.75.31.7.
4.75.31.7.3 Created new 4.75.31.7.3, Effect on Employee Plans
4.75.31.7.4 Created new 4.75.31.74, Effect on Tax Exempt Bonds (TEB)
4.75.31.8 Moved contents to IRM 4.75.31.8, Gift Tax Consequences, to new sub-subsection 4.75.31.7.2, and inserted new contents titled Statute Procedures for Converted returns. This new section addresses coordination between Appeals and EO Examinations for tax cases held in suspense.
4.75.31.8 Appeals Officers will inform EO Examinations regarding statute matters if there is a corresponding income tax case held in suspense by EO Examinations.
4.75.31.10 Retitled, "The Initial Report" for simplicity.
4.75.31.10(3) Deleted Table. Contents moved and restated in table at IRM 4.75.31.4.4.2(9)
4.75.31.11 Retitled, "The Formal Report" for simplicity
4.75.31.11(3) Deleted Table. Contents moved and restated in table at IRM 4.75.31.4.4.2(9).
4.75.31.12 Retitled, "Contents of the FAST Envelope," to reflect the destination of its contents.
4.75.31.12 Updated procedure where delinquent and converted returns previously destined to the Ogden Campus are now destined for the EO Examinations FAST in Ogden, UT.
4.75.31.13 Contents moved and restated in table at IRM 4.75.31.4.4.2(9).
4.75.31.13 Created new IRM 4.75.31.13 to address Form 990-T examinations when a revocation is proposed.
Exhibit 4.75.31-4 Updated procedure where all secured remittances will be forwarded to the FAST group.
Exhibit 4.75.31-5 Deleted and Marked "Reserved"

Effect on Other Documents

IRM 4.75.31 is reinstated.

Audience

Tax Exempt and Government Entities (EO Examiners)

Effective Date

(02-07-2012)

Lois G. Lerner
Director, EO
Tax Exempt & Government Entities (EO)

4.75.31.1  (02-07-2012)
Introduction

  1. This section contains procedures for revocations of tax-exempt status; for processing converted income tax returns of revoked tax-exempt organizations, and if necessary, initiating deficiency procedures for Federal income tax purposes.

  2. An organization whose tax-exempt status is revoked based on an examination should be brought current on its filing obligations and income tax liability not barred for assessment.

  3. The taxpayer must be kept informed of the issues encountered that jeopardize its tax-exempt status, and the income tax consequences resulting from a loss of tax-exempt status.

  4. For every revocation, EO examiners will either:

    • Prepare an information report on Form 5666 for later enforcement by SB/SE or LB&I, or

    • Proceed to enforce the income tax after a revocation is final. For EO enforcement criteria, see IRM 4.75.31.5 #

    For instructions preparing Form 5666, see IRM 4.75.31.3.1.2.

  5. The authority for revenue agents to enforce income taxes is rooted in Treasury Regulations §601.105(b) regarding the general authority of revenue agents, and IRM 4.75.20.6(3) (7/2003). This authority is consistent with the authority granted grade 11 and above exempt organizations specialists to issue determination letters pertaining to the imposition of taxes. See section 2.01(d) of TE/GE Delegation Order (D.O.) 18 (Rev. 2), as authorized by Servicewide D.O. 7-2 (formerly D.O. 113 (Rev. 14)).

4.75.31.2  (02-07-2012)
Terminology

  1. Affected Tax Years - All tax years affected by a revocation beginning with the first tax year that includes the effective date of revocation, to the most current completed tax year.

  2. Conversion – The process of converting an annual EO information return to an income tax return (Form 1120 series or Form 1041).

  3. Converted Return – The income tax return converted from an EO information return. A "converted return" includes substitute for converted returns. Thus, for purposes of these procedures, a tax return is a "converted return" even if no EO information return was filed. For purposes of these procedures, "tax returns" will be understood to be "converted returns" throughout this IRM section unless otherwise stated.

    Note:

    Form 990-N, e-Postcard, is not a "return" and does NOT start the statutory period of limitations for assessment.

  4. Substitute for Converted Return (SFCR) – a substitute for return prepared by the examiner after determining an organization should be revoked, and enforcement of income taxes will be necessary. The actual SFCR consists of Form 13496, IRC Section 6020(b) Certification, and the RAR (Form 4621, Form 4549, Form 886-A and attachments) prepared after a final revocation has been sustained. See IRM 4.75.31.4.2.

  5. EO Information Return – Denotes annual EO information returns required under IRC 6033 , including Form 990 series information returns filed by exempt organizations. Form 990-PF and Form 990-BL are considered "EO information returns" even if a Chapter 42 excise tax is reported on these returns.

  6. Enforcement – Deficiency procedures, as required by Subchapter B of chapter 63 (including IRC 6211 to IRC 6216 ) of the Internal Revenue Code. With certain exceptions, deficiency procedures are required before an examination assessment can be made. Deficiency procedures are exemplified by a 30-day letter process, appeals process if applicable, and a 90-day letter process. For purposes of these procedures, "EO Enforcement" denotes enforcement of income taxes by EO examiners on AIMS Master File generally after a proposed revocation has been sustained by Mandatory Review or Appeals.

  7. Open Tax Year - a tax year not barred by statute of limitations for assessment.

  8. Protective (AIMS) Establishment or Suspended Tax Case – AIMS Non-Master File (NMF) establishment of an income tax return pending the outcome of a proposed revocation in Mandatory Review or Appeals. See Exhibit 4.75.31-11. All protective establishments are generally suspended in Mandatory Review.

  9. FAST Envelope – The envelope containing documents (including a live converted return) to be processed with the FAST group once a proposed revocation is sustained by Mandatory Review or Appeals. See IRM 4.75.31.12.

  10. Final Revocation – A revocation sustained by Mandatory Review or Appeals after issuance of a final revocation letter. Final revocations can be challenged in the Courts. For more information, see IRM 4.75.31.3 (3).

  11. RAR – The examiner's report recommending a change in tax, status or claim disallowance. Also known as the "Revenue Agent’s Report" or "Report of Examination" . Page one of every RAR is either Form 4621 or Form 4621-A, except that employment tax changes and gaming excise tax changes use Form 4666 and Form 5385/Form 5384 respectively. Examiners may rescind an RAR and issue a corrected RAR. For a listing of the component documents of an RAR, see IRM 4.75.31.10 (2) for initial reports and IRM 4.75.31.11 (2) for formal reports.

  12. Initial Report or Initial Proposal – Examiner's preliminary report consisting of an Information Document Request (or similar transmittal) and a summary RAR, which solicits an agreement to change in tax or status (or claim disallowance). The proposed change will either be agreed or unagreed based on a reply (or non-reply) from the taxpayer. For more information on an initial report, see IRM 4.75.31.10.

  13. Formal Report – Examiner's formal report consisting of a 30-day letter with RAR, issued for unagreed cases (and allIRC 501(c)(3) adverse determination cases), or consisting of a final agreed change letter with RAR for agreed cases. For more definition and contents of a formal report, see IRM 4.75.31.11.

  14. 30-Day Letter – The official letter that notifies the taxpayer of a proposed change in tax, status or claim disallowance, allowing the taxpayer an opportunity for administrative review in Appeals. The 30-day letter serves as a transmittal for the RAR and is required for all unagreed changes and allIRC 501(c)(3) adverse determination cases. See Treas. Regs. §601.201(n)(6) for status changes; and IRC 7522(b)(3), IRC 7430(c)(2)(B) , IRC 6603(d)(3)(B) and Treas. Regs. §601.105(d) for tax changes. The 30-day letter for tax purposes is also referred to as the "preliminary (30-day) letter." See IRM 4.10.8.11.

4.75.31.3  (02-07-2012)
Revocation Case

  1. EO Examiners may propose a revocation of a ruling or determination letter granting an organization's tax-exempt status under IRC 501(c) or 501(d) if the organization no longer meets the statutory requirements for tax-exemption. See Section 12 of Rev. Proc. 2011-9; 2011-1 C.B. 283 (updated annually).

  2. Group managers must approve all proposals to revoke a tax exempt status. All proposed revocations of tax-exempt status are also subject to Mandatory Review.

  3. A revocation is final (sustained) only after Mandatory Review or Appeals issues the final revocation letter, or in the case of a non-501(c)(3) organization, the taxpayer fails to submit a protest to the 30-day letter, and Mandatory Review concurs. A final revocation permits the Service to do the following:

    • Remove the organization from the Cumulative List (electronic Pub 78)

    • Publish notice of the revocation of IRC 501(c)(3) and IRC 170(c) status in the Internal Revenue Bulletin

    • Inform eligible States as required by IRC 6104(c) for revocations of IRC 501(c)(3) organizations

    • Submit a redacted copy of the final revocation to the IRS Electronic Reading Room required under IRC 6110 for "written determinations." See Tax Analyst v. Internal Revenue Service, 350 F.3d 100; 358 U.S. App. D.C. 385 (2003)

      Note:

      Unlike rulings and determination letters defined in Rev. Procs. 2011-4 and 2011-9, a revocation letter discloses the conduct of an examination - which is protected "return information." See Rev. Proc. 2011-4, 2011-1 C.B. 123 (updated annually) and Rev. Proc. 2011-9; 2011-1 C.B. 283 (updated annually). Although protected, IRC 6104(c) requires the Service to inform certain States of an IRC 501(c)(3) revocation through proper channels, including a decision not to revoke if a proposal was previously issued. See IRM 7.28.2.

      Note:

      A final revocation may be contested in Federal court, such as by the taxpayer filing a petition in Tax Court after receiving a final adverse determination letter (90-day letter) from Mandatory Review or Appeals.

  4. For every proposed revocation, an examiner's report must be issued to the taxpayer. See IRM 4.75.31.10 (2) for contents of an initial revocation report. See IRM 4.75.31.11 (2) for the contents of a formal revocation report.

  5. Generally before proposing a revocation, estimate the income tax liability for all affected tax years. See IRM 4.75.31.7 and IRM 4.75.31.6 for determinations of income tax liability and the scope of the determination. Keep the taxpayer informed on any issues encountered that jeopardize tax-exempt status, and the tax effect if the exempt status is lost.

  6. If a proposed revocation is imminent, EO Examiners will establish the MFT accounts for EO information returns (Forms 990, 990-EZ, 990-PF, etc) for all subsequent tax years not barred for assessment on AIMS Master File.

  7. For every proposed revocation of an IRC 501(c)(3) organization, send a copy of the formal report package to the EO Fed/State Liaison, 1616 Capital Ave., Stop 4730, Omaha, NE 68102. Refer to the updated list of States in interim guidance memoranda or in IRM 7.28.2. The package should include the following:

    • 30-day letter

    • Form 6018, Consent to Proposed Adverse Action

    • Revenue Agent Report (RAR)

    • Form 990 for all tax periods under examination

    Notate in the case chronology, "§6104(c) package for [state(s)] was sent to the EO Fed/State Liaison on dd/mm/20XX)."

  8. For every proposed revocation of an IRC 501(c)(3) organization that is unagreed, prepare an administrative record. See IRM 4.75.32.

  9. For purposes of these procedures, a "revocation" does not include:

    1. Disqualification of a IRC 501(c)(12) or 501(c)(15) organization for failing their respective 85 percent member income test or gross receipts tests for a given tax year. These organizations can file Form 1120 or Form 1120-L (for IRC 501(c)(12) organizations), or Form 1120-PC (for IRC 501(c)(15) organizations) without revoking their tax-exempt status or changing their annual filing requirement.

    2. Automatic revocations generated by Ogden Campus under IRC 6033(j). An organization is auto-revoked when Status 97 posts in the EO BMF for failing to file EO information returns (or Form 990-N e-Postcards) for three consecutive tax years, starting with tax years beginning after 12/31/2006.

    Note:

    Income tax returns (Forms 1120 or 1041) required to be filed by organizations in subparagraphs (a) and (b) herein will not be controlled on AIMS by EO Examinations.

    Note:

    If the examiner believes that an IRC 501(c)(12) or IRC 501(c)(15) organization should be "revoked" , he/she must consult with EO Technical, and if necessary, initiate a request for a Technical Advice Memorandum. Refer to IRM 4.75.36 for Technical Advice procedures.

  10. Refer to IRM 4.75.15, Closing Letters and Reports for Examination, regarding closing letters and reports in general.

  11. Refer to IRM 4.75.16, Exempt Organizations Examination Case Closing Procedures, for closing procedures in general.

4.75.31.3.1  (02-07-2012)
Proposed Revocations - Agreed

  1. For every proposed revocation, a report must be issued to the taxpayer that solicits a response. See IRM 4.75.31.10 (2) for the contents of an initial revocation report. See IRM 4.75.31.11 (2) for the contents of a formal revocation report.

  2. A proposed revocation is agreed only when the taxpayer signs Form 6018 or Form 6018-A in response to a proposed revocation of tax-exempt status.

    Note:

    Filing a tax return or paying the tax does NOT constitute an agreed revocation.

  3. Stamp or write received date on Form 6018 or Form 6018-A.

  4. Solicit tax returns for all affected and open tax years. Do NOT submit these returns for processing.

    1. If a tax return is secured, mark the return and place the return in the FAST envelope in accordance with the procedures in IRM 4.75.31.4.1

    2. Generally, do not allow more than 30 days for the taxpayer to file tax returns. Examiners may apply shorter time frames due to statute and resource considerations

    Note:

    Examiners will not establish secured converted returns on AIMS, unless the return is substantially incorrect and EO enforcement criteria are met. See IRM 4.75.31.5 for EO enforcement criteria.

  5. Prepare the closing letter as follows for agreed revocations:

    If the taxpayer is ... and the agreement is based on the issuance of... then the examiner will...
    a 501(c)(3) Organization an initial proposal (IRM 4.75.31.10)
    (1). Reissue the report using a modified 30-day Letter 3618 at Exhibit 4.75.31-7.

    Note:

    This delay is a factor when considering bypassing the initial report process for an IRC 501(c)(3) organization.



    a 501(c)(3) Organization a formal proposal (IRM 4.75.31.11)

    (1). No additional closing letter needed by the exam group.
    other than a 501(c)(3) Organization any proposal (initial or formal)
    (1). Prepare (but do not issue) the Agreed Final Revocation Letter. Exhibit 4.75.31-9.

  6. Prepare (but do not process) Form 2363-A, Request for IDRS Input for BMF-EO Entity Change, to reflect a revocation and change in filing requirement. Place Form 2363-A in the FAST envelope.

    Note:

    See IRM 4.75.31.12 for the contents of the FAST envelope. See samples of Form 2363-A at Exhibit 4.75.31-1, Exhibit 4.75.31-2 and Exhibit 4.75.31-3.

  7. For IRC 501(c)(3) organizations only, send the proposed revocation report to EO Fed/State Liaison. See IRM 4.75.31.3 (7).

  8. Prepare closing documents for the EO information return case file.

    • Prepare Form 5599, DC 09 (211), Agreed Revocation

    • Prepare Form 3198-A, TE/GE Special Handling Notice. See instructions in IRM 4.75.31.3.1.1

    • Prepare Form 5666, TE/GE Referral Information Report, only if TE/GE EO will not enforce income taxes. See instructions at IRM 4.75.31.3.1.2

    • Prepare other closing documents as necessary. See IRM 4.75.16

  9. Close all revocation cases to Mandatory Review.

4.75.31.3.1.1  (02-07-2012)
Forms 3198-A

  1. Form 3198-A. Indicate the following general notations on Form 3198-A for the EO information return case file before transferring a revocation case to Mandatory Review:

    • Indicate, "PROCESS FORM 2363-A ONLY IF REVOCATION IS SUSTAINED"

    • If a revocation is agreed, check Mandatory Review Box - Enter "AGREED REVOCATION." If the revocation is unagreed, enter "UNAGREED REVOCATION"

    • For IRC 501(c)(3) organizations in specified States, "NOTIFICATION OF STATE OFFICIALS UNDER IRC 6104(c) REQUIRED"

    • If a tax return was secured, indicate, "CONVERTED FORM [1120 or 1041] RETURN SECURED – PROCESS ONLY IF REVOCATION IS SUSTAINED" and

    • If Forms 990-T were previously filed for affected tax years, add the following for ESS, “REVERSE TAX ASSESSMENTS ON 990-T TAX MODULE AND TRANSFER PAYMENTS FOR UBIT TAXES TO CONVERTED RETURN MODULE IF REVOCATION IS SUSTAINED.”

  2. If a converted return income tax case is established on AIMS NMF pending the outcome of the revocation in Mandatory Review or Appeals...

    • indicate BOLDLY, "CONVERTED RETURN CASE IN SUSPENSE PENDING OUTCOME OF REVOCATION - NOTIFY EO EXAMS OF TP's INTENT NOT TO EXTEND STATUTE." This is necessary to remind Appeals to alert EO Exams on statute matters affecting tax cases held in suspense.

      Caution:

      Any communication between Appeals and EO Examinations must not violate ex-parte rules.

  3. If a converted income tax return is NOT established on AIMS NMF, notate the following on Form 3198-A:

    • Indicate a brief reason for not enforcing the tax year; for example, “2006 TAX YEAR NOT ENFORCED BY EO FOR INCOME TAX DUE TO NOL.”

    • Indicate, "SIGN AND DATE FORM 5666 AND ROUTE TO CLASSIFICATION AFTER REVOCATION IS SUSTAINED"

4.75.31.3.1.2  (02-07-2012)
Form 5666

  1. If a tax case does NOT meet EO enforcement criteria in IRM 4.75.31.5 #, prepare Form 5666, TE/GE Referral Information Report, for the EO information return case file.

    Exception:

    Form 5666 is not required for a proposed revocation of a private foundation.

  2. Form 5666 will recommend examination for either the first year in which the organization is a taxable entity or for an appropriate subsequent year. Information submitted with the Form 5666 will include the following:

    • A statement that the organization’s exemption has been revoked

    • The effective date of the revocation

    • The date the organization was incorporated or created

    • A statement that, as a taxable entity, the organization should be reporting any income, employment and excise taxes for which it may be liable

    • A list of the taxable returns secured by the examiner, including the form number, MFT and the tax period and a statement that the original returns are being processed by EO Examinations

    • A statement that contributions to the organization are no longer deductible as charitable contributions, if applicable

    • The effective date after which contributions are no longer deductible as charitable contributions, if known

    • If discrepancy adjustments have not been proposed, list the names and social security numbers or employer identification numbers of contributors who will not be able to deduct contributions made before the revocation is published in the Internal Revenue Bulletin

      Note:

      A contributor cannot deduct contributions prior to the date an announcement is published in the Internal Revenue Bulletin, if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for, or was aware of, the activities or deficiencies on the part of the organization which gave rise to the revocation. See Treas. Reg. §1.509(a)-7(a) and Rev. Proc. 2011-33, 2011-1 C.B. 887, which supersedes and modifies Rev. Proc. 82-39, 1982-2 C.B. 759 and Rev. Proc. 2009-32, 2009-28 I.R.B. 142.

  3. Attach the following documents to Form 5666:

    • A copy of the report of examination in agreed cases for other thanIRC 501(c)(3) organizations.

      Note:

      In agreed cases, the reviewer will attach a copy of the letter transmitting the report to the taxpayer. In unagreed cases (and allIRC 7428 cases), the reviewer or Appeals officer will attach the final revocation letter or conference report after a final determination is made.

    • A copy of the exempt organization returns being converted, e.g., Form 990

    • A copy of any taxable returns which have been obtained

    • If no taxable return has been obtained because the organization did not submit appropriate returns as requested by the EO examiner, or because the conversion of the Form 990 to Form 1120 or Form 1041 is complex and requires the expertise of income tax examiners, a statement to that effect and a recommendation that the return be secured by LB&I or SBSE

    • Any pertinent financial or other information or documents

  4. Form 5666 will remain in the EO information return case file until a final determination is made by Mandatory Review or Appeals. If the proposed revocation is sustained, the reviewer or Appeals officer will sign and date Form 5666 and route it to EO Classification. Appeals may route Form 5666 through Mandatory Review. If the proposed revocation is not sustained, the reviewer (non-protest cases) or Appeals Office (protested cases) will destroy Form 5666 and its attachments.

  5. Place Form 5666 on the inside-left of the EO information return case file, ready for processing in the event the proposed revocation is sustained.

4.75.31.3.2  (02-07-2012)
Proposed Revocations - Unagreed

  1. Do NOT solicit tax returns for unagreed revocations.

    Note:

    Tax returns may only be solicited if the unagreed proposed revocation becomes final, such as by the text of a final revocation letter issued to the taxpayer, and again by the EO examiner if EO enforcement is required and the NMF suspended tax case is sent back to the examination group.

  2. If a taxpayer happens to file a converted return on an unagreed revocation, do not submit the return to the FAST. Mark and prepare the return for the FAST envelope in accordance with IRM 4.75.31.4.1.

  3. There are two forms of disagreement: with protest, and without protest. Disagreements without protest include defaults (taxpayer fails to reply). Prepare the closing letter as follows based on a reply (or non-reply) to a formal report :

    If the taxpayer is ... and if the taxpayer... then the examiner will...
    a 501(c)(3) Organization Defaults on formal report

    (1). Close revocation case to Mandatory Review.
    (2). Mandatory Review will issue final 90-day letter.
    other than a 501(c)(3) Organization Defaults on formal report



    (1). Close revocation case to Mandatory Review.
    (2). The 30-day letter becomes final if Mandatory Review concurs.
    a 501(c)(3) Organization Provides new or additional information that warrants changing the report (1). Either,
    • Rescind the report and continue the examination,
    • Rescind the report and conclude the examination on the basis of another finding, or
    • Incorporate new information in a corrected formal report using new modified 30-day Letter 3618 at Exhibit 4.75.31-7.
    other than a 501(c)(3) Organization. Provides new or additional information that warrants changing the report (1). Either,
    • Rescind the report and continue the examination,
    • Rescind the report and conclude the examination on the basis of another finding, or
    • Incorporate the new information in a corrected formal report using new modified 30-day Letter 3610 at Exhibit 4.75.31-8.

    a 501(c)(3) Organization Disagrees and provides NO new or additional information that changes the report
    (1). Issue rebuttal letter to the taxpayer.
    (2). Close revocation case to Mandatory Review.
    (3). If revocation was not protested, Mandatory Review will issue a final adverse determination letter (90-day letter) if it concurs with revocation. If revocation was protested, the revocation case will go to Appeals.
    other than a 501(c)(3) Organization Disagrees and provides NO new or additional information that changes the report (1). Issue rebuttal letter to the taxpayer.
    (2). Close revocation case to Mandatory Review.
    (3). If revocation was not protested, the 30-day letter becomes final if Mandatory Review concurs with revocation. If revocation was protested, the revocation case will go to Appeals.

  4. Prepare (but do not process) Form 2363-A, Request for IDRS Input for BMF-EO Entity Change, to reflect a revocation and change in filing requirement. Place Form 2363-A in the FAST envelope.

    Note:

    For contents of the FAST envelope, see IRM 4.75.31.12. See samples of Form 2363-A at Exhibit 4.75.31-1, Exhibit 4.75.31-2 and Exhibit 4.75.31-3.

  5. For IRC 501(c)(3) organizations only, send the proposed revocation report to EO Fed/State Liaison. See IRM 4.75.31.3 (7).

  6. For IRC 501(c)(3) organizations only, prepare the administrative record (unagreed cases only). See IRM 4.75.32.

  7. Prepare closing documents for the EO information return case file.

    • Prepare Form 5599, DC 07 (601) or DC 55 (605)

    • Prepare Form 3198-A

    • Prepare other closing documents as necessary. See IRM 4.75.16.

  8. In addition to the general notations required on Form 3198-A in IRM 4.75.31.3.1.1, indicate the following notations specifically for unagreed revocations on Form 3198-A:

    • If a revocation is unagreed, check the Mandatory Review box - Enter UNAGREED REVOCATION

    • If a protest was filed, indicate “30-DAY LETTER HAS BEEN ISSUED - PROTEST FILED FOR APPEALS CONSIDERATION”

  9. Close EO information return case to Mandatory Review.

4.75.31.4  (02-07-2012)
Converted Returns Case

  1. While EO examiners generally solicit converted tax returns for only agreed revocations, the taxpayer may nevertheless file an unsolicited tax return for an unagreed revocation.

    Note:

    Taxpayers may file tax returns for unagreed revocations in order to seek a hearing with the U.S. District Court or Claims Court. Generally the taxpayer would have to pay the tax and file a claim for refund.

    Caution:

    The statute of limitations for assessment for a converted return is based on the filing of an annual EO information return.

  2. Generally there is no need to establish a converted return on AIMS, even if a converted return is secured.

  3. If a converted return is secured, a converted return package must be prepared and ready for submission to the FAST after the revocation is final. The converted return package will be included in the EO information return (Form 990) case file.

  4. In addition, if EO enforcement criteria in IRM 4.75.31.5 are met, the examination group must create a separate converted return case file, and establish an AIMS Non-Master File (NMF) record for the converted return. The converted return case file will then be transferred to Mandatory Review for suspense at the same time the EO information return is closed to Mandatory Review.

  5. After the revocation issue is decided Mandatory Review or Appeals will submit the converted return package to the FAST for processing (revocation upheld) or send back to the group (revocation not upheld). If there is also a suspended converted return case, Mandatory Review will send the suspended case back to the examination group for either (1) EO enforcement and AIMS Master-File establishment (revocation upheld), or (2) AIMS deletion (revocation not upheld).

    Note:

    Mandatory Review will send the tax case back to the examination group for group suspense (AIMS Status 39) when the statute date for assessment expires within 270 days.

  6. For disposition of the converted return package and the suspended tax case after a proposed revocation is sustained, refer to IRM 4.75.31.4.4. If the revocation is not sustained, refer to IRM 4.75.31.4.5.

4.75.31.4.1  (02-07-2012)
Converted Return Secured (Prior to Transfer to Mandatory Review)

  1. If a tax return is secured, examiners will NOT submit it for processing. Generally, there is no need to establish the tax return on AIMS.

  2. If the taxpayer files a substantially incorrect tax return with the examiner, the examiner can allow the taxpayer an opportunity to re-submit a complete and correct return.

    Note:

    If the taxpayer insists on filing a substantially incorrect return, the examiner may secure the return, potentially subject to future adjustment after a revocation is final.

  3. If the secured tax return is substantially incorrect and EO enforcement criteria in IRM 4.75.31.5 are met, initiate a protective establishment on AIMS Non-Master File (NMF). Group managers must approve all AIMS establishments. See Exhibit 4.75.31-11.

  4. If an AIMS NMF record is established, create a separate case file for the tax return with Forms 5464, 5772-EO, 5773 and any supporting workpapers. Follow case file assembly procedures in IRM 4.75.16.17.

    Reminder:

    Include a workpaper reflecting the estimated income tax for all the affected tax years, as well as a pro-forma report on Form 4549. The tax must be computed correctly based on information available from the examination of the EO information return and well grounded in tax law. Be sure copies of Form 990 returns are included in the workpapers and marked "COPY DO NOT PROCESS" in order to support the amounts. If there are different amounts from those reported on Form 990, they should be supported by documentation. This will allow for the issuance of a statutory notice of deficiency (90-day letter) if it becomes necessary at any point during the revocation process, such as when the taxpayer refuses to extend the statute of limitations for assessment on an approaching statute date.

  5. For all secured converted returns, properly annotate the original tax return as follows:

    1. Stamp or (write in) the received date on the tax return along the dotted lines. Avoid stamping over numbers.

    2. Annotate on the top margin of a secured tax return in red ink, “FORM 990 CONVERTED TO FORM 1120 [or 1041] BY TE/GE, Sent to FAST on ________.” Do not fill in the blank.

    Note:

    There will be no need for examiners to annotate a TC 599 cc 96 on the bottom margin of the return. Note that after the revocation is sustained and the tax returns are submitted to the FAST for processing, the FAST will input TC 599 in IDRS with the appropriate closing code, and edit it on the return. The FAST will also edit the appropriate Computer Condition Code (CCC) at the appropriate location on the tax return. See IRM 4.75.22 for valid CCC codes.

  6. If a converted return is secured after a TC 150 posted (such as by a SFCR push code 036 establishment), refer to IRM 4.75.31.4.3, for procedures where the secured tax return will instead serve as an examined tax adjustment (TC 300).

  7. If a payment was received, process the payment within 24 hours. See Exhibit 4.75.31-4 for immediately processing remittances. Use TC Code 610, Remittance with Return.

  8. Prepare a "converted return package" ready for submission to the FAST. Include the following, front to back:

    1. Form 13133, Expedite Processing Cycle. IRM 4.75.22 provides a list of valid computer condition codes to indicate the particular penalty to be waived.

    2. Form 3198-A, TE/GE Special Handling Notice, one for each tax return.

    3. Copy of the check or payment document, if applicable. See Exhibit 4.75.31-4 for remittance procedures.

    4. Copy ofForm 3244-A, Payment Posting Voucher – Examination, if applicable.

    5. The taxpayer’s written penalty relief request, if applicable.

      Note:

      If the penalty is waived under oral statement authority, attach Form 886-A, explaining the taxpayer's cause, and the examiner’s penalty determination.

    6. The original converted return. See IRM 4.75.16.18.3.

      Note:

      Attach INOLES/BMFOLO and TXMODA/BMFOLT prints to the back of the return. IDRS printouts must not be more than 30 days old.

  9. If the converted return was established on AIMS NMF, make a copy of the converted return package. The copy will serve as the working return. Annotate "COPY OF" on the top margin of the tax return copy in red ink, immediately before the examiner's annotation. The reviewer or Appeals officer will fill-in the date the original converted return package was sent to the FAST.

    1. Scan the return (if a scanner is available) or photocopy for the file.

    2. If scanned, upload the return to RCCMS.

  10. Place the original converted return package in the FAST envelope. Place the FAST envelope in the EO information return case file between the working return and the first page of the workpapers (Form 5772).

  11. If the converted return was established on AIMS NMF, prepare (but do not issue) a closing letter as follows:

    If then
    the secured converted return is accepted as filed (1). Prepare (but do not issue) Modified Letter 2778, if no delinquency penalties are recommended. See Exhibit 4.75.31-12.

    or

    (2). Prepare (but do not issue) Modified Letter 2769, if delinquency penalties are recommended. See Exhibit 4.75.31-15.
    the secured converted return needs adjustment, and EO enforcement criteria are met
    (1). Prepare (but do not issue) Modified Letter 950 and income tax RAR, Exhibit 4.75.31-10.

    no converted return is filed, and EO enforcement criteria are met (1). Prepare (but do not issue) Modified Letter 950 and income tax RAR, Exhibit 4.75.31-10.
    (2). Refer to IRM 4.75.31.4.2 below for substitute for returns.

  12. Indicate the following notations on Form 3198-A for each secured converted return:

    1. For all returns, indicate, “THE ASSESSMENT STATUTE EXPIRATION DATE (ASED) STARTS WITH THE FILING OF FORM 990 ON [date 990 was filed] AND EXPIRES [statute expiration date of Form 990]”.

    2. For all secured returns, indicate, "CONVERTED FORM [1120 or 1041] RETURN SECURED BY TE/GE – HOLD PENDING OUTCOME OF REVOCATION."

    3. For all secured returns, indicate, “ASSESS THE FAILURE TO FILE AND/OR FAILURE TO PAY PENALTY” or “DO NOT ASSESS THE FAILURE TO FILE AND/OR FAILURE TO PAY PENALTY – REASONABLE CAUSE ESTABLISHED.”

    4. If there is a POA, check box for “SEND ALL COMMUNICATIONS PER POA.”

  13. If the converted return was established on AIMS NMF, indicate the following notations on Form 3198-A for the tax case file before transferring the case to Mandatory Review:

    1. For all tax cases, indicate, "PLACE CONVERTED RETURN CASE IN MANDATORY REVIEW SUSPENSE (STATUS 38) PENDING OUTCOME OF REVOCATION." Make the same notation in the comment field in RCCMS.

    2. In all tax cases, indicate, “THE ASSESSMENT STATUTE EXPIRATION DATE (ASED) STARTS WITH THE FILING OF FORM 990 ON [date 990 was filed] AND EXPIRES [statute expiration date of Form 990]”.

    3. If there is a POA, check box for “SEND ALL COMMUNICATIONS PER POA”.

  14. If the converted return was established on AIMS NMF, transfer the tax case to Mandatory Review (AIMS Status 20) at the same time the EO information return is closed to Mandatory Review.

    Note:

    Mandatory Review will update the converted return case to AIMS to status 38, Suspense All Other, until the revocation issue is resolved. If the statute date for any particular tax return bars in less than 270 days, do not transfer the tax case to Mandatory Review - instead, hold the case in examination group suspense AIMS Status 39.

  15. Once the revocation issue is resolved, Mandatory Review will send the tax case file back to the group for either (1) EO enforcement (with AIMS Master-File establishment), or (2) deletion, depending on the outcome of the revocation. For EO enforcement instructions after a revocation is sustained, see IRM 4.75.31.4.4. For deletion instructions after a revocation is NOT sustained, see IRM 4.75.31.4.5.

4.75.31.4.2  (02-07-2012)
Substitute for Converted Return (Prior to Transfer to Mandatory Review)

  1. If the organization refuses or is unable to file a converted return, a Form 5666 information report will generally be sufficient for enforcement purposes. However, if EO enforcement criteria are met, create a case file for a substitute for converted return (SFCR) with Forms 5464, 5772-EO, 5773 and any supporting workpapers. Follow case file assembly procedures in IRM 4.75.16.17.

    Reminder:

    Include a workpaper reflecting the estimated income tax for all the affected tax years, as well as a pro-forma report on Form 4549. The tax must be computed correctly based on the information available from the examination of the EO information return and well grounded in tax law. Be sure copies of Forms 990 are included in the workpapers and marked "COPY DO NOT PROCESS" in order to support the amounts. If there are different amounts from those reported on Forms 990, they should be supported by documentation. This will allow for the issuance of a statutory notice of deficiency (90-day letter) if it becomes necessary at any point during the revocation process, such as when the taxpayer refuses to extend the statute of limitations for assessment on an approaching statute date.

  2. The actual SFCR consists of Form 13496, IRC Section 6020(b) Certification, and the RAR. See IRM 4.75.31.11 (2) for the components to the RAR, which should be issued to the taxpayer only after a revocation is final.

  3. Initiate a protective AIMS establishment on AIMS Non-Master File (NMF). Group managers must approve all AIMS establishments. See Exhibit 4.75.31-11.

  4. If a payment was received, process the payment within 24 hours. See Exhibit 4.75.31-4. Use TC Code 640, Advance Payment on Deficiency.

  5. Prepare a dummy return (blank page 1 of Form 1120 or 1041 return) for the SFCR case file as follows:

    1. Annotate on the top margin of the dummy return in red ink, “SUBSTITUTE FOR RETURN PREPARED BY TE/GE on (date prepared)”.

    2. Complete the heading of the return with the taxpayer's name, address, tax period, and TIN.

    3. Do NOT include tax data on the dummy return.

  6. Prepare the "dummy return assembly" in the following order, front to back:

    1. Form 3198-A, TE/GE Special Handling Notice, one for each SFCR dummy return.

    2. Copy of the check or payment document, if applicable. See Exhibit 4.75.31-4 for remittance procedures.

    3. Copy ofForm 3244-A, Payment Posting Voucher – Examination, if applicable.

    4. Taxpayer’s written penalty relief request, if applicable.

      Note:

      If the penalty is waived under oral statement authority, attach Form 886-A, Explanation of Items, explaining the taxpayer's cause, and the examiner’s penalty determination.

    5. Dummy return prepared in paragraph (5) herein.

      Note:

      INOLES/BMFOLO and TXMODA/BMFOLT prints to the back of the return. The IDRS printouts must not be more than 30 days old.

  7. Use Form 3198-A as a cover sheet for each dummy return. In addition to the general notations listed for all returns in IRM 4.75.31.4.1 (12)a and d, indicate the following:

    1. “SUBSTITUTE FOR RETURN PREPARED BY TE/GE – ASSESS TAX PER FORM 4621 – PENDING OUTCOME OF REVOCATION.

  8. The original dummy return prepared by the examiner will serve as the working return for the tax case file.

  9. Transfer the tax case to Mandatory Review (AIMS Status 20) at the same time the EO information return is closed to Mandatory Review..

    Note:

    Mandatory Review will update the converted return case to AIMS status 38, Suspense All Other, until the revocation issue is resolved. If the statute date for any particular tax return bars in less than 270 days, do not transfer the case to Mandatory Review - instead, hold the case in examination group suspense AIMS Status 39.

  10. Once the revocation issue is resolved, Mandatory Review will send the tax case file back to the group for either (1) EO enforcement (and AIMS Master-File establishment), or (2) deletion, depending on the outcome of the revocation. For enforcement instructions after a revocation is sustained, see IRM 4.75.31.4.4. For deletion instructions after a revocation is NOT sustained, see IRM 4.75.31.4.5.

4.75.31.4.3  (02-07-2012)
Converted Return Received After TC 150 (SFCR) Posts

  1. If a tax return is received after a TC 150 has posted as a substitute for return, and if the secured tax return is accepted as filed, the amounts on the secured tax return must be incorporated into a report (RAR) and assessed as a TC 300. This return will be treated similarly to an amended return.

  2. If the tax return is accepted as filed, properly annotate the original tax return as follows:

    1. Stamp or (write-in) the received date on the tax return along the dotted lines. Avoid stamping over numbers.

    2. Annotate on the top margin of a secured tax return in red ink, “FORM 990 CONVERTED TO FORM 1120 [or 1041] BY TE/GE.” Do NOT forward the original return to the FAST or to Campus.

    The FAST will input the TC 599 in IDRS with the appropriate closing code based on a copy of the first page of the tax return.

  3. Incorporate the totals from the secured tax return to Form 4549. Use a starting tax value of $0 on Line 3 of Form 4549.

  4. Attach the original converted return to Form 4549. The taxpayer's signature is required on Form 4549 unless Area Counsel determines one is not needed. Complete the appropriate entries on RCCMS. Update the statute date to eliminate the EE alpha code and reflect a statute date based on the received date of the EO information return.

    Reminder:

    Do not complete the delinquent return indicator or delinquent return amount fields in RCCMS.

  5. Make a copy of the first page of the original converted return. Annotate "COPY OF" on the top margin of the copy of the tax return immediately before the examiner's annotation. Also annotate "The Form 990 IRS Received Date was [ date ]" on the middle of the page at the dotted lines. This is the date that set the ASED for the converted return.

    Note:

    Insert the copy in the FAST envelope pending the outcome of the revocation case.

  6. After a revocation is sustained, Mandatory Review will fax the copy of the tax return to the FAST. Indicate on the fax cover sheet, "Input TC 971 Action Code 282." Alternatively, the copy may be included in the FAST envelope, with Form 3210 indicating "Input TC 971 Action Code 282."

  7. If the tax is agreed, the tax case will close as an agreed tax change on Form 5599, disposal code 03 (102).

4.75.31.4.4  (02-07-2012)
Revocation Sustained

  1. Mandatory Review will notify the examination group of the outcome of a revocation by secure e-mail or reviewer's memorandum if appropriate. Appeals generally notifies Mandatory Review by Form 5402, Appeals Transmittal and Case Memo.

  2. The reviewer (non-protested cases) or Appeals officer (protested cases) will:

    1. Issue a final revocation letter to the taxpayer.

    2. For IRC 501(c)(3) organizations, send a copy of the final revocation letter to the EO Fed/State Liaison.

    3. Sign and date all Forms 2363-A clearly indicating approval of the revocation; then fax Form 2363-A to the FAST. Appeals sends Form 2363-A to Mandatory Review for faxing.

      Note:

      Annotate on Form 3198-A that, (1) Form 2363-A was processed; (2) the revocation and change in filing requirement posted to the EO BMF, and if applicable, (3) that the converted return(s) was submitted to the FAST.

    4. If a converted return was secured, Mandatory Review will fill-in the date the tax return package was sent to the FAST at the top margin of both the original and the copy of the tax return. Form 2363-A can be included in the FAST envelope if not already faxed. Appeals sends the FAST envelope (and Form 5666 if available) back to Mandatory Review for processing. AIMS establishment is not required unless EO enforcement criteria are met.

    5. If there is no tax case held in suspense by EO Examinations, see IRM 4.75.31.4.4.1.

    6. If Mandatory Review is holding a tax case in suspense (Status 38), Mandatory Review will send the file back to the examination group for EO enforcement. See IRM 4.75.31.4.4.2.

4.75.31.4.4.1  (02-07-2012)
Revocation Sustained - No Converted Return Case

  1. Mandatory Review will sign and date Form 5666 and attach a copy of the final revocation letter before forwarding the package to EO Classification. Appeals sends the Form 5666 package through Mandatory Review to EO Examinations Classification.

  2. Unless Appeals or Mandatory Review determines that there is an error or a tax case file should have been prepared, there will be no further action needed from the examination group over income tax liability.

4.75.31.4.4.2  (02-07-2012)
Revocation Sustained - Converted Return Case in Suspense

  1. If the revocation is sustained, the examination group will enforce income taxes after it receives the suspended tax case from Mandatory Review or if the tax case is already in group suspense.

  2. Verify that Form 2363-A has posted a revocation and a change in filing requirement by checking INOLES or BMFOLO. After Form 2363-A has posted, update the AIMS NMF record to status 12.

  3. If not already done, solicit tax returns for all affected and open tax years.

    Note:

    In cases where the statute expiration date is within 270 days and the tax year meets EO enforcement criteria, group managers at their discretion may initiate deficiency procedures in lieu of soliciting income tax returns.

  4. For every AIMS NMF record, establish the converted returns on AIMS Master File, Status 12. Use Push Code 036 or 020, whichever is applicable. For establishment instructions, see paragraph (9) below.

  5. Once the AIMS MF record is established, delete the duplicate AIMS NMF record on Form 10904.

  6. Unless a tax return is accepted as filed, initiate deficiency procedures.

    Note:

    Before initiating deficiency procedures consider the time given to the taxpayer to file tax returns by the 30-day proposed revocation letters. Examiners may ascertain the taxpayer's filing intentions before proceeding with EO enforcement action.

  7. Deficiency Procedures.

    1. Issue an initial or formal report for income tax deficiency. For the contents of an initial report, see IRM 4.75.31.10 (2). For the contents of a formal report, see IRM 4.75.31.11 (2).

    2. On Form 886-A, indicate receipt of the converted return if applicable.

    3. If no converted return had been filed (AIMS MF Push Code 036), prepare the official substitute for converted return, by attaching Form 13496 to the front of the first page of the RAR (Form 4621).

      Note:

      Form 13496, IRC Section 6020(b) Certification, will be attached to the front of Form 4621 after the proposed revocation is sustained by Mandatory Review or Appeals. The certification will be completed with a live signature or a computer facsimile signature. Prepare and date the certification after the 30-day letter (or revised 30-day letter) so that the date of the certification is identical to, or later than, the 30-day letter. Anyone authorized to prepare and issue reports of proposed tax adjustments is authorized to sign the certification. See Delegation Order 5-2 (formerly DO-182, Rev. 7) in IRM 1.2.44.3. Whenever the examiner revises a report of proposed adjustments (without regard to whether or not the revised report is re-issued to the taxpayer), a re-certification is required on another Form 13496 dated on (or after) the same day as the revised report. A Form 13496 may not be prepared or dated after the date of the 90-day letter.

  8. AIMS Master File Establishment Instructions. The following input is required for AIMS Master File establishments. The items in parenthesis denote corresponding block numbers on Form 5597 for manual establishments. See IRM 4.5.1 Exhibit 4.5.1-8 (9/2006):

    • (P7-8): Source Code 44 for SFCRs

    • (P10-12): Enter Primary Business Code
      401 Northwest
      402 Mid-Atlantic
      403 Great Lakes
      404 Gulf Coast
      406 Pacific Coast
      409 EPR
      410 EOCU

    • (P20-23): Enter Employee Group Code

    • (P25-26): Enter MFT 02 for Form 1120; MFT 05, For Form 1041

    • (P28-29): Enter Status Code 12

    • (P31): Return Not Requested should be “3”

    • (P33-36): Enter appropriate Project Code

    • (P41-43): Enter Push Code 036, for a SFCR establishment; 020 for a secured delinquent return.

    • (P45-46): Enter Statute Alpha Code, if appropriate.

    • (P48): Enter “1” as the flow-through indicator

    • (Line 2, P1-12; P14-17; blocks A and B): Enter Entity information

    • (P19-24): Enter Tax Periods

    • (P26-28): Enter Activity Codes:
      Form 1120 Activity Codes are 338, 203 through 231;
      Form 1041 Activity Codes are 495 or 496

    • (Blocks C, D and E): Self Explanatory.

  9. Prepare closing letters and Form 5599 closing record as follows. Assume no higher priority disposal code applies in each case:

    Taxpayer's Response to Income Tax Proposal After Revocation is Final
      If the taxpayer... and... then the examiner will...
    1 Filed a converted return the return is accepted as filed (1). Mark received date and annotate tax return, as instructed in IRM 4.75.31.4.1(5).
    (2). Submit return to the FAST only after revocation is final.

    (3). If no delinquency penalties are recommended, issue Modified Letter 2778. See Exhibit 4.75.31-12.

    (4). If delinquency penalties are recommended, issue Modified Letter 2769. See Exhibit 4.75.31-15.



    (5). Prepare Form 5599, DC 06 (208).
    (6). Enter ARDI Code, Item 42, Form 5599.
    (7). Enter Items 35 and 37, Form 5599
    (8). Enter Delinquent Return Amount, Item 414, Form 5599.
    (9). Close tax case to ESS.
    2 Filed a converted return the examiner issued a Modified Letter 950 & RAR to correct the return, and the taxpayer provided additional information showing no correction was necessary (1). Mark received date and annotate tax return, as instructed in IRM 4.75.31.4.1 (5).
    (2). Submit return to the FAST only after revocation is final.



    (3). Rescind 30-day letter and Report.
    (4). Issue Modified Letter 3604. See Exhibit 4.75.31-13.

    (5). Prepare Form 5599, DC 06 (208).
    (6). Enter ARDI Code, Item 42, Form 5599.
    (7). Enter Items 35 and 37, Form 5599
    (8). Enter Delinquent Return Amount, Item 414, Form 5599.

    (9). Close tax case to ESS.
    3 Filed a converted return the examiner issued a Modified Letter 950 & RAR to correct the return, and the taxpayer agreed with the correction. (1). Mark received date and annotate tax return, as instructed in IRM 4.75.31.4.1 (5).
    (2). Submit return to the FAST only after revocation is final.



    (3). Stamp the received date on Form 4549.

    (4). Issue Modified Letter 987. See Exhibit 4.75.31-14.
    (5). Prepare Form 5599, DC 03 (102).
    (6). Enter ARDI Code, Item 42, Form 5599.
    (7). Close tax case to ESS.
    4 Filed a converted return the examiner issued a Modified Letter 950 & RAR to correct the return, and the taxpayer failed to reply (1). Mark received date and annotate tax return, as instructed in IRM 4.75.31.4.1 (5).
    (2). Submit return to the FAST only after revocation is final.



    (3). Prepare Form 5599, DC 10 (604).
    (4). Close tax case to Mandatory Review.
    5 Filed a converted return the examiner issued a Modified Letter 950 & RAR to correct the return, and the correction was unagreed with protest (1). Mark received date and annotate tax return, as instructed in IRM 4.75.31.4.1 (5).
    (2). Submit return to the FAST only after revocation is final.




    (3). Issue rebuttal letter to taxpayer.
    (4). Prepare Form 5599, DC 07 (601).
    (5). Close tax case to Mandatory Review.
    (6). Mandatory Review will forward the case to Appeals to consider the income tax issue.
    6 Filed NO converted return the examiner issued a Modified Letter 950 & RAR, and the taxpayer agreed with the proposed deficiency
    (1). Stamp the received date on Form 4549.
    (2). Attach Form 13496 to front of file copy of Form 4621 of the RAR. Return is an SFCR.



    (3). Issue Modified Letter 987. See Exhibit 4.75.31-14.
    (4). Prepare Form 5599, DC 03 (102).
    (5). Complete ARDI Code, Item 42.
    (6). Close tax case to ESS.
    7 Filed NO converted return the examiner issued a Modified Letter 950 & RAR, and the taxpayer failed to reply



    (1). Attach Form 13496 to front of file copy of Form 4621 of the RAR. Return is an SFCR.

    (2). Prepare Form 5599, DC 10 (604).
    (3). Close tax case to Mandatory Review.
    8 Filed NO converted return the examiner issued a Modified Letter 950 & RAR, and the taxpayer provided additional information showing no adjustment was necessary
    (1). Attach Form 13496 to front of file copy of Form 4621 of the RAR. Return is an SFCR.


    (2). Issue a drafted letter that rescinds the 30-day letter and report, and reminds taxpayer to file income tax returns.
    (3). Prepare Form 5599, DC 02 (107).
    (4). Close tax case to ESS.
    9 Filed NO converted return the examiner issued a Modified Letter 950 & RAR, and the taxpayer provided additional information that decreases the proposed deficiency
    (1). Issue a corrected RAR (a new 30-day letter is not needed).
    (2). Issue a rebuttal letter to taxpayer over the part of the deficiency that remains unchanged.
    (3). Attach Form 13496 to front of file copy of Form 4621 of the RAR. Return is an SFCR.


    (4). Prepare Form 5599, DC 07 (601) or DC 10 (604).
    (5). Close case to Mandatory Review.
    (6). If a protest was submitted, Mandatory Review will forward the case to Appeals to consider the income tax issue.
    10 Filed NO converted return the examiner issued a Modified Letter 950 & RAR, and the taxpayer provided additional information that increases the proposed deficiency
    (1). Issue a corrected formal proposal: New Modified Letter 950 and a corrected RAR. See Exhibit 4.75.31-10.
    (2). Attach Form 13496 to front of file copy of Form 4621 of the RAR. Return is an SFCR.
    (3) Suspend tax case for 30 days pending reply to new proposal.
    (4) Refer to this table again after the new reply (or non-reply).
    11 Filed NO converted return the examiner issued a Modified Letter 950 & RAR, and the taxpayer provided NO new information or provided additional information that does not change the report
    (1). Issue rebuttal letter to taxpayer.
    (2). Attach Form 13496 to front of file copy of Form 4621 of the RAR. Return is an SFCR.



    (3). Prepare Form 5599, DC 07 (601) or DC 10 (604).
    (4). Close tax case to Mandatory Review.
    (5). If a protest was submitted, Mandatory Review will forward the case to Appeals to consider the income tax issue.

  10. The closing documents for the tax case file include the following:

    • Form 5599. See the suggested disposal codes in the table in paragraph (10) above

    • Form 3198-A, TE/GE Special Handling Notice

    • Other closing documents as necessary. See IRM 4.75.16.

  11. Form 3198-A. Use Form 3198-A as a cover sheet for the tax case file before closing to either ESS or Mandatory Review:

    1. In all converted return cases, indicate, “THE ASSESSMENT STATUTE EXPIRATION DATE (ASED) STARTS WITH THE FILING OF FORM 990 ON [date 990 was filed] AND EXPIRES [statute expiration date of Form 990]”.

    2. If there is a POA, check box for “SEND ALL COMMUNICATIONS PER POA”.

    3. If the tax case is unagreed, check the Mandatory Review checkbox and enter “UNAGREED INCOME TAX DEFICIENCY.”

    4. If a protest was filed, indicate “30-DAY LETTER HAS BEEN ISSUED - PROTEST FILED FOR APPEALS CONSIDERATION.”

    5. If there is an adjustment to a filed tax return, indicate “ASSESS TAX PER FORM 4621 – EXEMPT STATUS REVOKED.”

    6. If there is an adjustment to an SFCR, indicate SUBSTITUTE FOR RETURN PREPARED BY TE/GE – ASSESS TAX PER FORM 4621 – EXEMPT STATUS REVOKED.

    7. If there is a corresponding 990-T tax module, indicate “REVERSE TAX ASSESSMENTS ON 990-T TAX MODULE AND TRANSFER PAYMENTS FOR UBIT TAXES TO CONVERTED RETURN MODULE IF REVOCATION IS SUSTAINED”

  12. Close the tax case file to either ESS or Mandatory Review based on existing Mandatory Review criteria.

4.75.31.4.5  (02-07-2012)
Revocation NOT Sustained

  1. Mandatory Review will:

    1. If a converted return was secured, send the FAST envelope to the examination group with instructions to give the converted return back to the taxpayer since the return is not required due to continuation of tax-exempt status.

    2. If there is a suspended converted return case file, send the tax case back to the examiner with instructions to delete the AIMS NMF account on Form 10904.

    3. Destroy Forms 2363-A and Form 5666 with attachments, income tax closing letters, and any other documents prepared on the assumption that a proposed revocation would be sustained.

    4. For IRC 501(c)(3) organizations, inform the EO Fed/State Liaison of proposed revocations not sustained.

  2. Unless instructed otherwise, the examiner will draft a courtesy letter to the taxpayer that the converted return is being sent back to the taxpayer because it is not required due to the continuation of tax-exempt status.

4.75.31.5  ≡ ≡ ≡ ≡ ≡ ≡
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    9. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    10. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    11. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    12. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.75.31.6  (02-07-2012)
Scope of EO Enforcement

  1. If a proposed revocation is imminent, EO Examiners will establish the MFT accounts for EO information returns (Forms 990, 990-EZ, 990-PF, etc) for all subsequent tax years not barred for assessment on AIMS Master File.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  2. Income taxes are generally enforced for a maximum of 6 years. See P-5-133 at IRM 1.2.14.1.18 (8/2007).

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. In appropriate cases, examiners should consult with Counsel to see if the 6 year statute of limitations for assessment applies for any tax year.

4.75.31.7  (02-07-2012)
Determination of Tax Liability

  1. Examiners may rely on the following resources to help determine income taxes.

    1. GCM 39813.

    2. 1990 CPE Text, Topic B, The Synanon Case.

    3. CCH U.S. Master Tax Guide.

    4. IRM Chapters 4.10, 4.11 and 4.12.

    5. Income tax training textbooks.

    6. Training Pub 11361–002, LMSB Corporate Taxation Participant Guide (Catalog # 50286Q).

    7. Consult with fellow examiners with strong income tax background.

    8. Lexis-Nexis® and Westlaw®.

    9. SB/SE or LMSB websites.

4.75.31.7.1  (02-07-2012)
Basic Income Tax Considerations

  1. Apply IRC 7701. Identify the entity’s legal status as a corporation, association, trust, cooperative or partnership. This determines what type of return needs to be filed. Unincorporated associations are generally treated as corporations liable for Form 1120 returns.

  2. EO Examiners will NOT make income tax elections on behalf of taxpayers.

  3. All income is taxable and included in gross income unless excluded by statute. IRC 61.

  4. Regarding certain dues collected for others, escrow funds, similar trust funds, and amounts received on behalf of others, such amounts are not included in the organization’s gross income until the organization asserts dominion over it as its own. See guidance on an income determination with respect to deposits in Commissioner v. Indianapolis Power & Light Co., 110 S. Ct. 589; See Rev. Rul. 71-189, 1971-1 C.B. 32 (inactive deposits are not income until bank asserts dominion over the accounts). See also Fidelity-Philadelphia Trust Co. v. Commissioner, 23 T. C. 527 (1954).

  5. Contributions and donations received may or may not be taxable. See IRC 102.

    1. Determine whether a contribution received constitutes a “gift”.

    2. Gifts are excluded from gross income by IRC 102 of the Code.

    3. “Intent” is a critical consideration in determining whether a transaction is a gift. Commissioner v. Duberstein, 363 U.S. 278 (1960).

    4. However, if the gift is acquired by misrepresentation or fraud it is included in gross income of the recipient. Synanon Church v. Commissioner, T.C. . Memo. 1989-270.

    5. Government grants are not automatically presumed to be gifts. In some cases, a governmental entity can expect an economic benefit from programs that relieve business or individual hardships. For guidance, refer to Kroon v. United States, Civil No. A-90-71 (D. Alaska 1974); Rev. Rul. 77-280, 1977-2 C.B. 14; Rev. Rul. 68-97, 1968-1 C.B. 34; and United States v. Chicago, B. & Q. R. Co., 412 U.S. 401 (1973), 1973-2 C.B. 428.

    6. Quid pro quo contributions are gifts only to the extent the total amount received exceeds the fair market value of the consideration provided to the donor. IRC 6115(b).

  6. Deductibility of Expenses.

    1. Apply the rules of IRC 162 . Expenses are deductible only to the extent they are ordinary and necessary in carrying on a trade or business.

    2. The income-offset rule allows full deduction for exempt function expenses but only to the extent of income derived from the exempt function. See Adirondack League Club , 55 T.C. at 806; Five Lakes Outing Club v. U.S., 468 F.2d 443, 446 (8th Cir. 1972); Synanon, 57 T.C.M. at 631.

    3. Similarly, charitable distributions are deductible in full only to the extent of the charitable gifts received. For corporations, charitable distributions from other income are deductible only to the extent of 10% of taxable income after certain adjustments. See limitations at IRC 170(b)(2) .

      Note:

      Some taxpayers may want to claim charitable and program expenses as "promotional expenses", which if proven to be ordinary and necessary, are fully deductible.

    4. Lobbying and political expenses are not deductible expenses.

    5. Fines and penalties are not deductible expenses.

    6. Amounts paid for kickbacks, bribes, and other illegal payments are not deductible expenses.

    7. Amounts paid by health care providers for payments in consideration of the referral of a client, patient or customer are not deductible expenses.

    8. Amounts in excess of reasonable compensation or compensation for non-profit motivated activities are not allowable as a deduction.

    9. Income taxes paid (including UBIT) are not deductible.

    10. Expenses incurred in connection with a convention, seminar, or similar meeting held outside the "North American area" are limited under IRC section 274(h). Revenue Ruling 2011-26, 2011-48 I.R.B. 803.

  7. Substantiation of Expenses.

    1. Generally the burden of proving the existence of a deduction or loss falls on the taxpayer.

    2. Examiners should use their best judgment in balancing utilization of time on substantiating expenses and accomplishment of the overall EO examination program as directed by Management. Thus, EO Examiners are not required to substantiate all deductible expenses unless the situation demands it.

    3. Scrutiny should be reserved for expenses that appear unreasonable, large, unusual, and questionable. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) [92-1 USTC P 50,113].

    4. The “Cohan rule” is often cited by taxpayers who ask to use estimates where specific proof of the amount of the claimed deduction is absent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930) [2 USTC P 489]. However, the taxpayer must establish the essential proof necessary to allow for an estimate. Coloman v. Commissioner, 540 F.2d 427 (9th Cir. 1976) [76-2 USTC P 9581], aff'q T. C. Memo. 1974-78; see also Vanicek v. Commissioner, 85 T.C. 731 (1985).

    5. Expenses for travel, entertainment expenses, business gifts, computers and vehicles require recordkeeping before a deduction is allowed. These expenses should be substantiated in accordance with IRC 274(d) and IRC 280F and the regulations thereunder.

  8. Depreciation.

    1. A depreciable asset begins to depreciate in the year it is first placed in service.

    2. Note that the useful life or cost recovery period for certain assets may have expired before the year under examination began; thus, further depreciation of such assets would not be allowed.

    3. Certain assets are NOT depreciable, such as certain works of art and land.

    4. The IRC 179 deduction is only allowed if an election was made on a voluntarily filed tax return.

    5. In general, the depreciation method depends on when tangible property was placed in service:
      1.Since 1986 – Generally Use MACRS,
      2.After 1980, but before 1987 – Use ACRS,
      3. Before 1981 – Use straight line, DB, SYD, or other consistent method.

    6. EO examiners generally will not challenge the taxpayer’s depreciation methods established before the revoked years, and reported on annual EO Information Returns.

  9. Dividend Received Deduction.

    1. Corporations are allowed a special deduction called a dividend received deduction. See IRC 243 , IRC 244 , IRC 245 and IRC 246 . The major reason for the dividend received deduction in IRC 243 is to avoid so-called "double taxation" in corporate taxes on earnings as income is passed from one corporation to another.

    2. Generally examiners will not allow this deduction unless a revoked organization can establish that it is entitled to the deduction.

  10. IRC 277 , Deductions Incurred by Certain Membership Organizations in Transactions with Members.

    1. IRC 277 provides that a membership organization not exempt from tax may deduct expenses attributable to the provision of goods or services to members only to the extent of income derived from members. The purpose of this provision is to prevent nonexempt membership organizations from effectively rendering themselves free of tax by off-setting losses from membership activities against income derived from investments or other nonmember sources to produce little or no taxable income. Were they permitted to do so, they could put themselves in a better position than exempt clubs, which are taxable on all income but "exempt function" income.

  11. Other Income tax provisions.

    1. IRC 263 and IRC 263A , requires corporations to capitalize certain expenditures, or include in inventory certain costs incurred in connection with real property and inventory.

    2. IRC 470 , provides that if a corporation leases property to a governmental or other tax-exempt entity, the corporation cannot claim deductions related to the property to the extent that they exceed the corporation’s income form the lease payments.

    3. If a taxpayer under examination requests a change in accounting method, follow the procedures in IRM 4.11.6. A request for change in accounting method for a taxpayer under examination requires the consent of the Director, EO Examinations before an application on Form 3115, Application for Change in Accounting Method, can be submitted in accordance with the instructions of the form. See Rev. Proc. 2008-52; 2008-2 C.B. 587.

4.75.31.7.2  (02-07-2012)
Gift Tax Consequences

  1. IRC 2501 imposes a gift tax on donors who give to taxable entities, knowing it’s a taxable entity or after public notice of the revocation. A donor is not subject to gift tax and has advance assurance of charitable deductibility under IRC 170 for amounts contributed to a revoked IRC 501(c)(3) entity prior to public notice of the revocation (such as in the Internal Revenue Bulletin, however, notice may occur in other ways, see Estate of Clopton v. Commissioner, 93 T.C. No. 275 (8-29-89)).

  2. Consult with Gift Tax Specialist (attorney). Enforcement of this tax requires a referral to Estate and Gift using SRS online.

4.75.31.7.3  (02-07-2012)
Effect on Employee Plans

  1. The revocation of an organization’s IRC 501(c)(3) status may adversely impact deferred compensation programs sponsored by the organization. Consult with an Employee Plans IRC 403(b)/457 Coordinator for your area if the organization maintains a deferred compensation plan. Deferred compensation plans are those described under IRC 401(a), 403(b) or 457.

4.75.31.7.4  (02-07-2012)
Effect on Tax Exempt Bonds

  1. Revocation of an organization’s IRC 501(c)(3) status will result in the loss of the exclusion from gross income under IRC § 103 for interest payments on tax-exempt obligations issued under IRC § 145 as “qualified 501(c)(3) bonds.” The loss of such exclusion is effective back to the date of issuance of the 501(c)(3) obligations.

  2. Determine whether the organization is the beneficiary of outstanding tax-exempt obligations under IRC § 145 at the time of revocation.

4.75.31.7.4.1  (02-07-2012)
Referral to Tax Exempt Bonds (TEB)

  1. Because a revocation of the tax-exempt status of an IRC 501(c)(3) organization results in the loss of the exclusion from gross income of the interest on the organization's qualified IRC 501(c)(3) bonds a referral is required to Tax Exempt Bonds. This section describes the procedure to make a referral by transmitting the required information to the TEB Referral Coordinator.

  2. The Form 5666, TEGE Referral Information Report, can be used to refer a potential noncompliant bond issuance to TEB. Detailed instructions for completing the form are located in Exhibit 4.5.1-14.

  3. Complete Form 5666 with all information that is available about the issuer of the bonds and the nature and size of the potential noncompliance issue. Include information pertaining to the source of the EO examination and attach any news articles, correspondence or other documentation concerning the potential noncompliance issue with the Form 5666. The referral package should be as complete as possible with objective information to facilitate the TEB Classifiers in making their recommendations of compliance actions.

  4. Use the proper AIMS Source Codes for each referral. The following guidance will assist the originator in determining the proper source code for referrals and the preparation of Form 5666 or the Specialist Referral System.

    1. Use the appropriate source codes based on the EO examination. TEB source codes are identified in the GE Computer Systems Codes Book, Document 11308:

4.75.31.8  (02-07-2012)
Statute Procedures

  1. Follow the statute control requirements in IRM Chapter 25.6.

  2. The statute expiration date for a converted return is generally the same as that of the EO information return for the same tax year. IRC 6501(g)(2). These procedures are designed to protect the government's interest when one set of returns is assigned to Appeals (Forms 990, etc), and another set of returns (Forms 1120, etc) for the same tax years are held in suspense by Mandatory Review, pending the outcome of the proposed revocation in Appeals.

  3. The Appeals office assumes statute responsibility of EO information returns accepted in its inventory. Mandatory Review assumes statute responsibility for converted returns suspended in its inventory unless an EO information return for the same tax year is in Appeals inventory over the revocation issue. Mandatory Review (or the examination group suspending the tax case) must coordinate with Appeals before soliciting an extension of the statute expiration date.

    Caution:

    Any communication between Appeals and EO Examinations must be limited and not violate ex-parte rules.

  4. For protested revocations, Appeals can identify revocation cases that have a corresponding tax case in EO Examinations suspense by the notation on Form 3198-A: "CONVERTED RETURN CASE IN SUSPENSE PENDING OUTCOME OF REVOCATION - NOTIFY EO EXAMS OF TP's INTENT NOT TO EXTEND STATUTE" .

  5. Appeals will alert EO Examinations whether the taxpayer has no intention to execute a consent to extend the statute date. Appeals will alert Mandatory Review by the earlier of:

    1. 120 days prior to the statute expiration date.

    2. The date Appeals sends its case to Counsel for review of the 90-day letter.

    Appeals will also inform EO Examinations:

    1. if and when the revocation was approved by Counsel, and

    2. when Appeals issued the Final Adverse Determination Letter.

    Note:

    The group suspending the converted return case pending final revocation will follow-up with Appeals if necessary over the statute matter if an alert from Appeals is not forthcoming. Do not discuss the issues, facts, law, arguments and conclusions of the case with Appeals. Communications must not violate ex-parte rules.

  6. Upon receiving notice from Appeals of the taxpayer's refusal to extend the statute expiration date, Mandatory Review will transfer the suspended tax case back to the examination group for potential preparation of a statutory notice of deficiency.

    1. The examination group will make arrangements with Area Counsel to plan for the issuance of a statutory notice of deficiency (90-day letter).

    2. In rare instances where all attempts to secure a statute extension have failed, EO Examinations, in consultation with Counsel, may issue the statutory notice of deficiency before the revocation is final in order to protect the government's interest. Delegation Order 4-8 (formerly DO-77, Rev. 28) only authorizes TE/GE Grade 12 Reviewers and above to issue statutory notices of deficiency for income taxes.

    3. Any communications with Appeals over the matter of the statutory period for assessment must not violate ex-parte rules.

  7. If a statutory notice of deficiency is issued to the taxpayer, the examiner will immediately close the income tax case to Mandatory Review for 90-day suspense (AIMS Status 24).

4.75.31.9  (02-07-2012)
Holding the Closing Conference

  1. Examiner must inform the taxpayer of issues encountered that jeopardize tax-exempt status. Examiners must keep the taxpayer informed of the tax consequences of loss of tax-exempt status, including the need to file income tax returns to bring the organization current on its filing obligations.

  2. The closing conference is held once the examiner reaches conclusions on issues, up to the date of issuance of an examination report (initial or formal report).

  3. For field examinations, conclusions should be reached onsite.

  4. Closing conferences will be productive if the taxpayer and representative are kept informed of the issues throughout the examination.

  5. Closing conferences may be followed by a “managerial conference(s)”, which can be held anytime until the case closes. Managerial conferences are applicable primarily because the group manager did not attend the closing conference.

  6. There can be more than one closing conference, and managerial conference.

4.75.31.10  (02-07-2012)
The Initial Report

  1. The initial report is a summary report issued by the examiner involving a change in tax, status or claim disallowance. It presents the examiner's findings without an elaborate formal report. The transmittal that accompanies the report solicits an agreement. The taxpayer's reply (or non-reply) tells the examiner whether a case is agreed or unagreed. Characteristics of the initial report are as follows:

    1. The initial report is always a proposal.

    2. The initial report Is always used to solicit an agreement.

    3. The initial report may be bypassed for a formal report based on statute and resource considerations.

    4. Bypass of an initial report may be appropriate for IRC 501(c)(3) revocations. For example, even if the taxpayer agrees with the initial report, a formal report is still required.

    5. Generally the facts, law and argument portion of the RAR component of the initial report is prepared in summary form.

    6. The case must be fully developed before issuing an initial report.

    7. For income tax issues, Line 3 of Form 4549, Taxable Income per Return or as Previously Adjusted, for initial reports will be zero, unless a TC 150 previously posted reporting taxable income. Refer to IDRS command code BMFOLR to obtain this amount.

    8. Examiners may allow the taxpayer up to a maximum of 30 days to respond to the initial proposal.

    9. Statute of limitations and resource considerations may require shorter time frames for a taxpayer to respond to the initial report.

    10. The initial report allows the examiner more time to resolve relevant facts of the case.

    11. If the initial report is issued, indicate that the transmittal does not constitute an official 30-day letter.

  2. The components of the initial report are as follows:

      Proposed Revocation of
    501(c)(3) Organization
    Proposed Revocation of Other than 501(c)(3) Organization Proposed Income Tax (generally after revocation is final)
    Transmittal Request for Agreement or Explanation for Disagreement Form 4564, Form 5701, or drafted letter Form 4564, Form 5701, or drafted letter Form 4564, Form 5701, or drafted letter
    RAR Waiver form Form 6018 Form 6018–A Form 4549
    Basic Report Forms Form 4621–A (page 1 of RAR)
    Form 886-A
    Schedules & Exhibits, if any
    Form 4621–A (page 1 of RAR)
    Form 886-A
    Schedules & Exhibits, if any
    Form 4621
    (page 1 of RAR)
    Form 4549
    Form 886-A
    Schedules & Exhibits, if any

4.75.31.11  (02-07-2012)
The Formal Report

  1. The formal report is the official written report issued by the examiner presenting a change in tax, status or claim disallowance. A formal report consists of (1) a letter, such as a “30 Day Letter”, and (2) the RAR. The RAR is generally more elaborate as to facts, law and argument than the initial report. Characteristics of the formal report are as follows:

    1. The formal report is transmitted to the taxpayer by either a 30-day letter (issued by the examiner) or a final agreed revocation letter (prepared by the examiner, but issued by Mandatory Review).

    2. The 30-day letter generally should not be issued to the taxpayer unless the manager has attempted to resolve the controversies and reach an agreement.

    3. The formal proposal is a combination of the 30 Day Letter with an RAR.

    4. The formal proposal is generally issued after the examiner has presented an initial report, and the changes proposed by the initial report were unagreed.

    5. The formal proposal is required for all IRC 501(c)(3) revocations, even if the revocation was previously agreed on the basis of an initial report.

    6. Formal proposals (with 30-day letter) are issued by Certified Mail.

    7. All unagreed change cases, and all revocation and modification cases are subject to mandatory review.

    8. The formal report for tax is part of the "deficiency process" , and is generally required before a tax can be assessed.

    9. Agreements to proposed changes in a formal report are solicited on Form 6018 or 6018-A, or Form 870 for income tax changes. Note that Form 4549 is the waiver form for initial reports.

    10. All agreed tax change cases close directly to the ESS Closing Unit, unless the case otherwise meets mandatory review criteria.

  2. The Formal Proposal includes the following documents:

      Proposed Revocation of
    501(c)(3) Organization
    Proposed Revocation of Other than 501(c)(3) Organization Proposed Income Tax (generally after revocation is final)
    Exam Group Closing Letter 30–Day Letter Modified Letter 3618 (Exhibit 4.75.31-7) Modified Letter 3610 (Exhibit 4.75.31-8) Modified Letter 950 (Exhibit 4.75.31-10)
    RAR
    Waiver Form

    Form 6018

    Form 6018–A

    Form 870

    Basic Report Forms Form 4621–A

    Form 886–A
    Schedules and Exhibits if necessary
    Form 4621–A

    Form 886–A
    Schedules and Exhibits if necessary
    Form 4621


    Form 4549-A
    Form 886–A
    Schedules and Exhibits if necessary


4.75.31.12  (02-07-2012)
Contents of the FAST Envelope

  1. The FAST envelope contains documents to be processed with the FAST group if a proposed revocation is sustained by Mandatory Review or Appeals. Unless documents (other than original returns) have already been faxed to the FAST, the contents of the FAST envelope are as follows:

    1. Form 2363-A, with the reviewer's signature and title at bottom of form, in order to post a revocation and change the filing status. See Exhibit 4.75.31-1, Exhibit 4.75.31-2 and Exhibit 4.75.31-3.

      Note:

      Form 2363-A may be faxed to the FAST.

    2. Form 3210, Document Transmittal.

    3. The original secured converted return package from IRM 4.75.31.4.1 (8), or if applicable, a copy of the first page of the secured converted received after a TC 150 (SFCR) has posted from IRM 4.75.31.4.3.

  2. The FAST envelope should be labeled as follows: “CONVERTED RETURNS AND FORMS TO BE PROCESSED IF PROPOSED REVOCATION IS SUSTAINED.”

  3. Place the sealed envelope in a second mailing envelope. The envelope should be addressed to the FAST.

  4. Place the FAST envelope in the EO information return case file folder, behind the EO information return, but on top of Form 5772-EO. Mandatory Review or Appeals will submit the FAST envelope to the FAST if the revocation is sustained.

4.75.31.13  (02-07-2012)
Effect on Form 990-T and Other EO Tax Examinations

  1. The presence of a Form 990-T examination in conjunction with an EO information return will have no affect on conversion procedures. The unrelated business income tax issue should be fully developed in the event the revocation is not sustained.

  2. If there is no Form 990-T examination and a revocation is imminent, do not establish a Form 990-T on AIMS solely for the purpose of reversing an unrelated business income tax assessment with a transfer of credit to Form 1120/1041 modules.

  3. If applicable, notate the following on Forms 3198-A for the EO information return case file (and for the 990-T case file if open for examination): "REVERSE TAX ASSESSMENTS ON 990-T TAX MODULE AND TRANSFER PAYMENTS FOR UBIT TAXES TO CONVERTED RETURN MODULE IF REVOCATION IS SUSTAINED."

  4. If Form 990-T for an affected tax year is open for examination and a proposed revocation is imminent, the unrelated business income tax issue will be incorporated in the revocation report as an ALTERNATE ISSUE. The proposed revocation letter will include Forms 990-T at the heading.

    1. If there is no change in unrelated business income tax, a statement to that effect will be included in the revocation report immediately after the conclusion part of the revocation RAR.

    2. If there is a deficiency of unrelated business income tax, include the deficiency as an alternative issue after the conclusion part of the revocation RAR, complete with facts, law and argument.

    Exception:

    If the examiner requested a technical advice memorandum (TAM) on the revocation issue, and a TAM is issued to the taxpayer where IRC 7805(b) relief is granted, prepare a separate Form 990-T report for the exempt tax years, since the revocation will be prospective.

    Note:

    In cases where there is a single revocation report with an alternative UBIT issue, include a copy of the proposed revocation RAR in the Form 990-T case file.

  5. Forms 990-T for affected tax years under examination will close with identical revocation disposal codes applicable to the corresponding Form 990 case. For example, use DC 09 (211) for agreed revocations, and DC 55 (605) for unagreed revocations without protest.

    Exception:

    If the examiner requested a technical advice memorandum (TAM) on the revocation issue, and a TAM is issued to the taxpayer where IRC 7805(b) relief is granted, use the disposal codes appropriate for examinations of Form 990-T tax returns, since the revocation will be prospective.

  6. The procedures in this subsection pertaining to alternate issues can be similarly applied to other tax returns filed only by tax-exempt organizations described in IRC 501(c) for affected tax periods, such as Forms 1120-POL or Form 4720 (MFT 50).

Exhibit 4.75.31-1 
Form 2363–A, Revocation of IRC 501(c)(3) and Generating 1120 Filing Requirement

Revocation of IRC 501(c)(3) - Instructions For Form 2363-A
Field 1 Enter the EIN
Field 2 Enter the name control
Field 3 Place an X in the box next to 80
Field 4 Place an X in the box next to 016
Field 5 Type in definer codes A and B
Field 8 Type in the name of the entity.
Field 17 Enter 03
Field 18 Type in the two digit foundation status code. See BMFOLO or INOLES.
Field 19 Type in the one digit classification code. See BMFOLO or INOLES.
Field 22 Type in 22 followed by the year and month of effective revocation date.
Field 34 Type in the number 9 to remove Employment Code "W" .
Field 35 Type in the two digits representing the ending month of the fiscal year.
Field 38 Place an 01 in the 941 field and an 01 in the 940 field (if applicable.)
Field 39 Type REVOKE C-3 AND SET 941-940 AND 1120 FILING REQ
Field 40 Digitally sign and date or print the form, sign and date it.
Field 41 Type in PREPARER/GROUP NUMBER

Exhibit 4.75.31-2 
Form 2363–A - Revocation of PF and Generating Form 1120 Filing Requirement

Revocation of IRC 501(c)(3) (PF)- Instructions For Form 2363-A
Field 1 Enter the EIN
Field 2 Enter the name control
Field 3 Place an X in the box next to 80
Field 4 Place an X in the box next to 016
Field 5 Type in definer codes A and B
Field 8 Type in the name of the entity.
Field 17 Enter 03
Field 18 Type in the two digit foundation status code. See BMFOLO or INOLES.
Field 19 Type in the one digit classification code. See BMFOLO or INOLES.
Field 22 Type in 19 followed by the year and month of effective revocation date.
Field 34   Type in the number 9 to include Form 940 as a filing requirement.
Field 35 Type in the two digits representing the ending month of the fiscal year.
Field 38 Place an 01 in the 941 field and an 01 in the 940 field (if applicable.)
Field 39 Type REVOKE C-3 AND SET 941-940 AND 1120 FILING REQ
Field 40 Digitally sign and date or print the form, sign and date it.
Field 41 Type in PREPARER/GROUP NUMBER

Exhibit 4.75.31-3 
Form 2363–A - Revocation of IRC 501(c)(Other) and Generating Form 1120 Filing Requirement

Revocation of IRC 501(c)(3) (Other)- Instructions For Form 2363-A
Field 1 Enter the EIN
Field 2 Enter the name control
Field 3 Place an X in the box next to 80
Field 4 Place an X in the box next to 016
Field 5 Type in definer codes A and B
Field 8 Type in the name of the entity.
Field 17 Enter code section. i.e., 04,05, etc.
Field 18 Type in the two digit foundation status code. See BMFOLO or INOLES.
Field 19 Type in the one digit classification code. See BMFOLO or INOLES.
Field 22 Type in 22 followed by the year and month of effective revocation date.
Field 34 Type in the number 9 to include Form 940 as a filing requirement.
Field 35 Type in the two digits representing the ending month of the fiscal year.
Field 38 Place an 01 in the 941 field and an 01 in the 940 field (if applicable.)
Field 39 Type REVOKE C-3 AND SET 941-940 AND 1120 FILING REQ
Field 40 Digitally sign and date or print the form, sign and date it.
Field 41 Type in PREPARER/GROUP NUMBER

Exhibit 4.75.31-4 
Processing Payment of Tax

All payments must be submitted to the FAST within 24 hours of receipt. Prepare the remittance documents as follows:.

  • Prepare a Form 3244-A, Payment Posting Document, for each taxable year for which payment was received. Enter the amount of the payment under TC 610, Remittance with Return, or TC 640, Advance Payment on Determined Deficiency, whichever is applicable.

  • For income tax remittances received on unagreed revocations, state in the remarks block of Form 3244-A in bold letters, “INCOME TAX VOLUNTARILY PAID IN ADVANCE WHILE TAXPAYER CHALLENGES PROPOSED REVOCATION OF TAX-EXEMPT STATUS.” Examiners will leave their phone number on Form 3244-A.

  • Make a copy(s) of Form(s) 3244-A and the payment document received (check or money order) for the tax case file. Attach the copies to the copy of the tax return (or dummy SFCR return). Enter “COPY OF ORIGINAL SENT TO THE FAST ON [ Date ]” on the top of the copy(s) of Form(s) 3244-A in red ink.

  • Prepare Form 3210, Document Transmittal, to transmit the payment to the FAST. Itemize each payment on Form 3210.

Place all remittance documents in the FAST envelope. Place the FAST envelope in a second mailing envelope addressed to the FAST.

Exhibit 4.75.31-5 
Reserved

Exhibit 4.75.31-6 
Summary Instructions for Form 4549 for the Converted Return

Substitute for Return - Form 4549

Taxable income and expense items will be treated as adjustments on line 1

Line 1, Lists adjustments. Adjustments should be supported by computations and explanations on attached schedules or worksheets.

Line 2, is the sum of all "adjustments".

Line 3, Taxable Income Per Return or as Previously Adjusted

If a tax return was filed and an adjustment to that return is proposed: This amount will be taxable income shown on the tax return after it posted. If the tax return has posted, refer to this amount as stated in BMFOLR

Substitute Return. This amount will always be zero because no taxable income had been previously reported on Form 1120 series or Form 1041. This is true even if Form 990-T was filed for the tax year while the organization was exempt.

Line 12, Total Tax Shown on Return or as Previously Adjusted

If a tax return was filed and an adjustment to that return is proposed: This amount will be the total tax shown on the tax return. If the tax return has posted, refer to this amount as stated on BMFOLT.

Substitute Return. This amount will always be zero because no income tax had been previously reported on Form 1120 or 1041. This is true even if Form 990-T was filed for the tax year reporting income tax while the organization was exempt.

Other Information, Explain the amount of unrelated business income tax already paid for the tax years the organization was exempt, including payments for penalties and interest. Be sure to explain the circumstances giving rise for the need to transfer payment credits against any UBIT for affected tax years to the Form 1120 or 1041 module. In Other Instructions of Form 3198-A for the tax return, indicate “REVERSE TAX ASSESSMENTS ON 990-T TAX MODULE AND TRANSFER PAYMENTS FOR UBIT TAXES TO CONVERTED RETURN MODULE IF REVOCATION IS SUSTAINED.” Do not include amounts paid for UBIT taxes as a credit in the dollar columns of Form 4549.

Examiners should not interpret the agreement to tax as an agreement to revocation.

Exhibit 4.75.31-7 
Modified Letter 3618, 30-Day Letter, Proposed Revocation of IRC 501(c)(3) Organization

Internal Revenue Service   Department of the Treasury
[Insert street address]
[Insert city, state, and zip code
   
       
Date: [Insert date]   Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax Years(s) Ended:
[Insert tax periods]
Person to Contact/ID Number:
[Insert name, ID number]
[Insert name of entity]
[Insert street address]
[Insert city, state, and zip code]
  Contact Numbers:
Phone: [Insert phone number]
Fax: [Insert fax number]
         

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear ,

We propose to revoke our recognition of your exempt status as an organization described in section 501(c)(3) of the Internal Revenue Code (the Code). We enclose our report of examination explaining why we are proposing this action.

If you accept our proposal, please sign and return the enclosed Form 6018, Consent to Proposed Action - Section 7428, unless you have already provided us a signed Form 6018. We will issue a final revocation letter determining you are not an organization described in section 501(c)(3). After the issuance of the final revocation letter we will publish an announcement that you have been deleted from the cumulative list of organizations contributions to which are deductible under section 170 of the Code. If you do not respond to this proposal, we will similarly issue a final revocation letter. Failing to respond to this proposal may adversely impact your legal standing to seek a declaratory judgment because you may be deemed to have failed to exhaust administrative remedies.

If you do not agree with our proposed revocation and wish to protest our proposed revocation to the Appeals Office of the Internal Revenue Service, then you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. This written request is called a protest. For your protest to be valid it needs to contain certain specific information which generally includes a statement of the facts, the applicable law, and arguments in support of your position. For the specific information needed for a valid protest, please refer to page 6 of the enclosed Publication 3498, The Examination Process, and page 1 of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you do submit a valid protest, then an Appeals officer will review your case. The Appeals Office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498 and Publication 892 explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation Services referred to in Publication 3498, generally do not apply after issuance of this letter.

You may also request that we refer this matter for Technical Advice as explained in Publication 892 and an annual revenue procedure. Please contact the individual identified on the first page of this letter if you are considering requesting Technical Advice. If we issue a determination letter to you based on a Technical Advice Memorandum issued by the EO Rulings and Agreements function, then no further administrative appeal will be available to you within the IRS on the matter.

If you receive a final revocation letter, you will be required to file Federal income tax returns for the tax period(s) shown above as well as for subsequent years.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:
Internal Revenue Service
Office of the Taxpayer Advocate
[1st Line Address]
[2nd Line Address]
[City, State Zip]
[Phone Number]

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.
  Sincerely,




[Insert name]
Director, EO Examinations
Enclosure:
Publication 892,
Publication 3498,
Form 6018,
Report of Examination

Exhibit 4.75.31-8 
Modified Letter 3610, 30-Day Letter, Proposed Revocation of Other than a IRC 501(c)(3) Organization

Internal Revenue Service   Department of the Treasury
[Insert street address]
[Insert city, state, and zip code
   
       
Date: [Insert date]   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]
[Insert name of entity]
[Insert street address]
[Insert city, state, and zip code]
  Contact Numbers:
Phone: [Insert phone number]
Fax: [Insert fax number]
         

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear ,

We have enclosed a copy of our report of examination explaining why we believe an adjustment of your organization’s exempt status is necessary.

If you accept our findings, please sign and return the enclosed Form 6018-A, Consent to Proposed Action. We will then send you a final letter modifying or revoking your exempt status.

If we do not hear from you within 30 days from the date of this letter, we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final.


In the event of revocation, you will be required to file Federal income tax returns for the tax period(s) shown above. File these returns with the examining agent within 30 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

If you do not agree with our position you may appeal your case. The enclosed Publication 3498, The Examination Process, explains how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation Services referred to in Publication 3498, generally do not apply after issuance of this letter.

If you request a conference, we will forward your written statement of protest to the Appeals Office and they will contact you.

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.

You may also request that we refer this matter for technical advice as explained in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. If a determination letter is issued to you based on technical advice, no further administrative appeal is available to you within the IRS on the issue that was the subject of the technical advice.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:
Internal Revenue Service
Office of the Taxpayer Advocate
[1st Line Address]
[2nd Line Address]
[City, State Zip]
[Phone Number]

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.
  Sincerely,




[Insert name]
Director, EO Examinations
Enclosure:
Publication 892,
Publication 3498,
Form 6018-A,
Report of Examination

Exhibit 4.75.31-9 
Agreed Final Revocation Letter for Other than a IRC 501(c)(3) Organization

Internal Revenue Service   Department of the Treasury
[Insert street address]
[Insert city, state, and zip code
   
       
Date: [Insert date]   Taxpayer Identification Number:
[Insert TIN]
Form:
[Insert form number]
Tax Period(s) Ended:
[Insert tax periods]
Person to Contact/ID Number:
[Insert name, ID number]
[Insert name of entity]
[Insert street address]
[Insert city, state, and zip code]
  Contact Numbers:
Phone: [Insert phone number]
Fax: [Insert fax number]
         

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear ,

In a determination letter dated [ date ], you were held to be exempt from Federal income tax under section 501(c)([ ]) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined you have not operated in accordance with the provisions of section 501(c)([ ]) of the Code. Accordingly, your exemption from Federal income tax is revoked effective [ date ]. This is a final letter with regard to your exempt status.

We previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary. At that time, we informed you of your right to contact the Taxpayer Advocate, as well as your appeal rights. On [ date ] you signed Form 6018-A, Consent to Proposed Action, agreeing to the revocation of your exempt status under section 501(c)([ ]) of the Code.

You are required to file Federal income tax returns for the tax period(s) shown above. If you have not yet filed these returns, please file them with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:
Taxpayer Advocate Service
[1st Line Address]
[2nd Line Address]
[City, State Zip]
[Phone Number]

If you have any questions, please contact the person whose name and telephone number are shown at the beginning of this letter.

Thank you for your cooperation.
  Sincerely,




[Insert name]
Director, EO Examinations
 

Exhibit 4.75.31-10 
Modified Letter 950, 30-Day Letter, for Income Tax Deficiency

Internal Revenue Service
Tax Exempt and Government Entities Division
Department of the Treasury
Exempt Organizations: Examinations
[Insert street address]
[Insert city, state, and zip code]
 
                   
Date: [Insert date] Form Number:
[1120 or 1041]
Tax Year(s) Ended:
[Insert tax periods]
Taxpayer Identification Number:
[Insert TIN]
Person to Contact:
[Insert name]
Employee Identification Number:
[Insert ID number]
[Insert name of entity]
[Insert c/o or Attn: and name]
[Insert street address]
[Insert city, state, and zip code]
Employee Telephone Number:
[Insert phone number] (Phone)
[Insert fax number] (Fax)
Last Date to Respond to this Letter:
                   
CERTIFIED MAIL – RETURN RECEIPT REQUESTED
                   
Dear Sir or Madam,

We are enclosing a copy of our report of examination explaining proposed changes to the amount of your tax for the year(s) shown above.

Please read the report, and tell us whether you agree or disagree with the changes by the date shown above. (This report may not reflect the result of later examinations of partnerships, "S" Corporations, trusts, etc., in which you may have an interest. Changes to those accounts could also affect your tax.)

If you agree, you should:
  1. Sign, date and return the enclosed Form 4549, Income Tax Examination Changes.
  2. Enclose payment of the tax and interest. Make your check or money order payable to the United States Treasury. If you owe additional taxes, it is to your advantage to pay the full amount. The enclosed Publication 3498, The Examination Process, provides additional payment information.
  3. Return the signed agreement form and payment to us at the address indicated at the heading of this letter.
If you can only pay part of your bill, please call the contact person at the telephone number shown in the heading of this letter to discuss different methods of payment, such as paying in installments. If you do not enclose payment for the additional tax and interest, we will bill you for any unpaid amounts.

If you do not agree, you may appeal the proposed changes through our Appeals Office. Publication 3498 and Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, explain how to appeal an Internal Revenue Service (IRS) decision. These publications include information on your Rights as a Taxpayer and the IRS Collection Process. Send us a letter requesting consideration by Appeals. Indicate the issues you don’t agree with and the reasons why you don’t agree.

If you request a conference with Appeals, you must submit a written protest within 30 days from the date of this letter. An Appeals officer will review your case. The Appeals Office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. By requesting a conference with our Appeals Office, you may avoid court costs (such as the Tax Court filing fees), resolve the matter sooner, and/or prevent interest and any penalties from increasing on your account.

If you do not reach an agreement with our Appeals Office or if you do not respond to this letter by the date indicated in the heading of this letter, we will process your case based on the information shown in the report. We will send you a statutory notice of deficiency that gives you 90 days to petition the United States Tax Court. The notice will tell you how to obtain Tax Court Review of your case. If you allow the 90-day period to expire without petitioning the tax court, we will bill you for any additional tax, interest, and penalties.

You have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal Appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:
Taxpayer Advocate Service
[1st Line Address]
[2nd Line Address]
[City, State Zip]
[Phone Number]
Who to Contact if You Have Questions
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.
  Sincerely,




[Insert name]
Director, EO Examinations
Enclosures:
Report of Examination
Agreement Forms
Publication 3498
Publication 556
Publication 594
Envelope
In lieu of Letter 950

Exhibit 4.75.31-11 
RCCMS – NMF Protective Establishments RCCMS Activity Record Protective Establishments - AIMS NMF Establishment of 1120 Return (Unagreed Revocations Only)

Establishing Converted Form 1120

  • Validate For: Establish

  • Update AIMS: Unchecked

  • Type: Form 1120

  • Activity Codes: 338, 203 through 231 [For Form 1041, 495 or 496]

  • Statute date: The statute date is assumed to be the same as the statute date for the EO information return. If the taxpayer is a nonfiler, it is the date the tax return will be postmarked or filed with the examiner.

  • Master File type: NMF – Non-Master File

  • MFT Code: 32 (Form 1120 NMF), or 21 (Form 1041 NMF)

  • Source Code: 44

  • Status Code: 10

  • Reason for Request: Protective AIMS establishment for Conversion of Form 990 to Form 1120; Case suspensed while revocation is unagreed.

  • Save and Close

  • Select Request Establishment from the Actions menu.

    Note:

    The activity will be established on RCCMS without the AIMS box checked. The AIMS NMF establishment must be done manually on Form 5588. See instructions for Form 5588 at IRM Exhibits 4.5.1-11 and 4.5.1-12 (9/2006).

Exhibit 4.75.31-12 
Modified Letter 2778, Tax Return Accepted as Filed - No Penalties

Internal Revenue Service
Tax Exempt and Government Entities Division
Department of the Treasury
Exempt Organizations: Examinations
[Insert street address]
[Insert city, state, and zip code]
 
       
Date: [Insert date]   Form Number:
[1120 or 1041]
Tax Year(s) Ended:
[Insert tax periods]
Taxpayer Identification Number:
[Insert TIN]
Person to Contact:
[Insert name]
Employee Identification Number:
[Insert ID number]
[Insert name of entity]
[Insert c/o or Attn: and name]
[Insert street address]
[Insert city, state, and zip code]
  Employee Telephone Number:
[Insert phone number] (Phone)
[Insert fax number] (Fax)
         
Dear Sir or Madam,

Thank you for filing your income tax return(s) for the period(s) shown above. We're pleased to tell you that we inspected your return(s) and didn't propose any changes. If you are not eligible for a refund or do not owe any additional taxes, this is the final notice you will receive regarding your return(s).

If your return(s) showed that you overpaid your tax, we'll send you a refund if we receive your return(s) within the time limits for claiming a refund. Under the law, we can't refund tax that you paid more than three years before you filed the return.

If your return(s) showed that you still owe an amount to IRS, we'll send you a bill for the tax you owe, plus interest. As our examiner has explained to you, we're not charging you delinquency penalties because you showed that you had reasonable cause for filing late. You should receive the bill within the next few weeks.

If you have questions, please write to or call the person whose name is shown at the top of this letter. Whenever you write to us, please include your area code and telephone number, the best time for us to call you, and this letter. You may want to keep a copy of this letter for your records.
      Sincerely,




[Insert name]
Director, EO Examinations
In lieu of Letter 2778

Exhibit 4.75.31-13 
Modified Letter 3604, No Tax Liability after Proposed Adjustment

Internal Revenue Service
Tax Exempt and Government Entities Division
Department of the Treasury
Exempt Organizations: Examinations
[Insert street address]
[Insert city, state, and zip code]
 
       
Date: [Insert date]   Form Number:
[1120 or 1041]
Tax Year(s) Ended:
[Insert tax periods]
Taxpayer Identification Number:
[Insert TIN]
Person to Contact:
[Insert name]
Employee Identification Number:
[Insert ID number]
[Insert name of entity]
[Insert c/o or Attn: and name]
[Insert street address]
[Insert city, state, and zip code]
  Employee Telephone Number:
[Insert phone number] (Phone)
[Insert fax number] (Fax)
         
Dear Sir or Madam,

Thank you for replying to our notice of proposed adjustment regarding your income tax liability. We reviewed the information you provided and are pleased to tell you that our questions have been resolved.

If you have not yet filed your income tax return(s) you must still do so within 60 days from the date of this letter, otherwise you do not need to take any further action.

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.
      Sincerely,




[Insert name]
Director, EO Examinations
In lieu of Letter 3604

Exhibit 4.75.31-14 
Modified Letter 987, Agreed Income Tax Change

Internal Revenue Service
Tax Exempt and Government Entities Division
Department of the Treasury
Exempt Organizations: Examinations
[Insert street address]
[Insert city, state, and zip code]
 
       
Date: [Insert date]   Form Number:
[1120 or 1041]
Tax Year(s) Ended:
[Insert tax periods]
Taxpayer Identification Number:
[Insert TIN]
Person to Contact:
[Insert name]
Employee Identification Number:
[Insert ID number]
[Insert name of entity]
[Insert c/o or Attn: and name]
[Insert street address]
[Insert city, state, and zip code]
  Employee Telephone Number:
[Insert phone number] (Phone)
[Insert fax number] (Fax)
         
Dear Sir or Madam,

We've reviewed and accepted the proposed adjustment that we previously gave to you regarding your income tax liability for the year(s) shown above.

We do not plan to make any additional changes to your tax liability unless we change a partnership, S-Corporation, trust, or estate tax return in which you have an interest. Changes to these types of returns could affect your return.

Please call us at the telephone number shown above with any questions you may have. If you write, please include your telephone number, the best time for us to call you and a copy of this letter.

Thank you for your cooperation.
      Sincerely,




[Insert name]
Director, EO Examinations
In lieu of Letter 987

Exhibit 4.75.31-15 
Modified Letter 2769, Tax Return Accepted as Filed, with Penalties

Internal Revenue Service
Tax Exempt and Government Entities Division
Department of the Treasury
Exempt Organizations: Examinations
[Insert street address]
[Insert city, state, and zip code]
 
       
Date: [Insert date]   Form Number:
[1120 or 1041]
Tax Year(s) Ended:
[Insert tax periods]
Taxpayer Identification Number:
[Insert TIN]
Person to Contact:
[Insert name]
Employee Identification Number:
[Insert ID number]
[Insert name of entity]
[Insert c/o or Attn: and name]
[Insert street address]
[Insert city, state, and zip code]
  Employee Telephone Number:
[Insert phone number] (Phone)
[Insert fax number] (Fax)
         
Dear Sir or Madam,

Thank you for filing your converted income tax return(s) for the period(s) shown above. We're pleased to tell you that we inspected your return and didn't propose any changes.

If your return(s) showed that you overpaid your tax, we'll send you a refund if we received the return(s) within the time limits for claiming a refund. Under the law, we can't refund tax that you paid more than three years before you filed the return.

If your return(s) showed that you still owe an amount to IRS, we'll send you a bill for the tax you owe, plus interest and penalties. As our examiner has explained to you, we are charging you delinquency penalties because you didn't show that you had reasonable cause for filing late. You should receive the bill within the next few weeks.

You have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal Appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:
Taxpayer Advocate Service
[1st Line Address]
[2nd Line Address]
[City, State Zip]
[Phone Number]
If you have questions, please write or call the person whose name is shown at the top of this letter. Whenever you write to us, please include your telephone number, with the area code, the best time for us to call you, and a copy of this letter. You may also wish to keep a copy for your records.
      Sincerely,




[Insert name]
Director, EO Examinations
In lieu of Letter 2769

Exhibit 4.75.31-16 
Form 990 to Form 1120 Conversion Table

Contributions, gifts, grants, and other receipts
Form 990 Description Form 1120 Description
Direct public support Non-taxable or Gross Receipts or Sales 1 & 2
Indirect public support Non-taxable or Gross Receipts or Sales
Government contributions Gross Receipts or Sales 3
Program service revenue including government fees and contracts Gross Receipts or Sales
Membership dues and assessments Gross Receipts or Sales 4
Interest on savings and temporary cash investments Interest
Dividends and interest from securities Dividends
Gross rents Gross Rents 5
Less: rental expenses Other Deductions 5
Other investment income Other Income
Gross amount from sales of assets other than inventory Capital Gain Income (net with Cost)
Less: cost or other basis and sales expenses Capital Gain Income (net with Cost)
Net gain or (loss) Capital Gain Income
Gross revenue from special events and activities Gross Receipts or Sales
Cost of goods sold from special events and activities Cost of Goods Sold
Gross sales of inventory, less returns and allowances Gross Receipts or Sales
Less: cost of goods sold Cost of Goods Sold
Other Revenue Other Income
Expenses 6, 7 & 8
Form 990 Description Form 1120 Description
Grants and allocations Charitable Contributions, if qualified
Specific assistance to individuals Other Deductions, if qualified
Benefits paid to or for members Other Deductions, if qualified 4
Compensation of officers, directors, etc. Compensation of Officers
Other salaries and wages Salaries and Wages
Pension plan contributions Pension, profit-sharing, etc., plans
Other employee benefits Employee benefits programs
Payroll taxes Taxes and Licenses
Professional fund-raising fees Other Deductions, if qualified
Accounting fees Other Deductions
Legal fees Other Deductions
Supplies Other Deductions
Telephone Other Deductions
Postage and shipping Other Deductions
Occupancy Rents
Equipment rental and maintenance Repairs and Maintenance
Printing and publications Other Deductions
Travel Other Deductions
Conferences, conventions, and meetings Other Deductions
Interest Interest
Depreciation, depletion, etc. Depreciation or Depletion, if qualified
Other expenses Other Deductions
1 IRC §61, Gross Income Defined. As a general rule, all income is taxable unless proven otherwise.
2 IRC §102, Gift and Inheritances. As a general rule, gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. *See also: Synanon Church v. Commissioner, T.C. Memo. 1989-270 (Docket No. 20015-84). See Exhibit CPE 1990, Taxation of Revoked Tax-Exempt Organizations: The Synanon Case, and General Counsel Memorandum 39813. (Not citable as legal precedent)
** Issues Examiner should consider:
  1) Was there a good faith solicitation?
  2) Was there a good faith contribution?
3 Government Grants are not excludable income under IRC §102
4 IRC §277, Deductions by Certain Membership Organizations [non 501(c)(3)]. As a general rule, deductions shall be allowed only to the extent of income derived during such year from members or transactions with members.
* 501(c)(3) - generally deductible
** Examiners need to distinguish between contributions and gross receipts.
Scenarios would be:
  1) All classified as contributions with member benefits all deductible
  2) Quid-pro-quo - only partially contributions and only partially deductible
  3) Member services for member benefits - where no part is attributable to charitable purpose, would not be deductible.
5 IRC §470, Property Leased to an Exempt Organization. If a corporation leases property to a governmental or other tax-exempt entity, the corporation cannot claim deductions related to the property to the extent that they exceed the corporation's income form the lease payments.
6 IRC §162, Trade of Business Expenses. Examiners should be aware of the "Income Offset Rules" for deductibility of expenses.
7 IRC §§263 and 263A, Capital Expenditures. Generally requires corporations to capitalize, or include in inventory certain costs incurred in connection with real property and inventory. *Please be aware that this section applies to Form 990 as well*
8 IRC §183, Activities not engaged in for profit. As a General Rule, in the case of an activity engaged in by an individual or an S Corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter [26 USCS §§ 1 et. seq.] except as provided in this section.

More Internal Revenue Manual