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Part 8. Appeals

Chapter 19. Appeals Pass-Through Entity Handbook

Section 8. Collection Cases

8.19.8  Collection Cases

8.19.8.1  (04-14-2008)
Overview

  1. IRM 8.19.8 is intended to give appeals officers (AO) and settlement officers (SO) specific guidance in handling collection related cases on investors that involve income tax liabilities resulting from adjustments to TEFRA entities. Since TEFRA provisions require different technical and procedural treatment from those used for non-TEFRA cases, appeals officers and settlement officers should be familiar with the entire contents of this Handbook.

  2. The types of collection related cases that may be received in Appeals include offers in compromise (OIC), collection due process (CDP), and claims for refund or abatement.

    Caution:

    Position titles and delegated authorities referenced in IRM 8.19.8 attempt to reflect the results of the IRS reorganization. Users are cautioned to seek guidance from the Appeals TEFRA Technical Guidance Coordinator if questions of authority arise.

8.19.8.1.1  (04-14-2008)
TEFRA Entity

  1. A TEFRA entity includes:

    1. Any partnership that is subject to the unified audit and litigation procedures of IRC 6221 through IRC 6234 (i.e. TEFRA partnership), and

    2. Any S corporation that is subject to the unified audit and litigation procedures of IRC 6221 through IRC 6234 and former IRC 6241 through IRC 6245 (i.e., TEFRA S corporation).

      Note:

      S corporations cease to be subject to these procedures for S corporation tax years beginning after December 31, 1996.

    3. For more information on TEFRA entities, including an overview of the TEFRA audit and litigation procedures, refer to IRM 8.19.1 , Procedures and Authorities.

8.19.8.1.2  (04-14-2008)
TEFRA Terms

  1. For purposes of this section of IRM 8.19, there are a few TEFRA terms that are relevant. For a more comprehensive list of TEFRA terms, refer to IRM Exhibit 8.19.1-1.

  2. Tax Matters Partner (TMP): the statutory representative designated by the TEFRA partnership to act as a liaison between the partners, the IRS, and the federal courts. In the case of a TEFRA S corporation, the designated shareholder is known as the Tax Matters Person.

  3. Notice Partner: any identified partner in a TEFRA partnership having 100 or less partners or any partner owning a 1% or more profits interest in a TEFRA partnership with more than 100 partners. A notice partner is entitled to receive notices directly from the Service.

  4. Notice Group: a group of partners collectively owning 5% or more of a partnership having more than 100 partners. The group is formed solely for the purpose of receiving the notices required by IRC 6223, i.e., the NBAP and FPAA (or FSAA).

  5. Notice Shareholder: any identified shareholder in a TEFRA S corporation. A notice shareholder is entitled to receive notices directly from the Service.

  6. Non-notice Partner: A partner to whom the Service is not required to send notices.

  7. Notice of Beginning of Administrative Proceeding (NBAP): the required notice sent to notice partners (or shareholders), which officially begins the examination of the partnership (or S corporation) under TEFRA audit and litigation procedures.

  8. Final Partnership Administrative Adjustment (FPAA): the required notice sent to notice partners and the representative of a notice group providing the results of the partnership proceeding.

  9. Final S Corporation Administrative Adjustment (FSAA): the required notice sent to shareholders providing the results of the S corporation proceeding.

  10. Partnership Items: any item that is required to be taken into account for the partnership’s taxable year to the extent that the regulations provide that such item is more appropriately determined at the partnership level. Examples include the partnership’s income, expenses, deductions, credits, and accounting method. For TEFRA S corporations, the term is known as S corporation items.

  11. Affected Items: any item on a partner's or shareholder's return that requires adjustment as a result of adjustments to the partnership (or S corporation) items. Examples include a partner’s basis in the partnership, penalties, and a partner’s medical expense deduction that is based on a percentage of adjusted gross income.

  12. Non-partnership item: an item that is not a partnership item (example, a partner’s interest income from a bank), or that ceases to be a partnership item (example, when a partner signs a settlement agreement). For TEFRA S corporations, the term is known as non-S corporation items.

  13. Pass- thru Partner: any partnership, estate, trust, S corporation, nominee, or other similar person from whom other persons hold an interest in the TEFRA partnership.

8.19.8.2  (04-14-2008)
Contents of Case File

  1. The TEFRA investor’s case file will include the documents that would normally be expected depending on the type of case, i.e., offer in compromise (OIC), collection due process (CDP), claim for refund/abatement, etc.

  2. If there was an assessment resulting from a TEFRA entity, the file should also include one or more of the following documents that relate to TEFRA procedures. Examples are:

    1. Letter 1787 or Letter 1855, Notice of Beginning of Administrative Proceeding (NBAP);

    2. Letter 1827 or Letter 1829 (for partnerships), or Letter 1834 (for S corporations), 60 day Letter---used to transmit the audit report to the taxpayer;

    3. Letter 1830, Final Partnership Administrative Adjustment (FPAA), or Letter 1829, Final S Corporation Administrative Adjustment (FSAA) (if applicable);

    4. Notice of Computational Adjustment----computation reflecting the additional tax and/or penalties owed by the taxpayer based on the adjustments to the tax return of the TEFRA entity;

    5. Form 4605-A, Examination Changes – Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations;

    6. Form 886-Z(c), Partners' or S Corporation Shareholders' Share of Income;

    7. Form 4700-T, TEFRA Workpapers ;

    8. Settlement Agreement (if applicable): Form 870-P , Form 870-P(AD), Form 870-PT , Form 870-PT(AD) , Form 870-L, Form 870-L(AD), Form 870-LT or Form 870-LT(AD) for partnerships; Form 870-S or Form 870-S(AD) for S corporations;

    9. Federal court decision on the TEFRA entity (if applicable).

      Note:

      If there is an indication that the liability includes an assessment relating to a TEFRA entity and the file does not include any of these documents, the entire administrative file should be requested from the applicable Campus in order to confirm that the liability relates to an assessment from a TEFRA entity and the amount of such liability.

8.19.8.3  (04-14-2008)
Considerations in TEFRA Entity Cases

  1. There are two concepts that must be considered in collection cases involving assessments related to TEFRA entities: (a) Finality of the Liability, and (b) Consistent Settlement.

8.19.8.3.1  (04-14-2008)
Finality of the Liability

  1. A taxpayer's liability resulting from an assessment from a TEFRA entity is final and conclusive. Thus, a taxpayer will not be able to raise challenges to the underlying liability to the extent that it involves deficiencies in tax relating to disallowance or adjustment of losses, deductions, or credits regardless of how the deficiencies were assessed, by settlement agreement, by defaulted FPAA (or FSAA), or by a federal court decision. This applies to doubt as to liability offers, non-hardship Effective Tax Administration (ETA) offers (under either public policy or equity grounds), a CDP case, or a claim for refund/abatement. However, it does not apply to doubt as to collectibility offers or hardship offers.

  2. Taxpayers may contest erroneous mathematical computations applying the determined partnership items to their returns provided that a claim was filed within 6 months after the IRS mailed the computation to the taxpayer. See IRC 6230(c)(1)(A) and IRC 6230(c)(2)(A).

  3. The tax year of the partnership or S corporation subject to TEFRA procedures will determine whether the taxpayer can raise challenges to the underlying liability to the extent that it involves penalties or additions to tax relating to the TEFRA entity. Where a reduction in the penalties or additions to tax appears warranted, the issue must be discussed with the Appeals TEFRA Technical Guidance Coordinator.

    1. For partnership tax years ending after August 5, 1997, the applicability of penalties is determined at the partnership level; thus even if penalties were included in a settlement agreement, a defaulted FPAA, or a federal court decision, the taxpayer can raise partner level defenses to the penalty; however, penalties included in Part II of a Form 870-LT or Form 870-LT(AD) settlement agreement are considered to have been resolved with finality;

    2. For partnership tax years ending before August 6, 1997, the applicability of penalties is determined at the partner level, thus the taxpayer may raise partner level defenses to the penalty; however, penalties included in a Form 870-L or Form 870-L(AD) settlement agreement are considered to have been resolved with finality;

    3. For S corporation tax years that are subject to TEFRA procedures, the applicability of penalties is determined at the shareholder level, thus the taxpayer may raise shareholder level defenses to the penalty; however, penalties included in a Form 870(AD) are considered to have been resolved with finality.

  4. Taxpayers can seek interest abatement as part of a doubt as to liability offer, a CDP hearing, or a claim for abatement and may argue for an abatement relating to a specific period of time. However, abatement of any amount of interest cannot be incorporated into a liability challenge if the taxpayer has previously sought IRC 6404(e) relief. SO/AOs should evaluate the specific circumstances of an individual investor's case, but generally Appeals personnel should not grant abatement of interest under IRC 6404(e) in any TEFRA-related doubt as to liability offer, a non-hardship offer (under either public policy or equity grounds), a CDP case, or a claim for abatement without special circumstances because the delays in resolving TEFRA cases cannot be attributed to unreasonable delays and errors by the IRS. Where abatement appears warranted, the issue must be discussed with the Appeals TEFRA Technical Guidance Coordinator who will coordinate a response with the Appeals Program Analyst responsible for the abatement of interest program.

  5. A taxpayer may file a request for innocent spouse relief after the liability from a TEFRA proceeding is determined. However, the tax treatment of the partnership items and affected items giving rise to the assessment cannot be redetermined. The time limits set forth in IRC 6015, two years from the date on which the IRS begins collection, are available for a spouse who is seeking relief from TEFRA-related liabilities arising on or before July 22, 1998 and remaining unpaid as of July 22, 1998, as well as for liabilities for tax arising after July 22, 1998. Where innocent spouse treatment appears warranted, the issue must be discussed with the Appeals TEFRA Technical Guidance Coordinator who will coordinate a response with the Appeals Program Analyst responsible for the innocent spouse program.

  6. Taxpayers will not be able to raise challenges to the underlying liability, to the extent that it involves interest relating to tax-motivated transactions, assessed under the provisions of former IRC 6621(c) . Where such consideration appears warranted, before adjustments or reduction are recommended, the issue must be discussed with the Appeals TEFRA Technical Guidance Coordinator.

8.19.8.3.2  (04-14-2008)
Consistent Settlement

  1. Consistent settlement (sometimes referred to as consistent agreement or consistent treatment) is a term unique to TEFRA and provides that if the IRS enters into a settlement agreement with a partner (or shareholder), it must also offer these same terms to any other partner (or shareholder) who requests it. IRC 6224(c)(2) provides certain time frames by which a partner (or shareholder) must request consistent settlement.

  2. Consistent settlement is only available for partnership items, not affected items or non-partnership items. However, for partnership tax years ending after August 5, 1997, the applicability of penalties at the partnership level are subject to a request for consistent settlement.

  3. Consistent settlement is not available to partners or shareholders that have signed settlement agreements or otherwise had their partnership (or S corporation items) converted to non-partnership (or non-S corporation) items.

  4. Partnership items (or S corporation items) are converted to non-partnership items (or non-S corporation items) in the following situations:

    1. A settlement agreement is signed by the partner or shareholder;

    2. A petition in bankruptcy is filed by a partner or shareholder;

    3. An indirect method is used in determining a partner or shareholder's gross income, and a notice of deficiency is issued to the partner or shareholder based on the indirect method;

    4. The IRS issues a termination or jeopardy assessment to the partner or shareholder;

    5. A request for prompt assessment is filed by the partner or shareholder;

    6. If the IRS notifies a partner or shareholder that he is the subject of a criminal investigation and notification is sent in writing that his partnership or S corporation items are being converted to non-partnership (or non-S corporation) items;

    7. If the IRS mails a partner or shareholder a letter notifying him that his partnership or S corporation items are being converted to non-partnership or non-S corporation items, the partner or shareholder's items are converted on the date that the letter is mailed;

    8. If the partner or shareholder elects to have his partnership or S corporation items converted due to not receiving timely notice under IRC 6223 (when the TEFRA proceeding is still ongoing), or the items automatically convert as a result of not receiving timely notice (when the TEFRA proceeding has concluded).

  5. Partnership items (or S corporation items) are not converted to non-partnership items (or non-S corporation items) in the following situations:

    1. An FPAA (or FSAA) is issued and no petitions are filed;

    2. An FPAA (or FSAA) is issued and no timely petitions are filed; or

    3. An FPAA (or FSAA) is issued, a timely petition is filed, and the TEFRA proceeding is resolved as a result of a federal court decision.

  6. Doubt as to liability and non-hardship effective tax administration (ETA) offers (under either public policy or equity grounds) should not be accepted from taxpayers where their TEFRA liabilities were assessed and their partnership items were not converted to non-partnership items because the same settlement may have to be offered to other partners that are still in the partnership proceeding under the provisions of consistent settlement. See also the second example in IRM 5.8.11.2.2(3) .

    Note:

    As mentioned earlier, assessed TEFRA liabilities are final determinations, whether the matter was resolved with a settlement agreement or resulted in an FPAA being issued. This is another reason why doubt as to liability and non-hardship ETA offers should not be accepted where they relate to liabilities arising from TEFRA partnerships or TEFRA S corporation.

  7. For doubt as to collectibility and hardship ETA offers, there are no consistent settlement implications. This is because a taxpayer's individual financial situation is not a partnership item.

8.19.8.4  (04-14-2008)
Collection Due Process Cases

  1. In a TEFRA proceeding the Service must notify the Tax Matter Partner or Tax Matters Person (TMP), any Notice Partner, and any Notice Group of certain administrative actions. The remaining partners (Investors) receive notice through the TMP. The notice from the TMP is actual, although not personal, notice to the Investors. Investors who have not entered into settlement agreements may attempt to challenge the underlying liability on the grounds that they "did not otherwise have an opportunity to dispute" such liability. See IRC 6330(c)(2)(B). This argument, however, will fail because after an FPAA (or FSAA) is mailed to the Tax Matters Partner or Tax Matters Person (TMP), IRC 6226(a) allows the TMP 90 days in which to file a petition for a readjustment of partnership items with the Tax Court, the United States Court of Federal Claims, or the United States District Court in which the partnership's principal place of business is located under IRC 6226(b). If the TMP does not file a petition, any notice partner or notice group may file a petition with any of these courts within 60 days after the close of the 90-day period.

  2. Regardless of which partner files the petition, IRC 6226(c) provides that:

    1. Each person who was a partner in the partnership at any time during the year being litigated shall be treated as a party to such action; and

    2. The court having jurisdiction of the case shall allow such persons to participate in the action.

  3. Every investor of a TEFRA partnership (or TEFRA S corporation) for which a petition was filed in the Tax Court, the United States Court of Federal Claims, or the United States District Court in response to an FPAA (or FSAA) is precluded from challenging his liability at a CDP hearing because the investor has had the opportunity to dispute the liability.

  4. An investor's claim that he never received notice of the FPAA or FSAA (and therefore argues that he did not have the opportunity to dispute the partnership or S corporation liability) must be rejected, unless there has been a conversion of partnership items to non-partnership items under IRC 6223(e). If a partner is not entitled to direct notice because he is a non-notice or indirect partner, then notice to the TMP or pass-thru partner, respectively, is sufficient. IRC 6223(g) statutorily obliges a TMP to "keep each non-notice partner informed of all administrative and judicial proceedings for the adjustment at the partnership level of partnership items" . IRC 6223(h) requires a pass-thru partner to forward notices to indirect partners holding a partnership interest through the pass-thru partner. IRC 6230(f) further provides that the failure of the TMP or pass-thru partner to provide any notice or perform any action required under the TEFRA procedures on behalf of a partner does not affect the applicability of any proceeding or adjustment to such partners.

  5. By complying with the notice requirements of IRC 6223, the IRS gives any partner in a TEFRA partnership or shareholder in a TEFRA S corporation "an opportunity to dispute" the resulting liability within the meaning of IRC 6330(c)(2)(B) .

  6. For other information regarding TEFRA liabilities in CDP cases, see IRM 8.22.2.2.11.3.

8.19.8.5  (04-14-2008)
Offers In Compromise

  1. Upon receipt of an offer in compromise case, secure an AMDIS or AMDISA print:

    1. If there is a Partnership Investor Control File (PICF) Code 5, there is at least one open TEFRA key case linkage. The taxpayer should have been advised by the investigating officer or function that an offer cannot be considered until all TEFRA partnership (or TEFRA S corporation) issues have been resolved. See IRM 5.8.4.12.1(2). Attempt to secure a withdrawal. If the taxpayer refuses to withdraw the offer, it should be returned to the investigating officer as a premature referral.

    2. If there is a PICF Code 7, there is at least one closed TEFRA key case linkage. Verify that any assessment as a result of the TEFRA key case was made and that the additional liability is included in the offer.

  2. Doubt as to collectibility offers and hardship ETA offers may be accepted where appropriate even where the tax liability involved an assessment resulting from a TEFRA entity. The fact that the liability is final is not a reason for rejecting the offer. See IRM 8.19.8.3.1. The consistent settlement provisions of TEFRA do not apply to either doubt as to collectibility offers or hardship ETA offers. See IRM 8.19.8.3.2.

  3. Doubt as to liability offers should not be accepted because a taxpayer's liability resulting from a TEFRA assessment is final and conclusive. In addition, the consistent settlement provisions of IRC 6224(c)(2) may apply.

  4. Non-hardship ETA offers based on public policy or equity grounds should not be accepted based on a taxpayer's contention that a provision of the tax law is unfair, or that the TEFRA rules or the TMP's actions on behalf of the taxpayer caused an inequitable result. Other facts and circumstances may be present such that acceptance of an offer would be fair and equitable (see IRM 5.8.11.2.2), but consideration has to be given to whether the consistent settlement provisions of IRC 6224(c)(2) would apply.

  5. Appeals employees considering acceptance of a non-hardship ETA offer that includes an assessment resulting from a TEFRA proceeding must discuss the issue with the Appeals TEFRA Technical Guidance Coordinator who will coordinate a response with the Appeals Program Analyst responsible for the Offer program.

  6. For other information regarding TEFRA liabilities in OIC cases, see IRM 8.23.3.10.1.


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