4.90.13  FSLG Large Case Examination Program  (05-31-2006)

  1. Examination activities in a large case raise concerns that involve properly fragmenting the examination and assigning specific examination work to each Team Member. These procedures and guidelines promote uniformity and consistency in the management of large cases.

  2. The success of the large case examination program will depend in large part on the ability of the Field Manager to coordinate effectively with the other functions discussed in this subsection.  (05-31-2006)
Large Case Examination Program Objective

  1. To conduct effectively planned and managed large case examinations that produce quality results.  (05-31-2006)

  1. Entity refers to any Entity for which the FSLG function has examination responsibility.

  2. Entity Case Binder is a binder that CPM Classification maintains on the taxpayer with information about the current cycle and history of the Entity.

  3. Examination Plan is a written document containing agreements with the Entity, information for Service personnel, work assignments, examination procedures, time estimates, and special instructions. The plan is prepared using Forms 4764, Large Case Examination Plan, 4764-A Coordinated Examination Program Audit Plan, and 4764B, Large Case Examination Plan.

  4. Field Manager is the supervisor responsible for organizing, controlling and directing large case examinations.

  5. GSAIN – Government Entities Standard Audit Index Numbers.

  6. Large Case is a case involving a taxpayer, and/or an effectively controlled sub-segment, that warrants application of "team examination" procedures and meets the FSLG Large Case universe criteria. A large case may be an entire Entity, such as a state government; it may also be a significant sub-segment such as a metropolitan transit authority.

  7. Large Case Teamconsists of FSLG specialist(s) and other specialist revenue agents working under the direction of the Field Manager.

  8. CPM – Outreach, Planning, and Review staff is the planning, special procedures and quality review organization within FSLG.

  9. Planning File is a compilation of significant past and present data bearing on the tax obligations and operations of the Entity. It will provide basic information regarding the organizational structure, operations, past examination results, and other information useful to the planning process.

  10. Planning Meeting is a meeting or meetings involving the Field Manager, Support Specialist Manager(s), Team Coordinator, and Team Member(s) to discuss the scope of the examination.

  11. Post-examination Critique consists of meetings held to review the conduct of an examination and discuss recommendations for improvements in the subsequent examination.

  12. Pre-contact Analysis is a study of available information for the purpose of tentatively establishing the scope and depth of the examination. It should include a review of all related returns, the planning file, commercial services, public records, and consultation with the prior Team Coordinator and specialist revenue agent Managers.

  13. Pre-examination Conference is a meeting of Service and Entity personnel to discuss such matters as coordination, accommodations, and the general scope of the examination.

  14. Primary Group is the group assigned responsibility for managing and controlling a large case examination.

  15. Primary Entity is the Entity exerting control over all other entities in the large case examination.

  16. Support Specialists are commodity and financial products agents, engineers, excise tax agents, economists, international examiners, Computer Audit Specialists, Employee Plan agents, Exempt Organization agents, tax exempt bonds agents, Indian tribal government specialists and any other revenue agents as necessary.

  17. Team Coordinator is a Team Member who is responsible for a specific examination assignment, including performing coordination duties in planning and executing a team examination.

  18. Team Examination is a tax examination carried out according to a written plan and conducted by a team managed by a Field Manager.

  19. Technical Advisor is a specialist with nationwide responsibilities for a "Designated Industry " . See IRM 4.40.1, Technical Advisor Program, for information regarding this program.  (05-31-2006)
Identification of Large Case Examinations

  1. These procedures apply to organizations under the jurisdiction of FSLG.  (05-31-2006)
General Case Selection Criterion

  1. CPM will select large cases based on analysis of the following factors:

    1. Tax history of customer

    2. Market segment impact

    3. Potential deficiency

    4. Impact of enforcement on public services  (05-31-2006)

  1. This section discusses the responsibilities of the office of FSLG Outreach, Planning and Review (CPM), the Primary Group, and the Field Manager.  (05-31-2006)
Responsibilities of the office of FSLG Outreach, Planning, and Review (CPM)

  1. Office of FSLG Outreach, Planning, and Review (CPM) will:

    1. Provide active program assistance and monitoring, including field visits;

    2. Provide assistance in resolving jurisdictional disputes;

    3. Provide quarterly reports on program results and progress;

    4. Provide periodic reports of items of interest;

    5. Provide assistance to the Field Manager in developing, coordinating and executing large case examinations;

    6. Arbitrate disagreements between areas when they involve matters concerning team audits;

    7. Facilitate coordination with issue specialist(s);

    8. Identify the FSLG Large Case examination universe.  (05-31-2006)
Responsibilities of the Primary Group

  1. The Primary Group responsibilities include the following:

    1. Designation of a Team Coordinator(s);

    2. Assembly of planning files, prepare pre-contact analyses, develop examination plans, organize examination teams, execute case examinations and prepare written post-examination critiques;

    3. Reporting periodic information as requested by CPM;

    4. Monitoring examinations;

    5. Participation with support Field Managers in planning and executing support assignments;

    6. Coordination with TEGE Area Counsel in developing issues and requesting guidance pertaining to possible litigation, as appropriate;

    7. Coordination with issue specialist(s);

    8. Monitoring and evaluation of the conduct of the large case examinations.  (05-31-2006)
Responsibilities of the Field Manager

  1. The Field Manager has overall responsibility for the activities of all members assigned to each large case examination. The Field Manager should be cognizant of the workload of the large case examination coordinator and take the necessary actions to ensure the proper span of control. The determination of proper span of control is made by the primary Field Manager.  (05-31-2006)
Reporting Requirements

  1. Large Case examinations will be controlled on the Automated Inventory Management System (AIMS) and the Exempt Organization Inventory Control (EOIC) System using the appropriate AIMS Activity Code and Project Code 241, FSLG Large Examination Program. The Field Manager and the Team Coordinator are responsible for maintenance of all case controls.  (05-31-2006)
Program Planning

  1. This section discusses specific aspects pertaining to the program planning process including utilization of support assistance and the resources available.  (05-31-2006)

  1. Field Managers will evaluate future support assistance when conducting the post examination critique.  (05-31-2006)
Requesting Support Area Staffing

  1. Field Managers will use support assistance in appropriate situations. For support external to FSLG, the Specialty Referral System is required for use and is initiated by the specialist/coordinator requesting the assistance.

  2. The Field Manager's first contact with a support group to obtain a staffing commitment is through use of the Specialist Referral System. This request should be forwarded to the appropriate area at least 60 days prior to the start of the support examination. Support Areas should respond to the request directly to the Primary Group within 15 calendar days of receipt.  (05-31-2006)
Resources Available to the Field Manager

  1. Prior to the examination, the Field Manager will secure and review the information provided by CPM.  (05-31-2006)
Planning Files

  1. When there has been a previous large case examination, the planning and administrative file should be the best single source of information available for planning the examination. It should provide as much data about the Entity as possible, including information such as:

    1. History and organizational structure of the Entity;

    2. Identification of Entity's principal officials and representatives;

    3. Location and description of records and activities;

    4. Transactions potentially affecting subsequent year returns;

    5. Summary of examination adjustments by year and techniques used;

    6. Unusual examination problems;

    7. Chart of accounts and Entity's accounting manuals (if they can be obtained);

    8. Copies of any rulings affecting the Entity (Technical Advice (TA), Private Letter Ruling (PLR), Field Service Advice (FSA), etc.);

    9. Copies of documents having a significant bearing on subsequent years; (i.e. Closing Agreements, Letter of Understanding, etc.)

    10. Difficulties encountered during the prior examination such as public relations, facilities or support problems, etc.;

    11. Most recent examination plan;

    12. Post-examination management critique;

    13. Media (print and electronic) information; and

    14. Potential offset issues that exist which should be considered in the event claims are subsequently filed.

    The maintenance of this file requires constant updating, purging of unnecessary data, and inserting current information so that the resulting product reflects the examination needs of the next cycle.  (05-31-2006)
Returns in the Planning Process

  1. All related returns should be reviewed to ascertain:

    1. The size and complexity of the case;

    2. Identity of persons authorized to sign the various returns;

    3. Comparison of items for the year to be examined with like items in prior years;

    4. Location of the Entity(ies).  (05-31-2006)
Primary Group Control

  1. This section discusses the responsibilities of the Primary Group in controlling the examinations of Large Case Entities.  (05-31-2006)
Obtaining Returns

  1. CPM will obtain all returns related to the large case examinations, and assign them to the Primary Group.

  2. If the Primary Group Manager decides a return will not be examined, he or she will notify CPM of that decision prior to surveying the return.  (05-31-2006)
Elected Officials and Key Government Employees Returns

  1. On a case-by-case basis, the Field Manager will determine whether it is necessary to inspect IDRS information on elected officials and key government employees. The Field Manager's decision will be documented in the examination case file. The information obtained in this review is tax return information subject to disclosure provisions. Managers, Team Coordinators and Team Members must ensure that this information is not disclosed, in accordance with UNAX requirements.

  2. When the examination of an elected official or key government employee return is necessary, the appropriate information report will be made to the Wage and Investment or the Small Business/Self-Employed Operating Division.  (05-31-2006)
Support Activity

  1. The objective of the large case support program is to secure support assistance in each case when objectives warrant examination work in other field group areas.

  2. The primary Field Manager is ultimately responsible for the examination. The Support Manager should advise the Field Manager of concerns or problems as they arise.

  3. The basic principle of the support concept is that all segments of a case should be reviewed occasionally.

  4. Primary Field Manager visits to the support site are encouraged as a means to:

    1. Obtain the Support Area's continued commitment to a quality examination;

    2. Provide first-hand knowledge about the examination’s progress;

    3. Resolve major problems as they develop during the examination; and

    4. Demonstrate the importance of the Support Area activity as a viable part of the team concept.  (05-31-2006)
Use of Support vs. Primary Group Personnel

  1. Under any of the following conditions, the use of support personnel is appropriate:

    1. Planned staff-days to examine the Entity are extensive.

    2. Examination requires use of personnel with local knowledge.

    3. Records required for examination are voluminous.

    4. In-depth probes are planned.

  2. The primary Field Manager may find it more advantageous to send Primary Group specialists to other areas to make on-site examinations or assist the support specialist(s). Factors to be considered include whether:

    1. Data and records are fragmented between the Primary Group and an out-of-area Entity;

    2. Unusual accounting systems are closely integrated with the primary system; or

    3. The Primary Group Team has completed a significant portion of the examination on a particular Entity at the Primary Group and then needs to follow-up on specific areas at the out-of-area Entity.

  3. The support Field Manager will be consulted during the planning process.  (05-31-2006)
Perfecting Support Area Roles

  1. The primary FSLG Field Manager will consult with the support Group Manager to prepare the support request for CPM approval. The request should address the following:

    1. What is expected of each participant;

    2. Grade of specialist and type of work to be performed;

    3. Location of work;

    4. Flexibility of starting or completion dates;

    5. Specialists or special skills needed; and

    6. Planned visits by primary Field Manager.

  2. Once the Team Member is designated, the support Field Manager will arrange for direct communications between the primary Field Manager and Team Member.

  3. The support specialist should discuss proposed adjustments and identified issues with the Team Coordinator so that a consistent approach to the issues will be presented to the Entity.  (05-31-2006)
Follow-up on Support Roles

  1. Maintaining communications with the Support Area will provide for a more efficient examination. Some areas warranting follow-up are as follows:

    1. Periodic calls to the Support Area to discuss progress of the examination plan and any changes in starting dates.

    2. Visits to Support Areas during the planning and examination phases. In planning these visits refer to IRM below.

  2. The primary Field Manager should be aware of the need to keep the Support Area currently advised regarding changes in time requested and planned starting dates.

  3. Any need for additional Support Area time will follow the same procedures and approval as required for the original support request.  (05-31-2006)

  1. In some instances, group specialists will travel to other areas to conduct examinations. When such travel is planned, prior notification to the Field Manager to be visited will be made.  (05-31-2006)
Case Assignment Guidelines

  1. This section discusses guidelines to be used within the Large Case Examination Program when assigning cases.  (05-31-2006)

  1. The primary Field Manager will make the determination, based on an evaluation of the unique circumstances of each examination, whether an examination is sufficiently complex to warrant the Large Case Examination Program procedures. He or she should also address whether there are significant numbers of external specialists requiring extensive coordination.  (05-31-2006)
Planning the Large Case Examination

  1. The Team Coordinator and the Manager will take an active role in developing the case plan.

  2. Priorities should be established through a process that compares the potential benefits to be derived from examining an issue to the resources required to perform the examination. This process, referred to as risk analysis, is an integral part of the planning process to ensure efficient and effective use of resources.

  3. Risk analysis should be periodically revisited and updated.

  4. Planning the examination should be directed toward creating a written plan, tailored to the special circumstances of each Entity. Additionally, Field Managers should consider other matters such as the prevailing economic factors during the years to be examined and issues common to the particular Entity. The Entity, which should be consulted during the planning process, is uniquely situated to give information on government practices, trends and prevailing economic factors.

  5. A three-stage planning process, as outlined in IRM through below, should be followed in most large case examinations.

  6. It is important to bring the Computer Audit Specialist (CAS) into the planning process as early as possible. By doing so, the CAS may provide some excellent planning tools. All specialists should be requested using the Specialist Referral System.  (05-31-2006)
Government Entity Involvement

  1. The goals of the large case examination planning process include:

    1. Providing appropriate Government Entity and Service personnel needed to complete the examination;

    2. Promoting a mutual understanding of the Government Entity systems and the Service's processes;

    3. Best use of each party's resources; and

    4. Generating quality examinations in a timely manner

  2. To achieve these goals, the large case planning process must be flexible, ongoing and involve mutual cooperation.

  3. Effective communications throughout the entire planning process should include:

    1. A discussion of the potential issue areas which will be pursued to avoid surprises late in the examination (e.g., new issues, claims, and technical advice requests);

    2. Clarification on the use and role of specialists on the examination team;

    3. A discussion of the role of Counsel;

    4. A discussion of efforts to achieve and maintain currency in the examination process;

    5. A discussion of any potential penalties as they arise;

    6. Identification of problems associated with the examination of proprietary information not subject to public disclosure per statutes applicable to the particular Entity;

    7. Commitments, by both parties, to share all information necessary to bring the examination to a quick and successful conclusion. Neither the Closing Agreement nor the protest should be the vehicle to transmit new facts on an issue; and

    8. Planning for a continuing mutual critique process of the Entity and the Service.

  4. Early in the planning process, the Entity and the Service should agree to develop an understanding of each other's processes and procedures. This will include a study of the entity's accounting system, Entity structure, tax return preparation methodology, operative procedures, language and terminology, and IRS examination procedures. The Entity should provide the necessary information regarding operating procedures, problems, and economic factors that impact on the tax considerations of the Entity.

  5. Both parties should recognize the importance of a commitment to reaching an understanding with regard to:

    1. Resolving any questions regarding the content of Information Document Requests (IDR);

    2. Response times for IDRs, which should be negotiated with the entities and with consideration for issue priority and the difficulty in securing the information;

    3. The need for periodic meetings to review progress and emerging problems in the administration of the examination plan;

    4. The need for flexibility and ongoing planning;

    5. Coordination of the examination of off-site records and facilities (e.g., support examinations, travel requirements and scheduling);

    6. The use of Service and Entity resources, such as working hours, office space and equipment, computer time, libraries, tax workpapers, security concerns and personnel parking;

    7. The need for examiners to timely communicate new potential issue areas identified during the course of the examination to the Entity;

    8. Existence and presentation of documentation of items which the Entity feels might reduce the tax liability;

    9. Specific time frame for the submission/honoring of Forms 5701, (Notice of Proposed Adjustment), and receipt of Closing Agreement;

    10. What the entities will do to support the Service's examination (e.g., reconciliations); and

    11. Procedures for obtaining statute extensions elevated for authority to sign.

  6. The planning process should include a discussion directed toward resolving issues at the lowest possible level. This concept involves entities and examiners working together to pursue all methods and means appropriate to resolve issues. For example:

    1. Early submission of Technical Advice Requests;

    2. Resolution of an issue through the current filing year, with the agreement of the Entity.  (05-31-2006)

  1. The size and complexity of large case examinations require that workpapers be standardized to a greater degree than other examinations. Specialist workpapers are subject to review by the Team Coordinator, Field Manager, review staff, Appeals and TEGE Counsel. Workpapers indexed in a uniform manner will permit efficient review.

  2. Use of the Government Entities Standard Audit Index Number (GSAIN) system is required on all large case examination cases except where the Field Manager approves deviation. (See Exhibit 4.90.13-1 of this manual)

  3. Workpapers should be prepared as described below:

    1. Heading-- Each workpaper will be headed with the following information:

      • Name of Primary Case

      • Entity Being Examined

      • Years Covered by Workpaper

      • Source of Information

      • Team Member's Initials

      • Date Prepared

    2. Footer-- The bottom right hand corner of each workpaper and any folded papers will be marked in a manner so the following information is visible without unfolding papers:

      • Paper Number

      • Total Pages

      • GSAIN

    3. Cover Page -- Form 4318, Examination Workpapers, or suitable alternative, will be prepared as a summary of all workpapers. It will be placed on top of the complete set of workpapers.

    4. Lead Page -- Form 4764B, Large Case Examination Plan, will be prepared for each GSAIN account examined. This form will serve as a summary of workpapers for each GSAIN account and will be numbered as page 1.

    5. Numbering-- Workpapers will be numbered consecutively for each GSAIN. Form 4764B will always be page 1. Total number of pages will always be shown on Form 4764B and Form 4318.

    6. Indexing -- GSAIN is designed to be a flexible indexing system providing the uniformity required in FSLG large case examinations.  (05-31-2006)
Stage 1 – Pre-Contact Analysis

  1. Pre-contact analysis is a study, begun after selection of the taxpayer for examination, of available information to tentatively establish the scope and depth of the examination. This process includes a review of all related returns, any historical information, the administrative file, and consultation with specialist supervisors. It is recorded in the form of a general outline of observations regarding size, dispersion, and diversification of the case, probable examination expertise and staffing requirements, and matters to be discussed or clarified at the pre-examination conference. When supplemented by information gained at the pre-examination conference, it will form the basis for construction of the examination plan.

  2. The Team Coordinator will become thoroughly familiar with the Entity's operations by reviewing the following to determine staffing requirements, specialists needed and the general approach to the examination. It is recommended that at a minimum the following be reviewed:

    1. Returns;

    2. Prior Closing Agreements including specialists reports;

    3. Historical information and/or planning file;

    4. Administrative file;

    5. Any computer generated analysis;

    6. Reports made to other government agencies;

    7. Any pertinent media coverage, such as newspaper articles, books, magazine articles, radio or television broadcasts; and

    8. Other data pertinent to the current examination.

  3. Upon completion of this preliminary review the Team Coordinator will identify the following and make recommendations to the Field Manager:

    1. Those areas which should take priority in the examination;

    2. The overall scope and approach to the examination;

    3. The specialist(s) needed for the team; and

    4. An initial estimate of time.

  4. Notify all specialist managers who will be involved in the examination and advise them about:

    1. The date, time and place of planning meeting(s);

    2. The scheduled starting date of the examination;

    3. A description of data available for review; and

    4. The requirement that he or she provide the Field Manager with a written narrative which should include:

      • A list identifying each issue area recommended for inclusion in the examination plan;

      • A description of the examination procedures to be performed; and

      • An estimate of the time necessary to complete this portion of the examination.

  5. Meetings involving the Field Manager, Team Coordinator and Team Members should be held to discuss the Field Manager's review, specialist’s recommendations, and to decide which areas to include in the examination plan.  (05-31-2006)
Stage 2 -- Review of Entities Books and Records

  1. This phase involves preliminary examination work involving the pre-examination conference, review of all Entity minutes, and an overview of the Entity's accounting system. The results should serve as a basis for:

    1. Identifying the procedures necessary to examine the Entity;

    2. Identifying unusual items or issues not apparent during the pre-contact analysis in stage one; and

    3. Modifying decisions reached during the pre-contact analysis.

  2. In seeking commitments from the Entity during the pre-examination conference, the Team Coordinator should ensure that the individual he or she is dealing with has the authority to provide information and enter into agreements regarding examination procedures. The Field Manager should explain why their presence is needed and request that they be invited. At a minimum, the Field Manager and Team Coordinator should attend the pre-examination conference. If appropriate, the Computer Audit Specialist and any other support specialists should attend the meeting.

  3. The Field Manager, through the Team Coordinator, is responsible for making all arrangements authorizing discussion and exchange of information between Team Members and Entity personnel of the principal Entity and entities over which the Entity has control. The pre-examination conference is the proper time to make these arrangements, the results of which should be documented in the Entity Information Section of the examination plan. The arrangements for appropriate taxpayer staff and/or representatives for receiving information should be agreed to in writing at this time. Note: Refer to IRM 11.3, Disclosure Of Official Information Handbook, regarding Disclosure to Persons with a Material Interest.

  4. The pre-examination conference is the first formal meeting with authorized employees of the Entity. The main purpose of the meeting is to reach an agreement on coordination and accommodations and to discuss the scope and depth of the examination.

  5. Commitments made by the Field Manager and the Team Coordinator regarding team activities should be realistic and every effort should be made to honor them.

  6. The pre-examination conference should:

    1. Verify the Entity's size, dispersion, any and all related entities, and diversification (a tour of local facilities may be desirable);

    2. Verify the address where books and records are maintained;

    3. Include a thorough discussion of the accounting system and compliance with Rev. Proc. 98-25;

    4. Include a discussion of independent management authority delegated to subordinate organizations and agents;

    5. Arrange for review of return workpapers, examination reports, and other information to be available at start of examination;

    6. Arrange for flow of communications from Field Manager and team to Entity and vice versa;

    7. To the extent possible, arrange for time and place each Team Member will begin work;

    8. Establish agreements as to accommodations for the team including such items as locked file cabinets, desks, chairs, telephone and office machines;

    9. Establish agreement that issues will be raised, discussed, and resolved as the examination progresses;

    10. Establish agreement that the Entity will prepare its protest to identified unagreed issues during the course of the examination;

    11. Establish agreement to identify the need for an early submission of technical advice requests;

    12. Confirm implementation of agreements reached during the previous examination; and

    13. Establish agreement regarding security of IRS and Entity documents maintained on the Entity's premises during the examination.

  7. The Field Manager should ensure that:

    1. The examination plan identifies those representatives of the Entity who are authorized to furnish information to Team Members and those with whom issues may be discussed;

    2. Entity personnel designated to furnish information to Team Members are those best qualified to give complete first-hand information; and

    3. The roles of Field Manager, Team Coordinator and Team Members are fully explained, including information as to who has authority to secure information and discuss issues.

  8. After concluding the pre-examination conference, the Team Coordinator will summarize, in writing, all pertinent information developed and agreements reached. The Entity information section of the examination plan will be used for this purpose. Form 4764 may be used for the examination plan.

  9. A copy of the Entity information section should be furnished to the Entity. The Field Manager should deliver this document personally since it will provide an opportunity to:

    1. Review the document with the Entity;

    2. Again point out that the examination plan is subject to change when necessary; and

    3. Solicit the Entity's signature as an acknowledgment of receipt; and that agreements and information are correctly stated. If the Entity declines to sign, the Field Manager should document delivery of the plan and the fact that its correctness was orally acknowledged.

  10. The Field Manager and/or Team Coordinator should at this point make specific assignments to each of the Team Members. Each member should be given a written set of instructions (Form 4764 may be used for this purpose) identifying what is expected of him or her and the specific areas of responsibility. It should also be made clear to all of the Team Members that the instructions are a guide and are flexible.

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