4.81.5  Examination Process  (11-01-2009)
Tax Exempt Bonds (TEB) Examination Procedures

  1. The basic techniques incorporated in this manual are intended to ensure that a uniform approach is taken when conducting TEB examinations. The following guidance on general examination techniques and procedures used to conduct examinations of tax-exempt bonds and tax credit bonds is provided for TEB examiners. The procedures outlined within this section are designed to be used as a guide for TEB examiners when examining a Form 8038 series information return and are not intended to be all inclusive.


    For purposes of this section of the IRM, references to tax-exempt bonds include tax credit bonds, unless otherwise noted.  (11-01-2009)
Examination Jurisdiction

  1. The TEB examination program was established to ensure compliance with the qualification provisions of the Internal Revenue Code (IRC) applicable to tax-exempt bonds and tax credit bonds, including IRC sections 54, 54A-54F, 54AA, 103, 1394, 7871, and 141-150. Under this program, the returns within TEB’s jurisdiction include, but are not limited to --

    • Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues,

    • Form 8038-G, Information Return for Tax-Exempt Governmental Obligations,

    • Form 8038-GC, Information Return for Small Tax-Exempt Government Bond Issues, Leases, and Installment Sales,

    • Form 8038-T, Arbitrage Rebate, Yield Reduction, and Penalty in Lieu of Arbitrage

    • Form 8038-R, Request for Recovery of Overpayment Under Arbitrage Rebate Provisions,

    • Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds, and

    • Form 8328, Carryforward Election of Unused Private Activity Bond Volume Cap.

  2. TEB examiners have the authority to assert civil penalties where warranted.  (11-01-2009)
Examination Objectives

  1. The primary objective of a TEB examination is to determine if the bond issuance is in compliance with the qualification provisions of the Internal Revenue Code, which permit bondholders to exclude from gross income interest received on the bonds. Within this objective, a point of emphasis is to determine compliance with the yield restriction and rebate requirements, including confirmation that the issuer has timely and accurately submitted appropriate rebate and/or yield reduction payments.  (11-01-2009)
Case Assignment

  1. On a quarterly basis, general program cases are transferred to field groups, via RCCMS, by TEB CPM in accordance with procedures contained in IRM section 4.81.2. Project/Initiative cases will be assigned when the project is implemented. Group managers will receive a message through RCCMS to accept those cases. Once accepted, the cases will be transferred into the group’s unassigned inventory folder on RCCMS in status 10.

  2. Group managers have the opportunity to review the RCCMS file to determine the types and location of the cases received.

  3. Based on workload needs, group managers will assign cases on RCCMS, in status 10, to examiners.

  4. Due to the complexity and nature of the returns examined, all TEB examinations are Grade 13.  (11-01-2009)
Establishment of Related Returns

  1. (1) When an examiner determines, with concurrence of the group manager, that a related return should be placed under examination, the case will be established on AIMS through RCCMS.

  2. (2) Prior to requesting establishment of the return, the examiner must obtain appropriate IDRS information utilizing command codes BMFOLI, BMFOLT, and BMFOLR to identify the correct module on master file (MF). The information obtained from MF (tax period, name control, report number, etc.) will be utilized to request establishment of the related return.

  3. (3) Examiners will request establishment of the related return through RCCMS, with the AIMS box checked, utilizing the procedures in IRM 4.81.3.  (11-01-2009)
Planning of the Examination

  1. A pre-audit analysis is required for all examinations. Pre-audit analysis is an extremely important aspect of any bond examination due to the complexity of the transactions being analyzed.

  2. Agents will prepare an audit plan, based on the pre-audit analysis, and may coordinate the plan with their group manager in order to get his/her input.

  3. As part of the pre-audit analysis, the examiner will analyze the following information, if applicable:

    1. Issuer information return filed for the bond issuance (Forms 8038, 8038-G, 8038-GC);

    2. Issuer Form 8038-CP;

    3. Issuer Forms 8038-T and 8038-R;

    4. Official Statement and any filings of material event notices;

    5. Preliminary research, including Code sections, regulations, court cases, revenue rulings and procedures;

    6. IDRS research on issuers, conduit borrowers and related parties;

      • INOLES provides the most current name, address, and filing requirements for the entity and may also indicate the EINs of related entities.

      • NAMEE will provide an EIN for business entities when the business name and address are known.

      • BMFOLI will provide a list of business returns filed, the tax periods, plan number, report number for MFT 46, overpayments on the module, and whether any module has a freeze code.

      • BMFOLT shows the date that a return was filed, and any amounts assessed and paid.

      • BMFOLR for bond issues will provide CUSIP #, issue price, issue date, maturity date, yield reduction payments, total and unused volume cap, bond issuance costs, and rebate amounts.

      • BMFOLR for the conduit borrower will provide a transcript of a tax return filed by the borrower for a specific time period.

      • BRTVU will provide specific line item amounts for a business return.

      • AMDIS identifies all returns/tax periods currently under examination and the group to which they are assigned.

      • AMDISA provides all AIMS codes associated with the examination period.

    7. Other pertinent state or federal agency reports or files, such as audit reports, minutes of meetings, and annual reports;

    8. Issuer and conduit borrower internet websites;

    9. Any other information obtained through internet search engines; and

    10. Other (e.g. Guidestar-990 Returns; EDGAR-SEC Filings; EMMA-Official Statements and Material Event Notices).

  4. The steps taken and the conclusions reached during the pre-audit analysis will be recorded in the workpapers.

  5. The Form 5773-TEB, Tax Exempt Bond Summary Sheet, should be adapted to conform to the audit plan.

  6. If the conduit borrower or issuer is under examination by another operating division or another TE/GE function, the examiner should inform them of the TEB examination and coordinate as needed.  (11-01-2009)
Scope of the Examination

  1. The examiner is generally responsible for establishing the scope of the examination to ensure appropriate consideration of all items necessary in making a correct determination of the tax-exempt status of the bonds or other specified issues. The classifier may identify items; however, the examiner is not precluded from expanding the scope of the examination beyond those, or from eliminating certain items if circumstances warrant.

  2. Initiative cases assigned with a focused scope require group manager approval to expand the audit scope.

  3. Examiners should explain any large, unusual or questionable (LUQ) items appearing on the return, which if left unexplained, might raise doubt or cause confusion.

  4. Surveying a case requires approval by the group manager.

  5. TEB is not precluded from examining a bond issue that was previously examined and closed; however, any specific matters conclusively resolved in the earlier examination will be excluded from the scope of the current examination. The examiner and the group manager will concur on the matters to be excluded.

  6. For purposes of TEB examinations, each individual Form 8038 series return is treated as one examination, regardless of the number of official statements.

  7. In the case of a reissuance or a refunding of a prior bond issue, examiners should review appropriate documents pertaining to the prior issue. Based on this review, a determination of whether to expand the examination should be made with group manager concurrence.

  8. If an examiner determines that the bond issue has been reissued or refunded, the examiner should review appropriate documents pertaining to the subsequent issue. Based on this review, a determination of whether to expand the examination should be made with group manager concurrence.

  9. If an examiner identifies additional bond issue(s) which are part of the same plan of financing, the examiner should consider expanding the scope of the examination to include the other issue(s) as warranted.

  10. If an examiner requires during an examination of bonds the filing of a delinquent Form 8038-T or otherwise determines that an issuer has not timely and accurately submitted appropriate rebate and/or yield reduction payments, the examiner should expand the scope of the examination to include the Form 8038-T.

  11. The scope of the examination should be documented on Form 5773-TEB.  (11-01-2009)
Opening the Examination

  1. When the examiner opens the examination, the examiner will first contact the taxpayer. Once contact is made with the taxpayer, the examiner should update the case status on RCCMS/AIMS.  (10-01-2009)
Contacting the Taxpayer

  1. Examiners may initially notify the issuer of the examination by telephone to determine the contact person, correct address to mail correspondence, request a copy of the return be faxed and request a copy of the bond transcript be mailed.

  2. Whether or not the examiner initiates contact with the issuer by telephone, the examiner will issue one of the following examination letters:

    • Letter 4557, General Program Examination Letter

    • Letter 4558, Project/Initiative Examination Letter

    • Letter 4559, Referral Examination Letter

    • Letter 4560, Identified Noncompliance Exam Letter

  3. Publication 1, Your Rights as a Taxpayer, must be included with all examination letters. The publication fulfills the requirement in IRC section 7521(b)(1)(A) that taxpayers be informed of the examination process and their rights under such process at or before the initial interview. See RRA section 3503.

  4. Address the letter to the issuer at the address provided during an initial telephone contact or last known address. Examiners may rely on an address acquired from the issuer’s website or EMMA. Examiners may also obtain an INOLES print to determine the taxpayer's last known address.

  5. Examiners should prepare a Form 4564-Information Document Request (IDR), specifying which documents and files are needed for the examination. The IDR will be specific, understandable and appropriate for the type of bond issue examined. The IDR will include a specific response date and be enclosed as an attachment to the examination letter.

  6. An on-site visit is often an important and necessary part of a quality TEB examination. When examiners determine the facts and circumstances do not warrant an on-site visit, they will document the case file. To effectively utilize time, the on-site visit should be used to review appropriate books and records.  (11-01-2009)
Employee Contact - RRA Section 3705

  1. RRA section 3705 defines what contact information employees must provide and requires Service employees working tax related inquiries to provide taxpayers with the means to identify the appropriate employee who can address any further questions. Pursuant to RRA section 3705, effective January 22, 1999, all Service employees will provide the following information:

    1. During a telephone or personal contact, provide his/her name and badge number.

    2. On all correspondence, a telephone number (local, toll-free, or both) where the taxpayer's questions can be answered.  (11-01-2009)

  1. The examiner should request an AIMS status update through RCCMS anytime there is a change in the status of a case. For example, the examiner should request an update to status code 12 through RCCMS when initial contact is made with the issuer.

  2. See Document 11308, Government Entities Computer Systems Codes, for all available status codes.


    Document 11308 is updated annually.  (11-01-2009)
Power of Attorney (Form 2848) and Tax Information Authorization (Form 8821)

  1. Form 2848, Power of Attorney and Declaration of Representative, is used to authorize an attorney or other qualified person to represent an issuer or conduit borrower before the IRS. See IRM 1.25.1, Rules Governing Practice Before the Service.

  2. There are situations when an examiner should solicit a Form 8821, Tax Information Authorization. This will authorize the individual to receive or inspect tax return information, but this will not authorize the individual or organization to represent the issuer or conduit borrower before the IRS. These include but are not limited to:

    • When the issuer or conduit borrower appoints an individual to represent them during an examination and the person appointed is not qualified to sign Form 2848;

    • In a conduit financing, a Form 8821 signed by the issuer to permit direct communication between the examiner and the conduit borrower with respect to the issuer's tax matters;

    • Conversely, in a conduit financing, a Form 8821 signed by the conduit borrower to permit direct communication between the examiner and the issuer with respect to the conduit borrower's tax matters;

    • When direct communication with other parties to the transaction (e.g., financial advisor, trustee, rebate consultant, underwriter, bidding agent, investment provider) is necessary, a Form 8821 should be signed by the issuer.

  3. A valid Form 2848 and/or Form 8821 should contain the following information:

    1. Issuer/conduit borrower name, issuer/conduit borrower Employer Identification Number (EIN), and business address of the issuer/conduit borrower;

    2. Name, address, and phone number of the designated representative/appointee;

    3. Type of tax (legal name of the bond issue, including issue amount) and tax form number (Form 8038 series);

    4. Year or period (date of issue);

    5. Signature and date of signature of an appropriate official of the entity designating the authority;

    6. The representative must sign and date the declaration (Part II) of Form 2848 and enter the designation under which he or she is authorized to practice before the IRS.

  4. The Form 2848 should not be honored if the appointed representative is not qualified to sign Part II of the form or the form is incomplete or inaccurate. The Form 8821 should not be honored if the form is incomplete or inaccurate. Invalid forms should be returned.

  5. Forms 2848 secured during TEB examinations will be included in the correlating paper case file and will not be forwarded to the Campus.

  6. When making written contact with the issuers who have an authorized representative, the issuer will be sent the original correspondence and the authorized representative will be sent a copy of such correspondence, unless otherwise indicated on the Form 2848.  (11-01-2009)
Conflict of Interest Waiver

  1. Examiners should review all Forms 2848 received during the examination and determine whether a conflict of interest exists under section 10.29(a) of Circular 230. A conflict of interest exists when:

    • The bond counsel that issued the opinion is representing the issuer.

    • The same representative or firm is representing the conduit borrower and the issuer.

    • The representative or firm currently representing the issuer is or has represented any other party to the transaction.

    • The representative or his/her current or prior firm issued an opinion with respect to the financing under examination.

  2. The Office of Professional Responsibility (OPR) has advised that in these situations, a conflict of interest exists at the onset of the examination. No adverse position need be taken by the examiner for a conflict to exist. Therefore, in these situations, examiners will request the written consent(s), as defined in Section 10.29(c) of Circular 230, when the Form 2848 is received. Either Letter 4562, Conflict Waiver Request Letter or Letter 4579, Conflict Waiver Request Variation Letter should be issued to the representative listed on the Form 2848 in these situations.  (11-01-2009)
Examination Techniques

  1. The examiner should undertake a variety of techniques in order to resolve the examination in the most efficient manner. These techniques include conducting appropriate interviews, securing and reviewing taxpayer records, and documenting examination findings in workpapers to be located in the examination case file.  (11-01-2009)

  1. Appropriate interviews should be scheduled to obtain information needed to make informed judgments. Interviews provide information not available from other documents and are used to gain information and establish evidence.

  2. The person interviewed should have sufficient knowledge and be able to answer questions in a factual context for the area(s) of interest. Interviews may be conducted with issuers, designated representatives, conduit borrowers and other third parties.

  3. The availability and form of books and records should be addressed by the examiner.

  4. Information should be secured on unusual or questionable items. Follow-up questions should be asked to clarify questionable areas.

  5. The case file should record any interviews which were conducted. Limiting the scope of an examination does not generally eliminate the need to conduct an interview. The workpapers should document who was interviewed and the extent of the issues discussed.

  6. During the initial interview, the examiner should include a follow up explanation of the examination process and appeal rights, as set forth in Publication 1, Your Rights as a Taxpayer , provided with the initial exam notification letter. The case file should contain documentation that Publication 1 was issued to the taxpayer.  (11-01-2009)
Verbatim Recordings

  1. Requests by taxpayers or their representatives to make tape, stenographic or other verbatim recordings of examination proceedings will ordinarily be allowed, except where the taxpayer's or representative's behavior is clearly disruptive of the normal examination process or investigative proceeding. Requests to videotape or otherwise film examination proceedings will not be granted.

  2. In situations where a taxpayer or his/her representatives requests to make tape, stenographic or other verbatim recordings of examination proceedings, the examiner will generally concur subject to the following provisions:

    1. Group manager approval is secured prior to the recording.

    2. The taxpayer and/or representative furnish his/her own recording equipment.

    3. The examiner/group manager may also record the proceeding.

    4. The recording takes place in a suitable location, ordinarily in IRS offices.

  3. Immediately refer any request to make a tape, stenographic or other verbatim recording to the group manager for approval. If granted, the manager will arrange an appropriate time and suitable location in an IRS office where equipment is available to make the Service's recording.

  4. If a taxpayer, legal representative, or witness appears in an examination proceeding and requests to make a verbatim recording without the Service's prior knowledge of this intent, the examiner, with approval of the group manager, may attempt to make arrangements for space and recording equipment in order for the proceedings to continue.

  5. At the outset of the recording the examiner must identify himself or herself, the date, time, place, and purpose of the proceeding. Each participant in the proceeding also must identify himself/herself, his/her role in the proceeding, and acknowledge and consent to the making of a verbatim recording. If an additional participant arrives or a participant leaves the proceeding, note these facts on the recording.

  6. When written records are presented during the proceeding, they must be described in sufficient detail to make the verbatim recording a meaningful record when matched with the other documentation contained in the case file.

  7. At the conclusion of the proceeding, state that the proceeding has been completed and the recording has ended.

  8. The recording produced by the Service should be immediately reviewed for clarity and substance and, if needed, a complete written report of the conference should immediately be prepared.  (11-01-2009)
Workpapers & Case File Documentation

  1. The purpose of this section is to provide guidelines for the development of workpaper content and other case file documentation and for their format and organization. These guidelines are provided to promote quality and consistency in examiners workpapers.

  2. Workpapers are the written records generated by the examiner which provide the principal support for the examiner's determination and document the scope, procedures applied, tests performed, information obtained, tax law considered and applied, and the conclusion reached in the examination. They should include or reference all the information that was necessary to conduct the examination and support the examination results.

  3. Workpapers serve five basic purposes:

    1. Assist in planning the examination, including the analysis of internal and external documents and other sources of information, and setting the scope of the exam.

    2. Record and provide evidence of the documents and information secured and reviewed, audit procedures and tests performed, and analyses conducted during the examination process. The workpapers demonstrate the quality of the examination.

    3. Support technical conclusions.

    4. Provide a basis for review by management. They should tell the story of the examination and support the ultimate disposition of the case.

    5. Facilitate the use of the file by numerous customers after the case is closed. If the workpapers are a quality product, others will be able to use the case file effectively. Examples of other occasions when workpapers may be reviewed:

      • Case submitted to Appeals

      • Preparation of technical advice requests

      • Case selected for Quality Review

      • Possible use in court of law

      • Case transferred to another Agent

      • Case referred to Criminal Investigation Division  (11-01-2009)
Workpaper Format

  1. Workpapers should be clear, concise, legible, organized, labeled, dated, indexed and cross-referenced. Workpaper headers should list the name of the Issuer, name of the Bonds, the year(s) or period under audit, the name or initials of the examiner, and the date the workpapers were prepared. To the extent practical, all workpapers should be completed in an electronic format. The workpapers should be indexed in a manner consistent with the indexing scheme used in Form 5773, Tax Exempt Bond Workpaper Summary .

  2. The Form 5773 is intended to simplify and standardize examination workpapers. A Form 5773 is required on each case. There are several sample electronic versions available on the RCCMS system tailored to the various types of tax-exempt bonds: General Obligation (GO) Bonds, Section 501(c)(3) Bonds, Small Issue Bonds, Exempt Facility or Private Activity (PAB) Bonds, Solid Waste Bonds, Pooled Financing Bonds, Qualified Hedges and Tax and Revenue Anticipation Notes (TRANS).

  3. The Form 5773 is designed as a working tool for pre-examination planning, setting the scope of the exam, and for use an audit plan during the examination. The form is also used as the cover pages for the examiner's workpapers and summarizes the examination results. Additionally, its purpose is to provide an orderly presentation of supporting workpaper material, using an indexing system based on the particular Form 5773 utilized.  (11-01-2009)
Issue Lead Sheets and Content

  1. Workpapers supporting the Form 5773 should include "Issue Lead Sheets" for those sections of the Form 5773 that are the primary focus of the exam and where the majority of examination time will be expended. Issue Lead Sheets should summarize the issue or compliance area being addressed, document the facts, describe the procedures and audit techniques used, reference the records and other information reviewed, discuss the applicable law, and document conclusions and issues identified. These criteria should be presented in the workpapers in a logical order so that any person subsequently using the file can easily determine what audit steps were taken to support the conclusion.

  2. Issue Lead Sheet. A typical Issue Lead Sheet should include the following elements:

    • Header- Name of the Issuer, name of the bond issue, the date the bonds were issued, the name or initials of the examiner, and the date the workpapers were prepared.

    • Issue Identification- Issue or compliance area being addressed in this workpaper. Include any pre-audit comments as to why the issue was selected, the development of the audit plan, and the depth of the examination.

    • Facts- Discussion of all facts relevant to the issue.

    • Procedures and Audit Techniques- Procedures and audit techniques performed during the examination. A list of the source documents reviewed and other evidence and information gathered, and how it was used to develop the issue.

    • Applicable Law- Applicable law relied upon to resolve all issues (both accepted and otherwise).

    • Conclusion- Conclusion summarizing the disposition of all issues, including taxpayer's position.

    • Indexed- Workpaper number corresponds to the Form 5773 section it supports

  3. Those section of the Form 5773 that do not warrant an Issue Lead Sheet, including those sections that are "Not Applicable" , can be completed with comments within the Form 5773 itself.  (11-01-2009)
Other Supporting Workpapers and Documents

  1. In addition to the Issue Lead Sheets, other relevant supporting workpapers and documents should be included in the case file. In general, these would be workpapers and documents supporting the procedures and testing described on the Issue Lead Sheets, or otherwise referenced. These workpapers or documents should be filed behind the appropriate Issue Lead Sheet, and also be indexed to the corresponding Form 5773 section, and cross referenced to the Issue Lead Sheets or other workpapers as appropriate. These types of workpapers would include both workpapers generated by the examiner and documents secured from the Issuer, Conduit Borrower or another third party to the bond transaction. Some typical examples:

    • Copies of relevant documents secured from the taxpayer during the examination in response to Information Document Requests (IDRs).

    • Workpapers documenting audit procedures and testing performed.

    • Arbitrage spreadsheets used for testing bond yield, investment yield and rebate calculations.

    • Bond proceeds expenditure lists and/or requisitions.

    • Bond proceeds allocation documentation.

    • Trustee account statements.

    • Exempt facility project related documents such as floor plans, architect or engineering reports and project cost documentation.

    • Tax depreciation schedules.

    • Tax law research supporting legal authority for conclusions reached.

  2. All workpapers should be clear, concise, legible, organized, labeled, dated and indexed. All self-generated workpapers must include a heading with the name of the Issuer, name of the bonds, the date the bonds were issued, the initials or name of the examiner, and the date the workpapers were prepared. All workpapers must be indexed to the Form 5773. They should be cross-referenced to the Issue Lead Sheets and other workpapers when applicable.

  3. In summary, an examiner's documentation on the Issue Lead Sheets should describe the issue, facts, exam procedures, applicable tax law, application/analysis of law and conclusions in a format that can be readily copied to a Form 886-A, Explanation of Items, when an issue warrants the issuance of a Form 5701-TEB, Notice of Proposed Issue.  (11-01-2009)
Workpapers: Electronic Format & RCCMS

  1. To the extent practical, all workpapers should be completed or generated in an electronic format. When practical, examiners should utilize the sample spreadsheets, forms, workpapers and letters available in RCCMS. This will facilitate the working and processing of the examination case file within RCCMS.

  2. Examiners are to request that the taxpayer provide, whenever possible, all documents and information in electronic format. Taxpayer records commonly available in an electronic format would be the Official Statement, Bond Transcript, trustee account statements, and rebate reports. Appropriate MITS procedures should be followed to scan any electronic data for viruses, prior to reviewing.

  3. Any key documents, or portions thereof, secured in a non-digital format that are vital to supporting examination conclusions should be transferred to a digital format through the use of a scanner, if available. For example, copies of documents supporting the Issue Lead Sheets.

  4. All electronic workpapers must be indexed to the Form 5773 within the electronic document. All electronic workpapers must be named utilizing the naming convention.  (11-01-2009)
Activity Records

  1. Form 5464, Case Chronology Record (CCR) - This record of the examiner's case related activities is a key document as it provides the history and the official record of all work performed during the examination. It should contain the following important information:

    • Dates when audit work was performed

    • Description of audit work performed on the case

    • Location and activity codes

    • Time charged to the case

    • Name(s) of any examiner contacts with taxpayer, POA, group manager, third parties, or other contacts

    • Documentation of the managerial involvement in the development of the case

    • Record of follow-up dates for IDRs or other key dates

    • Document and explain any large or unusual gaps in dates when examination time was not charged to the case.  (11-01-2009)
Inadequate Records

  1. The basic goal of a tax-exempt bond or tax credit bond examination is to determine the correctness of the bond issue's series Form 8038 information return, and determine the tax-exempt status of the bonds, and hence the correct tax liability of the bondholders. Taxpayers are required to keep accurate books and records that support the various items that affect income tax liabilities, or support items on an income tax or information return. Generally, these books and records are required to be retained so long as the contents thereof may become material in the administration of any Internal Revenue law.

  2. In a tax-exempt bond examination, the Issuer of the bonds is considered the "taxpayer" , so the burden of maintaining and producing adequate records necessary to conduct a quality examination is placed on the Issuer. In the examination of private activity bonds, many records are often secured from the conduit borrower, and sometimes from other parties to the transaction. However, they are considered third parties in a bond examination.

  3. Generally, securing adequate records and information needed to conduct a quality examination of a bond issue is not a problem. Bond issues require a Bond Transcript that contains a large quantity of information about every aspect of the transaction, and almost every issue involves a trustee that maintains transactional records in regard to the investment and use of the bond proceeds. Issues that involve conduit borrowers also include loan agreements with the issuer and trustee agreements that generally ensure that records regarding their use of the proceeds are maintained. However, in those cases in which the production of records becomes a problem, the examiner needs to be aware of the applicable law and the avenues available for securing the necessary records.  (11-01-2009)
IRC Section 7602 Provisions

  1. The authority to request and examine a taxpayer's records stems from IRC section 7602. This section of the Code provides that, in ascertaining the correctness of any return or determining the liability of any person for any internal revenue tax or liability, the Secretary is authorized to:

    • Examine any books, papers, records, or other data which may be relevant or material to such inquiry; and

    • Summons the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.  (11-01-2009)
IRC Section 6001 Provisions

  1. In general, IRC section 6001 requires any person to keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title, and to file any statements or returns as required by rules and regulations.

  2. Section 1.6001-1 of the regulations requires taxpayers to keep sufficient permanent records to establish or support any items or matters required to be shown on a tax or information return. The books and records required by this section shall be kept at all times available for inspection by authorized Internal Revenue employees, and shall be retained so long as the contents may be material in the administration of the Internal Revenue law.  (11-01-2009)
Securing Records

  1. The records necessary to perform a quality examination usually can be secured using a Form 4564, Information Document Request, issued to either the issuer of the conduit borrower.

  2. If the taxpayer is either unable or unwilling to provide the records that are necessary to perform a quality examination, IRC section 7602 provides the authority to summons or otherwise secure records relevant to the examination. The examiner should discuss the particular circumstances of their examination with their group manager. The usual option would be to secure the records from third parties either using a summons, third party contact or another type of contact.

  3. For third party contact procedures, See IRM, Third Party Contacts.

  4. For summons procedures, See IRM, Summons Procedures.  (11-01-2009)
Suspense Procedures

  1. There are some situations where a case should be put in a suspense status in order to properly reflect its processing time. These include cases subject to technical advice requests, cases with requests for field service advice and other cases designated by management.

  2. Suspended cases will be maintained at the group level. The front line manager will continue to monitor all inventory controls to protect the government's interest.

  3. The examiner will send Letter 4563, Suspense Letter, to the issuer notifying them that the case was placed in suspense and will again make contact as needed or when activity on the case is resumed.

  4. The case status should be updated through RCCMS to the appropriate code to reflect the case as suspended.

  5. The examiner should complete the examination with regard to all other issues prior to the case being placed in suspense.

  6. When the issue that triggered the suspense status is resolved, the case will be updated through RCCMS to reflect that the examination is no longer in suspense (e.g. status code 12).

  7. Prior to closing cases that were previously suspended, examiners will follow the written guidance from management regarding necessary special handling notices and the CPM closing unit will properly update the RCCMS system.  (11-01-2009)
Case Management Guidelines

  1. Effective case and inventory management are essential elements of a quality examination. These elements directly impact the Service's balanced measures- business results, customer satisfaction and employee satisfaction. A well managed inventory improves quality and cycle time, increases customer satisfaction with the examination process and enhances job satisfaction.

  2. Every case is unique and it is the responsibility of the examining agent to work each case in a manner that optimizes time and resources. Included in this IRM section are guidelines for efficient case processing and inventory management.  (11-01-2009)
General Inventory Management

  1. Inventory management methods vary from examiner to examiner. More important than the actual method is the outcome. Cases must be worked promptly and in accordance with current priorities.

  2. Examiners must consider divisional goals when they prioritize their work. Each examiner should have a strategy for working cases such that follow up action is taken in a timely manner and, barring unusual circumstances (e.g. cases in suspense), each case is reviewed for necessary action at least once every 30 days.

  3. Examiners should plan work at least a week in advance. At the outset of every work day, the examiner should prioritize which cases will be worked that day. Examiners should complete all actions possible on a case before moving on to the next case/activity.

  4. When scheduling multiple field visits, examiners should allow for sufficient time in the office to make phone calls, review and respond to mail and e-mail and to close completed cases. Examiners should use VMS to let callers know when they will return to the office and be available to respond to inquiries. Examiners should also use the out of office assistant feature on Outlook to inform senders of their absence and the date they will return.

  5. Examiners should give their managers advance notice of their need for additional case assignments. Only the number of cases that can be started within a reasonable period of time should be requested. Managers should only assign examiners cases which can be started within 30 days.

  6. Examiners should keep their managers apprised of unusual or problematic situations. When necessary, managerial involvement should be secured.

  7. It is important that examiners set the tone for the examination by exemplifying a high level of professionalism at all times. This standard requires that examiners be on time for all meetings and respond to phone calls and correspondence within a reasonable period of time. Examiners are required to keep issuers/representatives apprised of the status of their cases. Where possible, examiners should notify the issuer/representative in advance regarding delays in case processing.  (11-01-2009)
Examination Pre-Planning

  1. Once a case is assigned, it should be started by the examiner within a reasonable period of time. If the examiner anticipates a significant delay in starting the case, the manager should be advised.

  2. If, after reviewing the case file, the examiner determines that there is little audit potential, he/she should discuss whether the case should be surveyed with the group manager.  (11-01-2009)
Timeliness and Case Chronology Records During the Examination

  1. Timeliness is one of the measures of a quality examination. Both the Service and the taxpayer depend on the examiner's professional judgment to ensure that examinations are processed accurately and efficiently. Every case has its own unique set of circumstances; however, the following guidelines should generally be applied:

    • Cases should be worked on a regular basis by reviewing requested documents as soon as possible after receipt,

    • Additional documents should be requested as soon as it is known they are needed. Follow-up requests for information should be made in a timely manner.

    • No case should be allowed to remain dormant without significant action being taken to resolve it.

    • Examiners should recognize needless delays and take appropriate steps to shorten them. Taxpayers or representatives should not be allowed to needlessly prolong examinations. Anytime an examiner suspects there is a needless prolonging of the examination by a taxpayer or representative, the examiner should consider using the bypass procedures under IRM

    • Examiners should timely follow up with the taxpayer, representative or other third party when a deadline for response is not met.

    • Site visits to inspect records and observe activities should be scheduled when bonds have financed a facility.

  2. The case chronology record (CCR) must completely and accurately document activities and delays with regard to the case. A clear, concise chronology record is particularly important in instances where the case is a sensitive or high profile case, the case involves uncooperative issuers or representatives, or the case will be the subject of litigation.

  3. The CCR should always indicate a follow-up or response date. When extensions are requested, the examiner and the taxpayers or their representatives should agree on a new, specific response date and that response date should be documented.

  4. Lengthy or unusual delays should be documented on the CCR and discussed with the group manager.

  5. The CCR should clearly reflect the status of the case at all times.  (11-01-2009)
Other Considerations

  1. Follow up IDRs should include the response date and the manner in which the data should be submitted (by mail; made available on next field visit.)

  2. The process of examining an issuer's books and records can be substantially enhanced through the use of appropriate sampling techniques.

  3. When significant research is conducted on an issue, the examiner should retain sanitized results of the research for reference and file the results by issue for use on future cases. Examiners should also network with other Tax Exempt Bond examiners to avoid redundancies.  (11-01-2009)
Managerial Responsibilities

  1. Group managers have overall responsibility for the efficient processing of cases in their groups.

  2. Effective inventory management requires ongoing involvement of group managers in case work. Workload reviews and other reviews provide opportunities to check on the status of case activity to ensure that cases are being moved to resolution.

  3. Managers should process all closed cases in a timely manner.

  4. Managers should ensure that examiners understand the importance of securing managerial involvement in appropriate situations.

  5. Case reassignments due to retirement, extended details, or other factors, should be handled as expeditiously as possible.  (11-01-2009)
Power of Attorney Bypass Procedures-Overview

  1. IRC section 7521(c) states that an examiner with the manager's approval "may notify the taxpayer directly that such officer or employee believes such representative is responsible for unreasonable delay or hindrance of an Internal Revenue Service examination or investigation of the taxpayer. "

  2. The procedures to bypass the power of attorney (POA) permit the examiner to contact the taxpayer directly and to request any information necessary to complete the examination. See IRM

  3. Under the "Bypass Procedures" , the POA continues to represent the taxpayer, and copies of all correspondence issued to the taxpayer are required to be sent to the representative. The taxpayer may at his/her discretion forward the requested information/documentation through the representative to the examiner.  (11-01-2009)
Bypass Procedures

  1. If any of the following issues occur, the examiner will document the case chronology accordingly:

    1. The representative impedes or delays an examination by failing to submit the records or information requested by the examiner.

    2. The representative impedes or delays an examination by failing to keep scheduled appointments.

    3. The representative impedes or delays an examination by failure to return telephone calls and written correspondence.

  2. If a trend is noted and the examination is being hindered because of the representative, the examiner will notify the group manager of the representative's actions. The group manager will ensure reasonable efforts have been taken by the examiner to deal directly with the representative and that the case file sufficiently details the facts that support how the examination has been delayed or hindered. The group manager will advise the Field Operations Manager of the situation.

  3. If the examiner has not done so already, correspondence sent to the representative will also be sent to the taxpayer. This includes all document requests (IDRs). In many cases, the taxpayer may not be aware that the representative is procrastinating and may correct the situation once he/she is made aware of the problem.

  4. Letter 4020–A, Warning Letter for Bypass Procedures for Preparers covered under Circular 230, will be prepared by the examiner and issued by the group manager advising the representative of his/her responsibilities under Circular 230 and conveying advance notice of a possible bypass because the representative is violating Circular 230.

    • Copies of prior document requests, a list of outstanding items and a brief chronology of events will be attached to the letter.

    • A copy of the Letter 4020-A, with attachments, will be sent to the issuer.

    • A copy of the Letter 4020-A, with attachments, will be forwarded to the Field Operations Manager.

  5. If the representative continues to delay or refuses to provide the information requested, the Field Operations Manager should be notified. The Field Operations Manager will issue Letter 4020-C, Final Bypass Letter, to the representative. A copy of the Letter 4020-C will be forwarded to the group manager and examiner as authority to bypass the representative on the examination.

  6. The bypass permits the examiner to contact the issuer directly. The representative can continue to represent the issuer, if accompanied by the issuer. The representative will be afforded the courtesy of being advised of the time and place for future appointments with the issuer.

  7. A summons should be utilized to secure information if both the issuer and the representative are intentionally uncooperative.

  8. Whenever a Letter 4020-C is issued, the examiner should prepare a referral to the Office of Professional Responsibility in accordance with the IRM and forward to the TEB Field Operations Manager, through the group manager.

More Internal Revenue Manual