4.76.23  Small Insurance Companies or Associations IRC section 501(c)(15)

4.76.23.1  (07-01-2005)
Introduction

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from income tax under IRC section 501(a) as an organization described in IRC section 501(c)(15). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC section 501(c)(15) organization.

  2. These guidelines provide specific assistance for the examination of an IRC section 501(c)(15) organization and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM 4.75.10 through 4.75.12. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC section 501(c)(15) organizations. The examiner should review the technical information contained in IRM 7.25.15.

4.76.23.2  (07-01-2005)
Background Information

  1. IRC section 501(c)(15) originally granted exempt status to entities referred to as certain mutual insurance companies or associations other than life or marine. The Tax Reform Act of 1986 (TRA-86) eliminated the distinction between small mutual companies and other small companies and extended IRC section 501(c)(15) to all eligible small companies, whether stock or mutual, other than life.

  2. TRA-86 changed the nature of the ceiling amount for tax exemption from certain gross receipts to net written premiums (or, if greater, direct written premiums) which do not exceed $350,000 per year. This exemption also includes interinsurers and reciprocal underwriters. These changes were made effective for tax years beginning after December 31, 1986.

4.76.23.3  (07-01-2005)
Organizational Requirements

  1. Effective for years beginning after December 31, 2003, Section 206 of Public Law 108-218, Pension Funding Equity Act of 2004 (the Act), revised the definition of small property and casualty insurance companies (insurance companies other than life insurance companies) exempt from income taxes. Specifically, the Act amended IRC section 501(c)(15) to provide that a property and casualty insurance company is eligible to be exempt from federal income tax if,

    1. Gross receipts for the taxable year do not exceed $600,000; and

    2. More than 50 percent of such gross receipts consist of premiums. See IRC section 501(c)(15)(A)(i).

      Note:

      For purposes of these tests, amounts received by all members of the insurance company’s controlled group (including foreign and tax-exempt companies) are taken into account. See IRC section 501(c)(15)(C).

  2. In the case of a mutual insurance company, the gross receipts of which for the taxable year:

    1. Do not exceed $150,000; and

    2. More than 35 percent of such gross receipts consist of premiums.

      Note:

      This clause shall not apply if any employee of the company, or a member of the employee's family (as defined in IRC section 2032A(e)(2)), is an employee of another company exempt from taxation by reason of this paragraph (or would be so exempt but for this sentence).

4.76.23.4  (04-01-2011)
Examination Guidelines

  1. The type of examination conducted, of an organization exempt under IRC section 501(c)(15), will depend on whether the organization is a stock-owned organization or a mutual type organization.

4.76.23.4.1  (04-01-2011)
Stock-Owned Examination Guidelines

  1. Review the operations of stock-owned insurance companies:

    1. Determine whether the organization is providing insurance;

    2. Determine that the organization is not a life insurance company;

    3. Ascertain whether the organization has gross receipts in excess of $600,000. If the gross receipts exceed $600,000 the organization will not qualify for recognition of exemption under IRC section 501(c)(15) for the year under examination;

    4. If the organization's gross receipts do not exceed $600,000, ascertain whether over 50 percent of the gross receipts consist of premiums. If the premiums do not exceed 50 percent of the gross receipts, the organization will not qualify for recognition of exemption under IRC section 501(c)(15) for the year under examination.

4.76.23.4.2  (04-01-2011)
Mutual Insurance Companies Examination Guidelines

  1. Review the operations of mutual insurance companies:

    1. Determine whether the organization is providing insurance;

    2. Determine that the organization is not a life insurance company;

    3. Ascertain whether the organization has gross receipts in excess of $600,000. If the gross receipts exceed $600,000 the organization will not qualify for recognition of exemption under IRC section 501(c)(15) for the year under examination;

    4. If organization's gross receipts do not exceed $600,000, ascertain whether over 50 percent of the gross receipts consist of premiums. If the premiums do not exceed 50 percent of the gross receipts, the organization may still qualify for exemption under IRC section 501(c)(15) if it meets the requirements in (e) and (f) below;

    5. If the organization does not meet the requirements in (c) and (d) above, ascertain whether the organization's gross receipts exceed $150,000. If gross receipts exceed $150,000, the organization will not qualify for exemption under IRC section 501(c)(15) for the year under examination;

    6. If it has been determined that the gross receipts do not exceed $150,000, ascertain whether the premiums exceed 35 percent of the gross receipts. If the premiums exceed 35 percent of gross receipts, the organization will not qualify for recognition of exemption under IRC section 501(c)(15) for the year under examination.

4.76.23.4.3  (04-01-2011)
Life Insurance Companies Examination Guidelines

  1. The examiner should review IRC section 816, which provides a definition of a long-term life insurance company, and establishes a mechanical formula for determining whether an insurance company is a life insurance company. The definition of a life insurance company takes into account " life insurance reserves" and "unearned premiums and unpaid losses on noncancellable life, accident, or health policies not included in life insurance reserves." A company is not a life insurance company unless these amounts exceed 50 percent of the total reserves. If the organization is considered a life insurance company, it is not able to meet the requirements under IRC section 501(c)(15). IRC section 501(c)(15) is only for small property and casualty companies. Life insurance companies are excluded.

4.76.23.4.4  (04-01-2011)
Gross Receipts Test

  1. The examiner should ascertain that the gross receipts of the organization for the taxable year do not exceed $600,000 and more than 50 percent of such gross receipts consists of premiums.

  2. If the organization is a mutual company and does not meet the requirements in (1), then the examiner should ascertain that the gross receipts of the organization for the taxable year do not exceed $150,000 and more that 35 percent of such gross receipts consist of premiums.

  3. The examiner should review IRM 7.25.15 and Notice 2006-42, 2006-1 C.B. 878, which provides a definition of "net written premiums," "direct written premiums," and other pertinent terms.

  4. All direct written premiums received by the insurance company during a tax year should be included in calculating the $600,000 gross receipts test, even though some of such income is not earned premium income for that tax year. In essence,"premiums written" is used in the calculation, not "premiums earned."

  5. In computing the gross receipts of an organization the following items should not be included in the computation:

    1. Capital Losses are not included. Only capital gains are included in the computation;

    2. Reimbursements from reinsurance companies to cover some or all of the claims paid. These amounts are a reduction in the claims paid, not part of gross receipts;

    3. So-called "commissions" received from a reinsurance company that the organization is reinsuring a portion of their insurance with. These so-called "commissions" are a reduction in the reinsurance premiums paid to the reinsurance company and are not part of gross receipts.

4.76.23.4.4.1  (04-01-2011)
Controlled Group

  1. The 2004 Act retains the controlled group rule, now requiring aggregation of gross receipts with those of other members of its controlled group defined by IRC section 831 and IRC section 1563. See IRM 7.25.15.3.3.

  2. The examiner must determine whether the insurance company is a member of a controlled group, as the gross income from all other members of the controlled group is included in the $600,000 gross income test.

4.76.23.4.5  (07-01-2005)
Transactions Between Related Parties

  1. The examiner should review transactions between related parties to determine whether a significant tax avoidance effect exists, or if the transactions indicate a "sham." The examiner should review IRC section 845 regarding reinsurance agreements between related parties. Where there is evidence of tax avoidance or evasion, the examiner should determine whether there is a significant tax avoidance effect with respect to any reinsurance contract entered into by the insurance company that would require adjustments under IRC section 845(b). Factors that the courts have looked at to determine whether the transaction was a " sham" have included:

    1. Whether the parent formed the captive insurer with a legitimate business purpose;

    2. Whether the captive insurer determined premiums at arm's length that reflect the insured's risk history and industry standards;

    3. Whether there exists indemnification agreements or comfort letters that guarantee the performance of a captive insurer;

    4. Whether the captive is thinly or over-capitalized;

    5. Whether the captive's reserves were actuarily determined at a fair and reasonable level and not inflated for tax avoidance reasons; and

    6. Whether circular cash flows exist, such as loans from the captive insurer to its parent or other affiliated entity.

  2. The examiner should review the governing instruments, and, as part of the initial contact or interview:

    1. Obtain the names and family relationships of the shareholders in the controlled group;

    2. Determine whether the insurance company insures parties related to its shareholders; and

    3. Determine whether the insurance company reinsures insurance products produced by entities financially related to its shareholders.

    Caution:

    Revenue Ruling 77-316, 1977-2 C.B. 53, has been revoked by the issuance of Revenue Ruling. 2001-31, 2001-26 I.R.B. 1348, June 25, 2001. Therefore, an identity of ownership interests between the shareholders of the "producer taxable entities" (i.e., the source of the insurance business) and the insurance company shareholders (or identical shareholders, for that matter) will no longer be sufficient without additional facts to justify revocation of exemption on the basis that the "producer taxable entity" and insurance company are within the same "economic family," that is, have identical owners. With the revocation of Revenue Ruling 77-316, the "economic family" rationale can no longer be used for revocation of exemption. Instead, it is necessary to apply directly the facts and standards in the LeGierse and Malone & Hyde cases (see below). Agents seeking revocation on this basis are advised in all instances to seek technical advice from the Washington, D.C., Office, EO Rulings and Agreements.

4.76.23.4.6  (07-01-2005)
Insurance Contracts

  1. Exemption under IRC section 501(c)(15) provides that an organization's primary and predominant activity must be of an insurance company engaged in the business of issuing and servicing insurance contracts. An insurance contract must shift and distribute a risk of loss, and that risk must be an "insurance" risk, as stated in Helvering v. LeGierse, 312 U.S. 531(1941). Also, see Revenue Ruling 89–96, 1989-2 C.B. 114, which holds that the assumption of investment risk cannot create an insurance agreement. The examiner should conduct a sample review of the contracts issued by the organization to determine if they qualify as insurance contracts.

4.76.23.4.7  (07-01-2005)
Captive Foreign Corporation

  1. The examiner should ascertain whether the insurance company is a captive foreign corporation and whether it has made an election under IRC section 953(c)(3)(C) or IRC section 953(d). If so, obtain a complete copy of that election and determine if it satisfies the annual information requirements of Revenue Procedure 2003-47, 2003-2 C.B. 55.

    Note:

    Revenue Procedure 2003-47 details the required contents of the election. Those contents include not only a calculation under the "US Assets Test," but also a list of U.S. shareholders that includes their SSN's, percentage of ownership interests and addresses. Further, Revenue Procedure 2003-47 requires that the election be UPDATED yearly if there is a change in ownership interests or owners. A copy of the update must be filed with the Form 990 in the year of change. IRC section 1563(b)(2)(c) excludes foreign corporations subject to tax under IRC section 881 from the definition of a controlled group and, therefore, would deny exemption under IRC section 501(c)(15). If the foreign corporation has made an election under either IRC section 953(c)(3)(C) or IRC section 953(d), then it will not be treated as an excluded member under IRC section 1563(b)(2)(c).

  2. If the insurance company is a captive foreign corporation, determine whether it is operated like the organization described in Malone & Hyde Inc. v. Commissioner, 62 F.3d 835 (6th Cir. 1995). The Sixth Circuit concluded since there was no shifting and distribution of the risk of loss to unrelated parties, there was no insurance, and the offshore insurance subsidiary was a sham corporation propped up by its parent.

    Note:

    Per Revenue Ruling 2001–31, 2001-1 C.B. 1348, the Service may, however, continue to challenge certain captive insurance transactions based on the facts and circumstances of each case. See, e.g., Malone & Hyde Inc., which concluded that brother-sister transactions were not insurance, because the taxpayer guaranteed the captive's performance, the captive was thinly capitalized and loosely regulated; and Clougherty Packing Co. v. Commissioner , 811 F.2d 1297 (9th Cir. 1987), which concluded that a transaction between parent and subsidiary was not insurance.

4.76.23.5  (04-01-2011)
Insurance Companies in Liquidation

  1. Insurance companies in liquidation that no longer receive premiums and their main source of income is investment income may qualify for exemption under IRC section 501(c)(15) if they meet the transitional rule for companies in receivership or liquidation. The transitional rules are only for companies that are in a court-ordered liquidation or receivership. An organization that is voluntarily liquidating is not entitled to the transitional rules

  2. For insurance companies in liquidation, the examiner should:

    1. Review the court documents to determine the date on which the insurance company could no longer write insurance;

    2. Determine whether the insurance company received gross receipts in excess of $600,000 before the date on which it could no longer write insurance. If so, the insurance company does not qualify under IRC section 501(c)(15) for such tax year;

    3. Determine whether the insurance company has outstanding policies on which it is liable. If not, the insurance company does not qualify under IRC section 501(c)(15);

    4. Determine whether the insurance company's assets exceed the needs of the business. If so, the examiner would then determine if the company is primarily in the insurance business; and

    5. Determine whether the insurance company has received reinsurance or premiums during a tax year. If so, the insurance company would not qualify under IRC section 501(c)(15) if 50 percent or less of its gross receipts consisted of premiums.

4.76.23.5.1  (07-01-2005)
Transitional Rule for Companies in Receivership or Liquidation

  1. TRA 86 provides a transition rule for insurance companies in receivership or liquidation. It states:

    1. In the case of a company or association that, for the taxable year that includes April 1, 2004, meets the requirements of IRC section 501(c)(15)(a) as in effect for the last taxable year beginning before January 1, 2004,

    2. And that is in a receivership, liquidation, or similar proceeding under the supervision of a State Court on April 1, 2004, the amendments made by the Act apply to taxable years beginning after the earlier of the date such proceeding ends or December 31, 2007,

    3. The transition rules no longer apply to the organization, even if still in receivership, liquidation or other similar proceeding under the supervision of a State Court.

4.76.23.6  (04-01-2011)
Uniqueness of Exemption

  1. An organization that wants to qualify for exemption under IRC section 501(c)(15) may do one of two things:

    1. Organization may apply for exemption by filing its application on Form 1024, Application for Recognition of Exemption Under Section 501(a) or for Determination Under Section 120

    2. Organization may start filing the Forms 990, Return of Organization Exempt From Income Tax,without filing Application Form 1024.

  2. An organization that files Application 1024 and qualifies for exemption under IRC section 501(c)(15) and the requirements set forth in the Act, will receive a determination letter from the Service. This letter entitles the organization to operated as an exempt entity under IRC section 501(c)(15) and file Forms 990. This also allows the organization to have potential relief under IRC section 7805(b), if revocation of the organization's tax exempt status is ever proposed. An organization that has received a determination letter from the Service will have Status Code 01 on the INOLES and BMFOLO.

  3. Organizations that do not file the application form but do qualify for exemption under IRC section 501(c)(15) and the requirements set forth in the Act may also file Forms 990. The difference is that they do not have a determination letter from the Service. Since the organization does not have a determination letter from the Service, it would not be allowed potential relief under IRC section 7805(b) if its exempt status is ever challenged. The examiner would propose "Denial of Exemption" rather than revocation, since the organization does not have a determination letter. Organizations that file the Forms 990 without having a determination letter from the Service will have Status Code 36 on INOLES and BMFOLO.

  4. Another uniqueness of organizations exempt under IRC section 501(c)(15), whether having a determination letter from the Service or just filing Forms 990, is that they can go in and out of exemption yearly, depending on whether they meet the requirements under IRC section 501(c)(15) and the requirements set forth in the Act. If in one year the organization meets the requirements, they are allowed to file the Form 990. In another year, if they don't meet the requirements, they are required to file Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return.An organization is able to switch between the Form 990 and the Form 1120-PC yearly depending on whether they qualify for exemption under IRC section 501(c)(15) and the requirements set forth in the Act.

4.76.23.7  (04-01-2011)
Revocation of Exemption

  1. An organization's exemption under IRC section 501(c)(15) may be revoked for two different reasons:

    1. Organization no longer qualifies as an insurance company, or;

    2. Organization does not meet the requirements set forth in the IRC section 501(c)(15) and the Act.

  2. If the organization no longer qualifies for exemption because it no longer qualifies as an insurance company, the organization would be liable to file Forms 1120,U.S. Corporation Income Tax Return. If the organization was formed offshore, the organization may have to perform an unwinding procedure where the organization would file Form 1120 for the first year of revocation, file Form 1120 for the first day of the second year, and then file Form 1120-F,U.S. Income Tax Return of a Foreign Corporation for future years. Assistance from SBSE or LMSB may be required in this situation.

  3. If the organization qualifies as an insurance company but fails to meet the requirements for exemption under IRC section 501(c)(15), based on the requirements set forth in the Act, the organization would be required to file Forms 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return.

  4. It is the examiner's responsibility to solicit the Forms 1120 or Forms 1120-PC and establish them on AIMS Master File for agreed revocations (AIMS Non-Master File for unagreed revocations). Referrals will no longer be made to SBSE or LMSB in order to enforce the tax.

4.76.23.7.1  (04-01-2011)
Processing Returns After Agreed Revocation

  1. After an agreed revocation of a 501(c)(15) organization the examiner must solicit the Form 1120 or Form 1120-PC. If the taxpayer is unable or unwilling to submit the return, and the return must be enforced, the examiner must prepare a substitute for return, and establish the return on AIMS Master File, using push code 036.

  2. If the taxpayer submits a converted return, the examiner will prepare a "Converted Return Package" in a separate folder apart from the revocation casefile. The return will be established on AIMS Master File, using push code 020.

  3. If the converted return is incomplete or inaccurate, the examiner can allow the taxpayer an opportunity to correct and re-submit a complete and accurate return to the examiner for processing.

  4. If the taxpayer insists on filing a disputable return, and the return is not fraudulent, the examiner will process the return, and, if the tax year meets enforcement criteria, propose an adjustment to the return. If the secured return is fraudulent, examiners should consult with the TE/GE Fraud Specialist (TFS) or their local Fraud Technical Advisor (FTA).

  5. The examiner must Stamp or write in at upper right corner, the date the return was received. Do not stamp over numbers. Annotate on the top margin of a secured converted return in red, "FORM 990 CONVERTED TO FORM 1120 BY TE/GE " or" FORM 990 CONVERTED TO FORM 1041 BY TE/GE" . Annotate on bottom margin in red. "TC 599 cc 96 "

  6. A copy of the secured converted return will serve as the working return for the converted return case file folder.

  7. Attach Form 3198-A, TE/GE Special Handling Notice, to the front of the income tax return. Include a statement regarding penalties in the Special Instructions section of the notice.

    Note:

    As a general rule, delinquency penalties should not be imposed, except under the most egregious cases where the taxpayer failed to file Forms 990 while exempt with no reasonable basis.

  8. Examiners have the authority to submit secured converted income tax returns to Campus for processing. Before submitting the return to the Campus examiners should:

    1. Process Form 2363-A with ESS to update the filing requirement and revocation. See IRM Exhibit 4.76.23-1 for instructions for preparing Forms 2363-A. Submit the Forms 2363-A by fax or mail to ESS at the following address
      Internal Revenue Service
      TEGE EO Exam Special Support (ESS)
      1100 Commerce Street, MC 4980DAL
      Dallas, TX 75242
      Fax (214) 214-413-5552

    2. Monitor INOLES or BMFOLO to ensure filing requirement changes have posted to BMF. This process will take approximately four weeks (two cycles) to complete.

    3. Submit Form 4844 to ESS (see fax and address above) to alert Campus noticing units of a complying taxpayer.

    4. Prepare Secured Converted Income Tax Returns package.

    5. Establish the secured return on AIMS Master File via the Records Case Control Management System (RCCMS) using Push Code 020.

    6. If applicable, delete a previously established Non Master File record for the same return and tax year on Form 10904.

    7. Forward the original converted return package to Ogden Campus by Form 3210, using procedures similar to delinquent returns.

    8. Submit the case to EO Mandatory Review.

4.76.23.7.2  (04-01-2011)
Preparation of Secured Converted Income Tax Returns Package

  1. The examiner will prepare the Converted Return Package which will contain the original converted returns filed with the examiner. The examiner must forward the package via Form 3210 to Campus after processing Forms 2363-A and 4844 with ESS. The package will also contain Form 3198-A completed as follows:

    • Check the box for "Send all communications per POA" , if applicable.

    • In Other Instructions, indicate "CONVERTED FORM [1120 or 1120-PC or 1041] RETURN SECURED BY TE/GE – EXEMPT STATUS REVOKED."

    • In Special Instructions, indicate in big bold letters " THE ASSESSMENT STATUTE EXPIRATION DATE (ASED) OF ATTACHED FORM [1120 or 1120-PC or 1041] STARTS WITH THE FILING OF FORM 990 ON [date 990 was filed] AND EXPIRES [state expiration date of Form 990]."

    • In Other Instructions if applicable, indicate "NOTIFICATION OF STATE OFFICIALS - §6103(d)."

    • Note on the Form 3198-A "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 OR OTHER PENALTIES – REASONABLE CAUSE ESTABLISHED"

    • In Other Instructions (agreed and default cases only), indicate" TRANSFER CREDIT FOR TAX PAID ON [YYYYMM ] FORM 990-T TAX MODULE TO THIS CONVERTED RETURN MODULE." .

  2. Each Converted Return should have Form 3198-A attached.

  3. If payment is received, the following steps must be taken:

    1. Prepare a Form 3244-A, Payment Posting Document, for each taxable year for which payment was received . Enter the amount of the total payment opposite Code 670 and enter a zero opposite Code 570. The TC 570 will prevent the payment from refunding until the examination deficiency has posted.

    2. Make a copy(s) of the Form(s) 3244-A and the check or other payment document, such as a money order, received for the income tax case file. Enter "Copy – Original sent to the Ogden Campus on [Date] " on the top of the copy(s) of Form(s) 3244-A in red.

    3. For amounts under $100,000 the Form 3244-A and payment are mailed to:
      Internal Revenue Service
      1973 N. Rulon White Blvd.
      Ogden, Utah 84404

  4. For amounts over $100,000, the Form 3244-A and payment are mailed to:
    Internal Revenue Service
    1973 N. Rulon White Blvd.
    Mail Stop: 2003
    Ogden, Utah 84404

  5. Prepare Form 3210, Document Transmittal, to transmit the payment to Campus. Itemize each payment on Form 3210.

  6. Original Secured Income Tax Return, properly annotated in red at top margin, "FORM 990 CONVERTED TO FORM 1120 BY TE/GE on [Date] " Annotate in red at bottom margin," TC 599 cc 96"

  7. If applicable, copy of power of attorney, and copy of executed consent to extend the statute of limitations. The copy of the executed consent is the last document facing the rear

  8. Current transcript, BMFOLT/TXMODA and INOLES/BMFOLO, used in the determination of the organization’s failure to file a required return. The transcript must not be more than 30 days old.

  9. A copy of the entire package will serve as a working return for the income tax return case file, and will be properly annotated in red on the top margin as "Copy of" immediately before the original annotation.

  10. Both the revocation and converted return file must be submitted to EO Mandatory Review together for final processing.

4.76.23.7.3  (04-01-2011)
Processing Returns After Unagreed Revocation, Without Protest

  1. If after issuance of a 30 day proposed revocation letter the taxpayer does not respond (default), the revocation becomes final if Mandatory Review concurs with the revocation. If enforcement of income taxes is required, the agent will prepare substitute for converted returns and place them in a separate income tax file to be closed with the revocation file. The substitute for converted returns will be established on AIMS Master File, using push code 036. Both files must be submitted to Mandatory Review for final processing.

  2. The revocation case file will contain the following documents

    1. Form 3198-A. See exhibit 4.76.23-3 for information to be placed on Form 3198-A.

    2. Form 5599, Disposal Code (DC 10)(RCCMS 604). See Exhibit 4.76.23- 2 for information to be placed on Form 5599.

    3. Copy of the 30 day letter which will become the final letter.

    4. Forms 2363-A and 4844 enclosed in a sealed envelope. ..

  3. The Income Tax file will contain the following:

    1. Form 3198-A to attach to each Substitute for Converted Return (SFCR). See exhibit 4.76.23-3 for instructions on the completion of Form 3198-A .

    2. Form 5599, Disposal Code (DC10) (RCCMS 604).

    3. Form 4549 with computation of tax for each year, including Form 13496, IRC Section 6020(b) Certification.

    4. Substitute For Converted Returns (dummy returns).

  4. The "Sealed Envelope" is a "To Be Opened by Addressee Only " envelope. The envelope is labeled as follows: "FORMS TO BE PROCESSED IF REVOCATION IS APPROVED" It will contain documents needed to process if Mandatory Review concurs with the revocation. The following is a list of those documents

    • Form 2363-A. See Exhibit 4.76.23-1 for instructions for completing Form 2363-A

    • Form 4844, to halt notices from the Campus,

    • Form 5597, to open an AIMS Master File record,

    • Form 10904, if applicable, to delete a duplicate AIMS Non-Master File record once the AIMS Master File record is established,

  5. Once completed. the file must be closed with the revocation file to mandatory review for final processing.

4.76.23.7.4  (04-01-2011)
Processing Returns After Unagreed Revocation With Protest

  1. If the organization files a formal protest the following actions should be taken

    • Prepare Forms 2363-A and 4844 place them in a sealed envelope. See IRM Exhibit 4.76.23-3 for completion of Form 2363-A

      Note:

      The "Sealed Envelope" is a "To Be Opened by Addressee Only " envelope. The envelope is labeled as follows: "FORMS TO BE PROCESSED IF REVOCATION IS APPROVED" .

    • Prepare Form 5599, DC 07 (RCCMS 601).

    • Prepare Form 3198-A, .

    • Prepare and issue a Rebuttal Letter.

    • Close case to Mandatory Review along with revocation case for forwarding of case to Appeals.

Exhibit 4.76.23-1 
Preparation of Form 2363-A

This image is too large to be displayed in the current screen. Please click the link to view the image.

Instructions for preparing Form 2363-A.

Exhibit 4.76.23-2 
Form 5599 Instructions For Unagreed Revocation Without Protest (Default).

1 Use Disposal Code 10 (RCCMS 604), Unagreed-Without Protest
2 Use Principal Issue Code 54, Revocation. This must be the first/primary code for unagreed revocations
3 Place Form 5599 on outside-front of the information return case file folder, underneath Form 3198-A.

Exhibit 4.76.23-3 
Form 3198-A for Tax Case: Substitute for Converted Return

1 Check the Mandatory Review checkbox
2 enter" UNAGREED INCOME TAX DEFICIENCY" next to Mandatory Review checkbox.
3 Check box for SEND ALL COMMUNICATIONS PER POA, if applicable
4 In Special Features, check SFR - Substitute for Return to be Processed box.
5 In Special Features, check"Other Instructions " box, and indicate"SUBSTITUTE FOR RETURN PREPARED BY TE/GE – ASSESS TAX PER FORM 4549 – EXEMPT STATUS REVOKED"
6 In Other Instructions, indicate in big bold letters " THE ASSESSMENT STATUTE EXPIRATION DATE(ASED) OF ATTACHED SUBSTITUTE RETURNS STARTS WITH THE FILING OF FORM date of Form 990"
7 In Other Instructions if applicable, indicate 30 DAY LETTER HAS BEEN ISSUED, THE TAXPAYER HAS FILED THE ENCLOSED PROTEST, AND THE CASE SHOULD BE FORWARDED TO APPEALS
8 In Other Instructions if applicable, indicate "NOTIFY STATE OFFICIALS IAW §6103(d)"
9 In Other Instructions if applicable, indicate "TRANSFER CREDIT FOR TAX PAID ON [YYYYMM] FORM 990-T TAX MODULE TO THIS SUBSTITUTE RETURN MODULE – SEE FORM 2424"
10 Prepare one Form 3198-A attached to outside-front of the converted return case file, and one attached as front page for each SFCR.

More Internal Revenue Manual