8.17.4  Notices of Deficiency (Cont. 1)

8.17.4.14 
Tentative Allowances and Other Carryback Claims in Notice of Deficiency Statement

8.17.4.14.1  (11-09-2007)
Tentative Allowance When Loss/Unused Credit Year Not in Appeals

  1. A tentative allowance is filed on a Form 1045 (individual) or a Form 1139 (corporation) and is identified by the presence of a TC 295 on the account module.

  2. If a notice of deficiency is being issued and the examination of the unused loss/credit year is not complete, or if it cannot be determined if the unused loss/credit year is under examination, completely ignore the tentative allowance in the notice of deficiency.

    Note:

    This procedure only applies for tentative allowances resulting from the filing of a Form 1045 or Form 1139. It does not apply to carryback claims that were allowed due to the filing of a Form 1040X or Form 1120X.

  3. Ignoring the tentative allowance means:

    1. Do not use net operating loss and capital loss carrybacks giving rise to the tentative allowance to decrease taxable income or alternative minimum taxable income.

    2. Do not use credit carrybacks to decrease tax liability.

    3. Do not include the increase or decrease in tax attributable to a tentative allowance in "tax as previously adjusted" .

  4. If it can be determined that there is no examination activity on the year giving rise to the tentative allowance, and the statute of limitations has expired on that year, include the tentative allowance in the notice in the amount previously allowed.

    1. Although Appeals adjustments may increase taxable income and tax liability in the allowance year, limit the amount of the tentative allowance to the amount originally allowed on Form 1045 (individual) or Form 1139 (corporation).

    2. Increasing the amount of tentative allowance may result in a duplicate allowance to the taxpayer. Only allow an additional amount when it can be determined that the allowance does not result in duplication.

  5. If it is determined that examination of the year giving rise to the tentative allowance has been completed, include the tentative allowance in the notice. Include the amount determined to be allowable based on the examination adjustments made to the loss/unused credit year.

8.17.4.14.2  (09-27-2013)
Tentative Allowance When Both Carryback and Loss/Unused Credit Year in Appeals

  1. If the notice of deficiency is being issued and both the tentative allowance year and the loss/unused credit year are under consideration in Appeals, include both years in the notice of deficiency.

  2. Adjust the year with the tentative allowance (the carryback year) based on adjustments made to the loss/unused credit year.

  3. If adjustments to the loss/unused credit year do not result in a deficiency, then:

    1. Do not include the loss/unused credit year in the notice letter.

    2. Include the loss/unused credit year on Form 4089 (or if prepared, Form 4089-A and Form 870).

    3. Include the loss year on the Form 5278 with the carryback year.

  4. Follow specific procedures if the adjustments to the loss/unused credit year result in an overassessment. See IRM 8.17.4.16.

  5. Include explanations of adjustments for all adjustments to the loss/unused credit year as well as the carryback year.

8.17.4.14.3  (11-09-2007)
Claim for Credit or Refund When Loss/Unused Credit Year is Not in Appeals

  1. This section discusses cases where a notice of deficiency is being prepared and a claim for credit or refund has been filed to carryback a loss/unused credit to one or more of the years included in the notice of deficiency. The claim is filed on an amended return Form 1040X (individual) or a Form 1120X (corporation).

  2. An amended return is identified by the presence of a TC 291 or 299 on the account module.

  3. If a notice of deficiency is being issued and the examination of the year of the loss/unused credit is not completed or if it cannot be determined if the year is under examination, do not ignore the prior allowance in the notice. Discuss the case with the Appeals Officer since the case may have to be returned to Compliance to examine the loss/unused credit year.

  4. If it can be determined that there is no examination activity on the year giving rise to the carrybacks, and the statute of limitations has expired on that year, include the previously allowed claim amount in the notice.

    1. Although Appeals adjustments may increase taxable income and tax liability in the carryback year, limit the carryback claim to the amount originally allowed on Form 1040X/1120X.

    2. Increasing the amount of a carryback claim may result in a duplicate allowance to the taxpayer. An additional amount should only be allowed when it can be determined that the allowance does not result in duplication.

  5. If it is determined that examination of the loss/unused credit year has been completed, include the carryback claim in the notice. Include the amount determined to be allowable based on the examination adjustments made to the loss/unused credit year.

8.17.4.14.4  (09-27-2013)
Claim for Credit or Refund When Loss/Unused Credit Year Is in Appeals

  1. If the notice of deficiency is being issued and both the carryback claim year and the loss/unused credit year are under consideration in Appeals, include both years in the notice of deficiency.

  2. The year with the carryback claim (the carryback year) should be adjusted based on adjustments made to the loss/unused credit year.

  3. If adjustments to the loss/unused credit year do not result in a deficiency, then see below:

    1. Do not include the loss/unused credit year in the notice letter.

    2. Include the loss/unused credit year on Form 4089 (or if prepared, Form 4089-A and Form 870 ).

    3. Include the loss year on the Form 5278 with the carryback year.

  4. Include explanations of adjustments in the notice for all adjustments to the loss/unused credit year as well as the carryback year.

8.17.4.15  (09-27-2013)
Years with Adjustments Resulting in No Deficiency

  1. Generally, do not include years that have adjustments that result in no deficiency (commonly called a "no change with adjustments" or a "change/no change" year) in a notice letter, Form 4089 (or if prepared, Form 4089-A and Form 870 ). However, if the no change with adjustments year is related to a deficiency year, then see procedures below.

  2. If any adjustment in the year with no deficiency affects the tax liability in the deficiency year, it is determined to be a related year.

  3. If the no change with adjustments year is related to a deficiency year, follow the procedures below:

    1. Do not include the year in which the adjustments result in no deficiency in the notice letter, but include that year on the Form 4089 (or if prepared, Form 4089-A and Form 870 ).

    2. Include a computation of tax for the no change with adjustments year in the notice as part of the Form 5278.

    3. Include explanations of adjustments for the no change with adjustments year.

  4. An example of when a year is considered related is when the years containing a loss/unused credit are under consideration in Appeals along with the related carryback or carryover years that have deficiencies. If the year in which the adjustments result in zero tax is a loss (or unused credit) year, and both the loss/unused credit year and the carryback or carryover year are under consideration in Appeals, then see IRM 8.17.4.14.4 for procedures.

8.17.4.16  (09-27-2013)
Overassessment Years in the Case

  1. Multiple year examinations can result in a proposed deficiency for one or more years and a proposed overassessment for other years. When this occurs, the overassessments will not be included in the notice of deficiency.

    1. The overassessment year is not included on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870) or Form 5278.

    2. However, if adjustments which result in an overassessment are related to deficiency adjustments, computations of any overassessment years plus explanations of adjustment may be included in the notice as a separate exhibit.

  2. Generally, if the adjustments are related, the Service will not process the overassessment until the deficiency can be assessed. However, if the issue generating the overassessment is not related to, or is not the result of, the deficiency proposed in the other year(s), then the overassessment may be processed.

8.17.4.16.1  (09-27-2013)
Preparing a Claim Invitation Letter

  1. Tax Court has no authority to review or redetermine an overassessment.

  2. The issuance of a notice of deficiency (and any subsequent petition filed with the Tax Court) for the deficiency year does not extend the statute of limitations for the overassessment year.

  3. The combination of (1) and (2) above could cause taxpayers to lose the refund to which they may be entitled if the statute on the overassessment year(s) expires before the deficiency year is resolved. Therefore, if the taxpayer has not filed protective claim(s), at the Appeals Officer’s option a claim invitation letter may be prepared by the TCS and issued along with the notice.

    1. The claim invitation letter should be mailed separately and ordinarily should not be "certified" or "registered."

    2. A pattern letter is set out in an exhibit. See Exhibit 8.17.4-3. (The letter is not available on ACDS APGolf or the Publishing Catalog web site.)

8.17.4.17  (09-27-2013)
Including Penalties/Additions to Tax in the Notice of Deficiency

  1. The determination of whether a penalty will be subject to a statutory notice of deficiency procedure usually depends on whether the underlying tax is subject to deficiency procedures. For example, if the negligence penalty was asserted on an underpayment of income tax, the deficiency procedures would apply to the negligence penalty as well as the income tax deficiency. However, if the penalty was the result of an underpayment of employment tax, notice of deficiency procedures would not apply to the penalty.

    1. The taxes and related penalties subject to deficiency procedures include income tax, estate tax, gift tax, and certain excise taxes.

    2. The taxes and related penalties not subject to deficiency procedures include employment taxes imposed by Subtitle C of the IRC, and certain excise taxes.

    3. The penalty itself must also be subject to deficiency procedures. IRC 6654 and IRC 6655 penalties may only be included in the notice of deficiency if a return was not filed. Only the IRC 6651 failure to file, failure to pay and fraudulent failure to file penalties that relate to a tax deficiency are subject to deficiency procedures.

    4. The assessable penalties shown in IRC Chapter 68, Subchapter B, Assessable Penalties, are not return related penalties and therefore notice of deficiency procedures do not apply. Some of these penalties are listed as follows: IRC 6673, IRC 6676, IRC 6694, IRC 6695, IRC 6695A, IRC 6700, IRC 6701, IRC 6702, IRC 6707A, IRC 6709,IRC 6713, etc.

  2. See the following IRM sections for additional penalty information:

    1. IRM 8.11.1, Return Related Penalties in Appeals

    2. IRM 8.17.7, Penalties/Additions to Tax in Computations

    3. IRM 20.1.1.4.2, Deficiency Procedures

  3. The type and amount of each addition to the tax or penalty, and the applicable code section must be shown separately for each year.

  4. Each addition to tax or penalty should be distinguished. For example, the failure to file penalty should be designated as IRC 6651(a)(1).

  5. A computation of the penalty/addition to tax must be included in any notice imposing a penalty or addition to tax that is issued after December 31, 2000, per IRC 6751. IRC 6751 also requires that the notice include the name of the penalty and the section under which the penalty is imposed.

  6. Penalties should have explanatory paragraphs included in the notice of deficiency. See IRM 8.17.4.13.4 for more information.

  7. Discussion of "substitute for return" (SFR) cases and the assertion of the IRC 6651(a)(2) addition to tax is discussed in IRM 8.17.4.18.1.1.

  8. For procedures concerning repealed IRC 6653 penalties, refer to the historical IRM 8.17.4 archived on the Publishing web site.

8.17.4.18  (09-27-2013)
Delinquency Penalties - Failure to File (FTF), Fraudulent Failure to FIle (FFTF) and Failure to Pay (FTP) Penalties

  1. The following includes instructions for preparing notices of deficiency with delinquency penalties.

  2. A notice of deficiency issued for a delinquently filed return should not include any penalty amounts attributable to the tax shown on the return as filed. The portion of the penalties attributable to the tax shown on the return as filed are not subject to deficiency procedures. If an examiner later determines additional tax is due on the delinquent tax return, that additional tax is subject to deficiency procedures, as are the associated delinquency penalties, if applicable.

    Example:

    Taxpayer files a return one month late and reports and pays a tax of $4,000. No penalties are assessed when the taxpayer files the return. During an audit, the IRS determines a tax deficiency of $1,000. The failure to file penalty (FTF) is 5 percent per month (for up to 5 months) of the amount of tax. The total FTF penalty is $250 (5 percent of $5,000 for one month). If the taxpayer contests the deficiency, the taxpayer will be entitled to a notice of deficiency for $1,050 ($1,000 tax deficiency and $50 FTF penalty (5 percent of $1,000). The remaining $200 failure to file penalty which was attributable to the original tax assessment is not part of the deficiency and is collectible by immediate assessment.

  3. The IRC 6651(a)(2) failure to pay penalty does not apply to a deficiency unless the taxpayer is a nonfiler and substitute for return procedures apply. See IRM 8.17.4.18.1.1 for additional information.

8.17.4.18.1  (09-27-2013)
IRC 6651(a)(1) and IRC 6651(a)(2) when Return Filed

  1. If a return is not timely filed, IRC 6651(a)(1) provides for a penalty of 5% if the failure is for not more than one month, with an additional 5% for each month or fraction thereof during which the failure continues, but not in excess of 25%. This penalty is computed on the net amount due as defined in IRM 8.17.7.3, Failure to File, IRC 6651(a)(1).

  2. If the taxpayer files a late return, only the IRC 6651(a)(1) failure to file penalty attributed to the amount of the deficiency should be asserted in the notice of deficiency. The amount used to compute the penalty is the tax required to be shown on the return that is not paid on or before the date prescribed for payment.

    1. Absent an extension of time to pay affected by IRC 7508, Time for Performing Certain Acts Postponed By Reason of Service in Combat Zone or Contingency Operation, or IRC 7508A, Authority to Postpone Certain Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions, the date prescribed for payment is generally the return due date without regard to extensions.

    2. The amount used to compute the IRC 6651(a)(1) penalty is not decreased by late payments, even if those payments are made prior to the extended return due date.

  3. The IRC 6651(a)(2) failure to pay penalty cannot be asserted in a notice of deficiency when the taxpayer has filed a return, because this penalty applies only to tax shown on a filed return, not to a deficiency.

    Note:

    The IRC 6651(a)(2) failure to pay penalty does not apply to a deficiency unless the taxpayer is a nonfiler and substitute for return procedures apply. See IRM 8.17.4.18.1.1

    .

  4. IRC 6651(c)(1) provides that the penalty for filing late under IRC 6651(a)(1) must be reduced by the amount of any penalty for paying late imposed under IRC 6651(a)(2) for any month during which both penalties apply.

    1. Therefore, if IRC 6651(a)(2) was assessed by the Campus when the return was filed, the amount of the penalty imposed under IRC 6651(a)(1) must be reduced by the amount of the IRC 6651(a)(2) penalty assessed for any month or part of a month during which both penalties apply.

    2. See IRM 8.17.7-1, Computation of Failure to File Penalty After Tax Adjustment, with Previously Assessed Failure to Pay Penalty, for a sample computation.

8.17.4.18.1.1  (09-27-2013)
Nonfilers: Substitute for Return Procedures in Notices

  1. If a taxpayer does not file a return, then the IRS can assert IRC 6651(a)(2) on the unpaid deficiency if a valid "substitute for return" (SFR) under IRC 6020(b) has been prepared, but only for returns due after July 30, 1996.

  2. A valid SFR must have been prepared under IRC 6020(b) in order to assert IRC 6651(a)(2) on a nonfiler.

    1. The requirements of a valid IRC 6020(b) return are discussed in Treas. Reg. Section 301.6020-1.

    2. See IRM 8.17.7.5, Nonfilers: Substitute for Return (SFR), IRC 6651(a)(1) and 6651(a)(2) and IRC 6651(g), for detailed discussion of SFR returns and IRC 6651.

    3. The AO is responsible for determining if a valid SFR has been prepared.

  3. A notice of deficiency issued on a valid substitute for return as described in IRC 6020(b) will include both a failure to file (FTF) penalty under IRC 6651(a)(1), and a failure to pay (FTP) penalty under IRC 6651(a)(2).

  4. On these cases, both the IRC 6651(a)(1) and IRC 6651(a)(2) penalties are shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870) and Form 5278.

  5. The IRC 6651(a)(1) FTF penalty is computed at 5 percent per month for each month or part of a month that the return is late, not to exceed a total of 25 percent. The IRC 6651(a)(2) FTP penalty is computed at 0.5 percent a month (or fraction thereof) on the unpaid tax liability, not to exceed a total of 25 percent. The FTP penalty is imposed from the original due date of the return and may accrue for a period of up to 50 months.

  6. Since the IRC 6651(a)(1) and IRC 6651(a)(2) penalties are asserted at the same time (concurrently) on substitute for returns, a special computation is necessary. The amount of IRC 6651(a)(1) FTF penalty must be reduced by the amount of the IRC 6651(a)(2) FTP penalty for any month or part of a month during which both penalties apply.

    1. For simplicity purposes, RGS implements this reduction by reducing the 5 percent FTF penalty rate by the 0.5 percent penalty rate of the FTP penalty for any month during which both penalties apply. This results in an IRC 6651(a)(1) penalty rate of 4.5 percent a month (to a maximum of 22.5 percent) shown on the RGS IRC 6651 penalty computation schedule. The RGS IRC 6651 penalty computation schedule may be included in the notice of deficiency as long as the computations are accurate.

    2. The TCS Excel IRC 6651 penalty spreadsheet on the Technical Support SharePoint correctly reduces the IRC 6651(a)(1) penalty amount by the concurrent IRC 6651(a)(2) penalty amount, and may be used in the notice of deficiency.

      Caution:

      If the taxpayer made payments after the due date of the return, the RGS IRC 6651 penalty computation schedule and the TCS IRC 6651 penalty Excel spreadsheet won't be accurate. This is because these penalty schedules won't consider any late payments in the FTP penalty computation. When there are late payments, these penalty schedules must be corrected or other schedules used in the notice of deficiency.

  7. IRC 6651(a)(2) penalty amount can be determined

    1. The FTP penalty is computed at 0.5 percent a month not to exceed a total of 25 percent, and may accrue for a period of up to 50 months.

    2. If the notice of deficiency is issued after this 50 month period, or if the taxpayer has paid the deficiency in full, it will be possible to determine the full amount of the IRC 6651(a)(2) penalty.

    3. Compute this amount and include it in the notice of deficiency.

  8. IRC 6651(a)(2) penalty amount is still accruing

    1. If the amount of the IRC 6651(a)(2) penalty has not accrued for the full 50 month period and the deficiency remains unpaid, then the notice of deficiency should not include a dollar amount for the IRC 6651(a)(2) penalty. Instead, the amount of the penalty should be shown in the notice letter as an asterisk (*), with an explanatory paragraph. See Exhibit 8.17.4-4 for an example of the format to use on the notice of deficiency letter.

    2. An asterisk should also be used instead of a penalty amount on the Form 4089 (or if prepared, Form 4089-A and Form 870) and on Form 5278. A very brief explanation should be given, such as "IRC 6651(a)(2) amount to be determined" .

  9. Explanations of the IRC 6651 penalty should also be included in the notice of deficiency.

    1. Generally the RGS IRC 6651 penalty schedule or the TCS IRC 6651 Excel penalty spreadsheet on the Technical Support SharePoint site is used for the statutory notice. If the RGS or Excel IRC 6651 penalty schedules are included in the statutory notice, explanations of the IRC 6651 penalty generally will not be needed since the RGS and Excel penalty schedules include appropriate explanatory paragraphs.

      Note:

      If the FTP penalty is still accruing, you don't need to delete the FTP amount from these penalty schedules and insert an asterisk, because there is a paragraph on the penalty schedule underneath the computation that tells the taxpayer that the penalty is still accruing.

    2. If the explanatory paragraphs included on the RGS penalty schedules and the Excel penalty spreadsheets are not acceptable, or the RGS or Excel IRC 6651 penalty schedules are not included in the notice, then also include appropriate explanatory paragraphs with the statutory notice. See IRM 8.17.4.13.1 for available sample paragraphs.

8.17.4.18.2  (09-27-2013)
IRC 6651(f) Fraudulent Failure to File (FFTF) Penalty

  1. If the failure to file the tax return is due to fraud, the FFTF penalty imposed by IRC 6651(f) may be asserted rather than the regular FTF penalty under IRC 6651(a)(1).

  2. For late filed returns, the FFTF penalty under IRC 6651(f) that is based on the tax per the return is not subject to deficiency procedures. The notice of deficiency will not reflect an IRC 6651(f) penalty on the portion of total corrected tax attributable to the return as filed (delinquent return).

    Note:

    The IRC 6651(f) penalty that is based on the tax per the return must be assessed prior to the expiration of the normal statute.

  3. The portion of the IRC 6651(f) penalty that is attributable to the tax deficiency is subject to deficiency procedures. Reflect this portion of the IRC 6651(f) penalty in the notice of deficiency.

  4. When the IRC 6651(f) penalty is proposed on an SFR, the penalty is based on the total corrected tax per the examination. The IRC 6651(f) penalty asserted on an SFR is subject to deficiency procedures and is included in the notice of deficiency.

  5. See IRM 20.1.2.2.7.5, Fraudulent Failure to File - IRC 6651(f), for additional information.

8.17.4.18.3  (09-27-2013)
Alternative to FFTF, IRC 6651(f)

  1. When the FFTF penalty under IRC 6651(f) is asserted, the AO will instruct the TCS if the IRC 6651(a)(1) failure to file penalty should be included in the notice of deficiency as an alternative issue.

  2. If the AO instructs that the failure to file penalty should be included in the notice of deficiency as an alternative issue to the FFTF penalty, then an explanation for the failure to file penalty must be included in the notice following the explanation of the fraudulent failure to file penalty.

  3. See below for sample format for the language to use for the alternative issue:

    "In the event the fraudulent failure to file penalty under Internal Revenue Code section 6651(f) is not sustained, in the alternative it is determined that because your income tax return for the taxable year ended ___was not filed within the time period required by law; and you have not shown that such failure to timely file your return was due to reasonable cause, ___percent of the tax is added as provided by section 6651(a)(1) of the Internal Revenue Code for the taxable year ended ___."

  4. If the RGS or Excel IRC 6651(a)(1) penalty schedules are used, the paragraph for the alternative issue shown above in paragraph (3) can be added to those schedules, or included on a separate schedule.

  5. The IRC 6651(a)(1) failure to file penalty is not shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870) or on Form 5278. The penalty is only mentioned in the paragraph for the alternative issue discussed above.

8.17.4.19  (09-27-2013)
Estimated Tax Penalties - IRC Sections 6654 and 6655

  1. An estimated tax penalty cannot be asserted on a deficiency when the taxpayer has filed a return.

  2. If a return was filed, the AO requests that APS assess the penalties prior to the expiration of the statute of limitations on assessment from the original return. (See IRM 8.17.4.3.) These penalties are not included in the notice of deficiency.

  3. If no return was filed for the taxable year, include any applicable penalties under IRC 6654 and IRC 6655 in the notice of deficiency.

  4. See IRM 8.17.7.8, Estimated Tax Penalties, IRC 6654 and IRC 6655, and IRM 20.1.3, Estimated Tax Penalties, for more information.

8.17.4.20  (09-27-2013)
Accuracy Related and Fraud Penalties

  1. The following includes instructions for preparing notices of deficiency with accuracy related and fraud penalties.

8.17.4.20.1  (09-27-2013)
Accuracy Related Penalties (IRC 6662 and IRC 6662A)

  1. The IRC 6662 accuracy related penalty and IRC 6662A accuracy related penalty on reportable transactions:

    1. Apply only if a return is filed.

    2. Cannot be asserted on a substitute for return (SFR) prepared by the IRS under IRC 6020(b).

    3. Do not apply to any portion of an underpayment that is subject to a fraud penalty.

    4. Either IRC 6662 or IRC 6662 with a subsection such as 6662(a) may be used in the notice of deficiency.

    5. Either IRC 6662A or IRC 6662A with a subsection such as 6662A(a) may be used in the notice of deficiency.

  2. See IRM 8.17.7.9, Accuracy-Related Penalty, IRC 6662, and IRM 20.1.5, Return Related Penalties, for more information.

8.17.4.20.2  (09-27-2013)
Civil Fraud Penalty (IRC Section 6663)

  1. The IRC 6663 fraud penalty applies only if a return is filed. It cannot be asserted if the taxpayer did not file a return.

  2. The IRC 6663 fraud penalty cannot be asserted on a substitute for return (SFR) prepared by the IRS under IRC 6020(b).

  3. The IRC 6663 fraud penalty cannot be asserted on the same underpayment (or portion of an underpayment) on which accuracy related penalties are asserted. Only one penalty can be applied to any portion of an underpayment of tax.

  4. Either IRC 6663 or IRC 6663 with a subsection such as 6663(a) may be used in the notice of deficiency.

  5. The delinquency and fraud penalties can be asserted concurrently.

  6. Although there is no specific prohibition against asserting penalties under both IRC 6651(f), Fraudulent Failure to File Penalty, and the IRC 6663 fraud penalty, the court is not likely to sustain the assertion of both penalties unless compelling facts support the IRS’s position. Area Counsel should be consulted before asserting both IRC 6651(f) and IRC 6663 on the same return. (Also see IRM 20.1.5.14.2, Penalty Assertions, for additional information.)

  7. See IRM 8.17.7.10, Fraud Penalty, IRC 6663, and IRM 20.1.5.14, IRC 6663, Civil Fraud Penalty, for more information.

8.17.4.20.2.1  (09-27-2013)
Fraud Penalty - Joint Return

  1. On a joint return, the IRC 6663 civil fraud penalty does not apply to a spouse unless some part of the underpayment is due to civil fraud on the part of that spouse. See IRC 6663(c).

  2. If only one spouse is liable for the fraud penalty, separate notices of deficiency are issued. The fraud penalty will be included on the notice for the culpable spouse only.

    1. See IRM 8.17.4.20.2.2 for procedures for the spouse liable for IRC 6663.

    2. See IRM 8.17.4.20.2.3 for procedures for the spouse not liable for IRC 6663.

      Note:

      The procedures in these two IRM sections may be altered if necessary to fit the facts and circumstances of a case, or on the advice of Counsel.

8.17.4.20.2.2  (09-27-2013)
Procedures - Spouse Liable for Fraud Penalty

  1. Letter 894(cg) is prepared for the spouse liable for the IRC 6663 fraud penalty (culpable spouse) as discussed below:

    1. Use the names of both spouses on the letter and the primary SSN.

    2. Use the address of the culpable spouse.

    3. Direct the salutation on the letter to the culpable spouse.

    4. Include the IRC 6663 penalty on the letter. Add a footnote on the first page of the letter saying that the non-culpable spouse is not liable for the IRC 6663 civil fraud due to the provisions of IRC 6663(c). See suggested language:

      (Taxpayer name) is not liable for the IRC 6663 civil fraud penalty for tax year(s) ____due to the provisions of IRC 6663(c).

    Note:

    Generally this footnote is placed on the letter below the listing of the years and amounts of tax and penalties, and above the salutation.

  2. Form 4089 is prepared for the culpable spouse as discussed below:

    1. Use only culpable spouse's name, address and SSN.

    2. Include the IRC 6663 penalty on Form 4089.

  3. One Form 5278 can be prepared and used for the notice of deficiency for each spouse as discussed below:

    1. Prepare one Form 5278 using both names and primary SSN.

    2. Include the IRC 6663 penalty on Form 5278. Put a footnote on Form 5278 saying that the non-culpable spouse is not liable for the IRC 6663 civil fraud penalty due to the provisions of IRC 6663(c).

      Note:

      A separate Form 5278 can also be prepared for each spouse showing the adjustments, deficiency and penalties that are applicable to each.

  4. Include appropriate explanations of adjustment and IRC 6663 penalty schedule as outlined in IRM 8.17.4.13.

8.17.4.20.2.3  (09-27-2013)
Procedures - Spouse Not Liable for Fraud Penalty

  1. Letter 894(cg) is prepared for the spouse not liable for the IRC 6663 fraud penalty (non-culpable spouse) as discussed below:

    1. Use the names of both spouses on the letter and the primary SSN.

    2. Use the address of the non-culpable spouse.

    3. Direct the salutation on the letter to the non-culpable spouse.

    4. Do not include the IRC 6663 penalty on the letter. Add a footnote on the first page of the letter saying that the non-culpable spouse is not liable for the IRC 6663 civil fraud due to the provisions of IRC 6663(c). See suggested language:

      (Taxpayer name) is not liable for the IRC 6663 civil fraud penalty for tax year(s) ____due to the provisions of IRC 6663(c).

      Note:

      Generally this footnote is placed on the letter below the listing of the years and amounts of tax and penalties, and above the salutation.

  2. Form 4089 is prepared for the non-culpable spouse as discussed below:

    1. Use only non-culpable spouse's name, address and SSN.

    2. Do not include the IRC 6663 penalty on Form 4089.

    3. Add a footnote on Form 4089 saying that the non-culpable spouse is not liable for the IRC 6663 civil fraud due to the provisions of IRC 6663(c).

  3. One Form 5278 can be prepared and used for the notice of deficiency for each spouse as discussed below:

    1. Prepare Form 5278 using both names and primary SSN.

    2. Include the IRC 6663 penalty on Form 5278. Put a footnote on Form 5278 saying that the non-culpable spouse is not liable for the IRC 6663 civil fraud penalty due to the provisions of IRC 6663(c).

      Note:

      A separate Form 5278 can also be prepared for each spouse showing the adjustments, deficiency and penalties that are applicable to each.

  4. Include appropriate explanations of adjustment and IRC 6663 penalty schedule as outlined in IRM 8.17.4.13.

8.17.4.20.3  (09-27-2013)
IRC 6662 Alternative to IRC 6663

  1. It is recommended that the IRC 6662 accuracy-related penalty should be included in the explanation of adjustments as an alternative penalty to the civil fraud penalty under IRC 6663 except in the following situations:

    • A criminal conviction under 26 U.S.C. 7201 collaterally estops the taxpayer from denying fraud, or

    • The statute of limitation has expired in the absence of a finding of fraud.

  2. Remember that IRC 6663 and IRC 6662 cannot be asserted if the taxpayer did not file a return.

  3. When the fraud penalty is asserted, the AO will instruct the TCS that the IRC 6662 penalty must be included in the notice of deficiency as an alternative issue.

  4. If the AO instructs that the IRC 6662 penalty should be included in the notice of deficiency as an alternative issue to the IRC 6663 civil fraud penalty, then an explanation for the IRC 6662 penalty must be included in the notice following the explanation of the civil fraud penalty.

  5. See below for sample format for the language to use for the alternative issue:

    "Alternatively, to the extent that it is determined that fraud does not apply to any portion of the underpayment, you are liable for an accuracy-related penalty under section 6662(a) of the Internal Revenue Code for any portion of the underpayment which is relieved from liability for fraud because there was (1) a substantial understatement of income tax, (2) a valuation misstatement(s), or (3) you were negligent (or disregarded rules or regulations)."

  6. If the RGS or Excel IRC 6663 penalty schedules are used, the alternative paragraph shown above can be added to those schedules, or included on a separate schedule.

  7. The IRC 6662 penalty is not shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870), or on Form 5278. The alternative issue is only shown in a paragraph that follows the explanation of the civil fraud penalty.

  8. The IRC 6651(a)(1) failure to file penalty is not shown on the letter, Form 4089 (or if prepared, Form 4089-A and Form 870) or on Form 5278. The penalty is only mentioned in the paragraph for the alternative issue discussed above.

8.17.4.21  (09-27-2013)
Interest Computations in Notices of Deficiency

  1. An interest computation will not be sent to the taxpayer with the notice of deficiency.

  2. Neither IRC 7522 nor IRC 6631 require that an interest computation must be included with the notice of deficiency.

  3. Chief Counsel has determined that IRC 7522 does not require that an interest computation be included with Notices of Deficiency.

    1. Counsel's IRM is called the Chief Counsel Directives Manual, or CCDM. Per CCDM 33.1.2.8.10.1, "A notice of deficiency is not required to inform the taxpayer that statutory interest at the legal rate will apply to any deficiency determined (or redetermined) by the Commissioner or the Tax Court. The reason is that a notice of deficiency relates exclusively to deficiencies. Generally, interest is not subject to deficiency procedures. (IRC 6601(e)(1).) The Service, however, includes a statement regarding the accrual of interest in each notice of deficiency."

      Note:

      See IRM 8.17.4.11.7. This is the required interest statement to include on Form 4089 or Form 4089-A.

    2. Also see CCDM 33.1.2.8.10, Compliance with Section 7522 Notices to Taxpayers, for further discussion.

  4. IRC 6631 does not require the IRS to include interest on notices of deficiency it issues to taxpayers.

    1. Rather, IRC 6631 merely provides that if the IRS includes interest on any notice sent to the taxpayer, then it must also show how that interest was computed.

    2. Therefore, since the notice of deficiency should not include an interest amount, there is no requirement under IRC 6631 that an interest computation be included.

8.17.4.21.1  (11-09-2007)
Addressing Interest on Substantial Underpayment (Tax Motivated Transactions)

  1. Former IRC 6621(c), pertaining to substantial underpayments attributable to tax motivated transactions (TMT), was repealed for returns with due dates (determined without regard to extensions) after December 31, 1989. However, some TMT cases are still active, and/or still in collection status and TMT rates continue to apply to those balances. For detailed information on former IRC 6621(c), refer to the historical IRM 8.17.2 archived on the Publishing web site.

8.17.4.21.2  (09-27-2013)
Notices of Deficiency with Interest on Large Corporate Underpayments

  1. IRC 6621(c) provides for a two-percent increased interest rate on the underpayment of a tax by a "C" corporation if the underpayment exceeds $100,000. For a complete discussion of large corporate underpayments, see IRM 8.17.6.6, Large Corporation Underpayment Interest (LCU) under IRC 6621(c).

  2. If the requirements of IRC 6621(c) are met, interest accrues at the higher rate for all tax periods after December 31, 1990.

  3. If the taxpayer is subject to the increased rate of interest under this section, the notice of deficiency letter should include a paragraph similar to the following:

    "If you are a C corporation, under Internal Revenue Code section 6621(c), large corporate underpayments may be subject to a higher rate of interest than the normal rate of interest for underpayments."

    1. Letter 901(cg) and Letter 894(cg) available on APGolf include this language.

    2. Since some letters (such as the Letter 3424(cg)) may not include this language , check the notice letters carefully to make sure this paragraph is included if IRC 6621(c) interest is applicable.

  4. A paragraph concerning this section should be shown on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms. Recommended language is as follows:

    "It is determined that the deficiency for the taxable year(s) ___is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax shall be 2 percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code for the tax year(s) ended ___."

  5. The paragraph shown in (4) should be modified if there are carrybacks allowed in the notice of deficiency.

    1. The paragraph must be modified to inform the taxpayer that the deficiency subject to the increased rate of interest is computed without regard to loss and credit carrybacks.

    2. This is especially important if the deficiency in the notice of deficiency is less than $100,000. The increased corporate interest under IRC 6621(c) could still apply if the deficiency before any carrybacks is more than $100,000.

    3. See modification of paragraph, below:

      "It is determined that the deficiency for the taxable year ___is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax shall be 2 percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code for the tax year ended ___. The amount of the large corporate underpayment is computed without regard to any net operating loss carryback, capital loss carryback or credit carryback, pursuant to IRC 6601(d)."

  6. Form 5403 Instructions to APS Spreadsheet:

    1. The TCS will enter the "Notice Date" on the Form 5403 Instructions to APS spreadsheet date. The "Notice Date" is the date of the letter/notice that activates the large corporate underpayment rate.

    2. The Form 5403 Instructions to APS spreadsheet is available on the Appeals Tax Computation Specialist web site at http://appeals.web.irs.gov/taxcomput/Default.htm. After the spreadsheet is completed, it should be attached to the inside left side of the administrative file folder.

    3. See IRM 8.17.5.2.2, Interest 6621(c) Notice Date, for more information.

8.17.4.22  (09-27-2013)
Prepayment (Refundable) Credits

  1. The deficiency to be shown in the notice of deficiency is the statutory deficiency before considering prepayment credit adjustments that the Tax Court has no jurisdiction over, such as withholding credits. (Prepayment credits are also referred to as "refundable credits." )

    1. The notice of deficiency letter will show only the statutory deficiency (line 21 of Form 5278), and will not include any adjustment to prepayment credits that the Tax Court does not have jurisdiction over. These credit adjustments are found on line 22 of Form 5278.

    2. See IRM 8.17.4.11.4.1. This subsection covers procedures on how to include adjustments to these credits on the notice of deficiency face sheet (Form 4089 or Form 4089-A.)

    3. See IRM 8.17.4.9. This subsection covers agreement forms in notices of deficiency. It includes procedures on how to include adjustments to these credits on Form 870, if prepared.

  2. Adjustments to refundable credits such as the earned income credit (EIC), additional child tax credit (ACTC), credit for federal tax paid on fuels, first time home buyer credit, etc. are included in the definition of a statutory deficiency (per IRC 6211). Therefore, any adjustments to these credits would be included in the statutory deficiency shown in the notice. Tax Court has jurisdiction over adjustments to these credits.

    1. The notice of deficiency letter and Form 4089, (or if prepared, Form 4089-A and Form 870) will show the statutory deficiency amount from line 21 of Form 5278 . This amount includes any adjustments to refundable credits such as EIC, ACTC, credit for federal tax paid on fuels, first time home buyer credit, etc.

    2. Explanations for adjustments to these refundable credits should be included with the other explanatory paragraphs written for the notice.

    3. See IRM 8.17.4.11.4.3 for additional information.

8.17.4.23  (09-27-2013)
Notice of Deficiency on Jeopardy Assessment Case

  1. Generally, the area Compliance function is responsible for issuing the notice of deficiency in jeopardy assessment cases. The taxpayer may protest the notice of deficiency to Appeals.

  2. On occasion, Appeals receives the case prior to issuance of the notice of deficiency. In these instances, IRC 6861(b) states the notice of deficiency must be issued within 60 days after the jeopardy assessment is made. While the jeopardy assessment becomes invalid after that period if the notice has not been issued, a valid notice of deficiency may still be issued thereafter.

  3. If Appeals issues the notice of deficiency, a copy of the notice is sent to the appropriate Compliance function.

  4. The office having jurisdiction of the case must establish strict controls to ensure there is sufficient time for associate area Counsel to review the notice before issuance.

  5. Generally, the TCS will verify tax computations when a jeopardy assessment is necessary on cases pending in Appeals.

  6. Compliance function uses Letter 531-J, Notice of Deficiency for Jeopardy Assessment Cases for notices in jeopardy cases. Generally, Appeals will use the Letter 901(cg) for notices in jeopardy assessment cases, with the exceptions noted below:

    1. Letter 894(cg) may be used for a jeopardy assessment made to an individual income tax case as long as the following sentence is added to the opening paragraph:

      "We have assessed the deficiency under the Internal Revenue laws that apply to jeopardy assessments."

    2. Letter 3424(cg) will be used for jeopardy assessment notices involving transferee liability. See IRM 8.7.5, Transferee and Transferor Liabilities, for discussion of Letter 3424(cg) and instructions on opening paragraphs to use.

    3. These letters are available in APGolf.

  7. Letter 901(cg) on APGolf:

    1. APGolf should be used to generate the Letter 901(cg).

    2. The APGolf letter has a two opening paragraph options; one for affiliated companies, and one for all other cases such as corporate, estate, gift, certain excise taxes, and withholding of tax at the source. Select the appropriate opening paragraph option on the input screen, and APGolf will generate the correct opening paragraph.

    3. Besides the selections for the opening paragraph, there is also an option to indicate there is a jeopardy assessment. Select this option, and the jeopardy assessment language will be added to the letter generated by ACDS.

  8. If the amount of the jeopardy assessment equals the amount of the deficiency, follow the procedures discussed below:

    1. Use Letter 901(cg) (or Letter 894(cg) or Letter 3424(cg), if applicable) with an appropriate opening paragraph.

    2. No agreement forms are enclosed with the jeopardy assessment notice.

    3. Letter 531-J used by Compliance contains no waiver language. Therefore, since no agreement forms are enclosed with the notice, the language in the notice letters discussing the taxpayer signing and returning the waiver form must be deleted. Delete the language shown below from Letter 901(cg) (or Letter 894(cg) or Letter 3424(cg), if applicable):

      "If you decide not to file a petition with the Tax Court, please sign the enclosed waiver form and return it to us at the IRS address on the top of the first page of this letter. This will permit us to assess the deficiency quickly and can help limit the accumulation of interest. The enclosed envelope is for your convenience.

      If you decide not to sign and return the waiver, and you don’t file a petition with the Tax Court within the time limit, the law requires us to assess and bill you for the deficiency after 90 days from the date of this letter (150 days if this letter is addressed to you outside the United States)."

      Note:

      In a transferee notice, Letter 3424(cg) contains the word "liability" instead of the word "deficiency" in the above paragraphs.

    4. Since no agreement forms are enclosed with the notice, Form 4089-A should be used as the summary page. On Form 4089-A, following the summary of tax liability, the following sentence is inserted:

      "Assessment of this deficiency has been made against you under the provisions of Internal Revenue laws applicable to jeopardy assessments."

      Note:

      In a transferee notice of liability, replace the word "deficiency" with the word "liability" in the above paragraph.

  9. If the amount of the jeopardy assessment is less than the amount of the deficiency (or transferee liability) asserted in the notice, follow the procedures discussed below:

    1. Use Letter 901(cg) (or Letter 894(cg) or Letter 3424(cg), if applicable) with an appropriate opening paragraph.

    2. Include a waiver form with the notice. Form 4089 or Form 870 can be used.

    3. It is recommended that a summary of jeopardy assessments be shown on Form 4089 , Form 4089-A, or a continuation sheet attached to these forms. See the following example.

      Summary of Jeopardy Assessments

      Summary of assessments made under the provisions of the Internal Revenue laws applicable to jeopardy assessments made on __(date) for tax years 2005 and 2006.

    Period Tax Penalties
    01/01/05 – 12/31/05 $141,901.00 $93,135.00
    01/01/06 – 12/31/06 $920,065.00 $734,563.00
  10. When computing the deficiency on any case in which a jeopardy assessment has been made, do not take the jeopardy assessment into account. This means that the amount of deficiency shown on the letter, Form 4089, Form 4089-A, Form 870 (if prepared) and Form 5278 is not reduced by the jeopardy assessment. (When determining the tax liability per return or as previously adjusted on Form 5278, jeopardy assessments should not be considered.)

  11. If it is determined before the notice is issued that the deficiency for any year is either greater or less than the corresponding jeopardy assessment, the notice should reflect such determined deficiency. If any part of the jeopardy assessment is determined to be in excess of the statutory deficiency, Form 5403, Appeals Closing Record, reflecting the overassessment to be abated should be processed by Account and Processing Support (APS). If all or any part of such excess has been paid, no refund should be made until the case is closed.

8.17.4.24  (09-27-2013)
Notice of Deficiency Involving Termination Assessment under IRC 6851 (Termination of Taxable Period)

  1. A notice of deficiency for a termination assessment case must be issued within 60 calendar days after the later of:

    1. The due date of the return (including extensions), or

    2. The date the taxpayer filed the return.

  2. If the notice of deficiency is not issued within the 60 calendar day period the termination assessment is invalid, but the notice of deficiency remains valid.

  3. A termination assessment is made when the taxable year of a taxpayer has not ended, or when the taxable year has ended but the due date for filing the return, or the due date as extended, has not arrived (IRC 6851). Termination assessments may only be made for income tax liabilities. Such assessments may not be made once the date for filing a full year return has passed.

    1. At the end of the full tax year, the taxpayer is required to file a full year return.

  4. When a taxpayer subject to a termination assessment files the full year return, the return will be examined and the correct tax liability determined by the Compliance function.

    1. When the tax reflected on the full year’s return filed by the taxpayer equals the termination assessment, and an examination of the full year’s return results in no additional tax or overassessment, a notice of deficiency will not be issued.

    2. If the amount determined to be the correct liability is greater than the amount shown on the return, a notice of deficiency will be issued in an amount reflecting the difference between the amount shown on the return and the amount determined to be the correct liability.

  5. If the taxpayer does not file a full year return on or before the proper due date, the Compliance function will follow "substitute for return" procedures and a notice of deficiency will be issued. The starting point for adjustments will be zero. Since no return was filed by the taxpayer, the notice of deficiency will be issued in an amount determined to be the correct tax liability for the year.

  6. The taxpayer may protest the notice to Appeals. In some cases, it is possible for Appeals to receive the case prior to issuance of the notice of deficiency. In these cases, Appeals will issue the notice of deficiency.

  7. The letter and forms to use for a notice of deficiency when there has been a termination assessment are shown below:

    1. Letter 894(cg) or Letter 901(cg) is used. No special language is required on the letter to indicate that there has been a termination assessment.

    2. Form 4089 is prepared, or Form 4089-A and waiver Form 870.

    3. Include language on a continuation page to Form 4089 or Form 4089-A notifying the taxpayer of the termination assessment and the amount. See suggested language to use below:

      Pursuant to section 6851 of the Internal Revenue Code, your taxable year of ___was terminated on ___, and an assessment was made against you for the income tax considered to be due from you for the taxable period beginning __and ending ___, in the amount of ______.

      The termination of your taxable year and the assessment made against you on ____are not taken into consideration in determining the deficiency for the taxable year ended ____,as shown above. Rather, the income tax liability shown by you on the return filed by you for the full taxable year ending ___, is taken into consideration in arriving at the statutory deficiency in income tax shown in this notice, as detailed on the accompanying schedules.

      Any portion of the amount collected at the time of termination of your taxable year which is reflected as a credit balance on your Federal income tax account for the taxable year ended ___will be taken into consideration in arriving at the net amount of tax due after final determination of your income tax liability pursuant to this notice of deficiency.

  8. The deficiency is computed without taking the termination assessment into account. This means that the amount of deficiency shown on the letter, Form 4089 (or Form 4089-A and Form 870), and Form 5278 is not reduced by the termination assessment. (When determining the tax liability per return or as previously adjusted on Form 5278, termination assessments should not be considered.)

  9. The statutory deficiency may be an amount greater or less than the termination assessment. If any part of the termination assessment is determined to be in excess of the statutory deficiency, then a Form 5403 reflecting the overassessment to be abated will be processed by Account and Processing Support (APS) when the case is closed. If all or any part of such excess has been paid, no refund should be made until the case is closed.

8.17.4.25  (09-27-2013)
Notices of Deficiency Involving Conversion of Form 1120-S to Form 1120

  1. Issue the notice of deficiency letter for total liability less liability assessed on Form 1120-S return.

  2. Show this deficiency on Form 4089 (or if prepared, Form 4089-A and Form 870) and on Form 5278.

  3. Explain on Form 4089 (or if prepared, Form 4089-A or a continuation page) the reason for the non-recognition of the Form 1120-S.

  4. Use Form 1120-S income as the starting point.

  5. Explain the adjustments and prepare the supporting schedules in the usual manner.

8.17.4.26  (09-27-2013)
Tip Income Cases, and FICA Tax Informational Notice

  1. The Tax Court does not have jurisdiction over FICA taxes on tip income and the 50 percent addition to the tax ("penalty" ) under IRC 6652(b). Therefore, should it be necessary to issue a notice of deficiency, the additional FICA taxes on unreported tip income and the applicable IRC 6652 penalty must be assessed before issuing the notice.

  2. Procedures:

    1. The income tax due on unreported tip income is computed by including the unreported tip income as an adjustment to taxable income in the notice of deficiency on Form 5278.

    2. Prepare Form 885-T to compute the FICA taxes due on the unreported tip income and the penalty under IRC 6652(b).

    3. Instruct the Appeals Officer that the FICA taxes and IRC 6652(b) penalty on the unreported tip income shown on Form 885-T must be assessed before the notice of deficiency is issued.

  3. A tip income and FICA tax informational notice may be sent to the taxpayer with the notice of deficiency when the taxpayer's tip income is adjusted and FICA taxes and penalties are assessed. The informational notice informs the taxpayer that a separate notification will be (or has been) sent from the Campus for the FICA tax and penalty assessments. The informational notice should reduce the taxpayer's confusion about receiving two separate bills, one for the income taxes and another for the FICA taxes and penalty.

  4. The informational notice is not part of the notice of deficiency. Therefore, the following actions must be taken when an informational notice is sent with the notice of deficiency.

    1. The informational notice must be labeled "For Informational Purposes Only."

    2. The informational notice must be on a separate page. It should not be attached to any part of the notice of deficiency.

    3. Use the specific language shown in the exhibit to prepare the informational notice. See Exhibit 8.17.4-5.

8.17.4.27  (09-27-2013)
Accumulated Earnings Tax IRC 534 Notification

  1. IRC 534(b) provides that the Service may notify taxpayers if a proposed notice of deficiency includes an amount with respect to the accumulated earnings tax imposed by IRC 531. Appeals offices are responsible for notifying the taxpayer, where necessary, in cases under their jurisdiction. Letter 572, Proposal to Issue a Notice of Deficiency for Excess Accumulated Earnings Under IRC 531, is the notification letter sent to the taxpayer and is sent by certified or registered mail.

    1. Issue the notification so that sufficient time exists, prior to the expiration of the statutory period of limitations, for the filing and adequate consideration of the taxpayer's statement.

    2. Usually, a notice of deficiency is not issued by the Area Director or Appeals office before the 60-day period (or 90-day period if an additional 30-day period is granted) for filing a statement under Treas. Reg. §1.534–2(d)(2) expires, unless the statutory period of limitations is due to expire, or other compelling reasons exist.

    3. If a jeopardy assessment has been made, the subsequent notice of deficiency serves as the IRC 534(b) notification and the taxpayer's statement may be included in his/her petition to the United States Tax Court.

  2. IRC 534(c) allows the taxpayer at least 30 days to submit a statement in response to the notification. Regulations require the taxpayer to submit the original and two copies of the statement. Upon receipt, attach the original to the return of the earliest years in which the issue was raised, place two copies in the administrative file. One copy remains in the administrative file and the other copy is for future association with Counsel's legal file.

  3. See IRM 4.10.13, Examination of Returns, Certain Technical Issues, for additional information and procedural instructions for accumulated earnings tax cases.

  4. See IRM 4.8.9.16.1, Accumulated Earnings Tax, IRC 531, for additional information about preparing notices with accumulated earnings tax under IRC 531.

8.17.4.28  (09-27-2013)
Notices of Deficiency for Special Types of Taxpayers

  1. Some cases have special procedures that apply because of the taxpayer involved. When preparing notices on cases involving these types of taxpayers, follow the normal procedures detailed above as well as the procedures found in the appropriate subsection below.

  2. This subsection details the specialized procedures required for notices of deficiency on cases involving the following:

    • Innocent Spouse - New Name and/or Address

    • Fiduciary Relationships/Deceased Taxpayer

    • Divorced or Separated Taxpayer

    • Notice Issued to Only One Spouse

    • Consolidated Returns (Affiliated Companies)

    • Tax Required to be Withheld at Source (Form 1042)

    • Penalty Only Notice of Deficiency

    • Open Criminal Case

    • Taxpayer is a Partner in a TEFRA partnership

    • Open TEFRA Proceeding and Non-TEFRA issues adjusted

8.17.4.28.1  (09-27-2013)
Innocent Spouse - New Name and/or Address

  1. If Form 8857, Request for Innocent Spouse Relief, has been filed and shows a new name or address for the requesting spouse, the new name or address cannot be disclosed to the non-requesting spouse.

  2. The AO must inform the TCS that a Form 8857 has been filed and provide the new name or address.

  3. See IRM 8.17.4.28.3, paragraph (5) for an example of how to address the notice of deficiency in a case where a Form 8857 with a new name has been filed.

  4. See IRM 25.15.12.23, Notice of Deficiency Under IRC 6015, for procedures when preparing notices of deficiency for cases where innocent spouse relief is requested.

8.17.4.28.2  (09-27-2013)
Fiduciary Relationships/Deceased Taxpayer

  1. A fiduciary is a person to whom property or power is entrusted, for the benefit of another. A fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest, or receives and controls income of another. This relationship occurs most often in cases involving:

    1. A deceased taxpayer or

    2. Legal disability - In situations where a taxpayer has been deemed disabled and unable to take care of his/her own affairs.

  2. Form 56, Notice Concerning Fiduciary Relationship, is used by an individual to notify the IRS of a fiduciary relationship. Other legal documents establishing fiduciary relationships can be substituted for the Form 56.

  3. When a taxpayer is deceased or under a legal disability, and the IRS has not been notified of a fiduciary relationship, an attempt should be made by the AO to obtain the name of the fiduciary as long as there is sufficient time remaining on the statutory period of limitations. Once the name is obtained, the fiduciary should be asked to give notice in accordance with the existing Internal Revenue laws (e.g. IRC 6903).

    Note:

    If a fiduciary relationship is known, the AO must include the fiduciary information with the notice of deficiency work request sent to TCS. (The fiduciary may give notice that the fiduciary capacity has terminated; but Form 56, as revised on 12-2011, no longer has a section for providing such notification.)

  4. If the IRS has been notified as to the existence of a fiduciary relationship, a notice of deficiency must be mailed to the fiduciary's mailing address. Sample formats are discussed below:

    • Deceased taxpayer:

      John Brown, Deceased,
      Richard Doe, Executor
      (Richard Doe's address)

    • Legal Disability:

      John Smith,
      Howard Doe (Enter proper title of fiduciary)
      (Howard Doe’s address)

  5. If the name of the fiduciary cannot be obtained or if there is not sufficient time remaining on the statutory period of limitations, address the notice of deficiency for a deceased taxpayer as follows:

    John Doe, Deceased
    (John Doe’s address)

  6. When a fiduciary relationship cannot be established on a case involving a taxpayer under legal disability, address the notice of deficiency as follows:

    John Doe,
    (John Doe’s address)

8.17.4.28.2.1  (09-27-2013)
Deceased Taxpayer, Joint Return Filed

  1. If one spouse has died since the joint return was filed, address the notice of deficiency as discussed in the paragraphs below.

  2. If the Service has not been notified as to the existence of a fiduciary relationship, a single joint notice of deficiency is addressed as follows:

    John Doe, Deceased,
    and Mary Doe
    (John and Mary Doe's last known address)

  3. If the Service has been notified as to the existence of a fiduciary relationship, duplicate original joint Notices of deficiency must be prepared, addressed as follows:

    John Doe, Deceased,
    Richard Rich, Executor
    and Mary Doe
    (Richard Rich's address)

    and

    John Doe, Deceased,
    Richard Rich, Executor
    and Mary Doe
    (Mary Doe's last known address)

  4. "Surviving Spouse" may also be added after the name (Mary Doe in the above examples).

8.17.4.28.3  (09-27-2013)
Divorced or Separated Taxpayers

  1. In the case of a joint return, if the Service has been notified by either spouse that separate residences have been established, then instead of the single joint notice, duplicate originals of the joint notice will be sent by certified mail to each spouse at the last known address.

  2. Each notice will carry only the address of the spouse to whom the notice is sent. It is very important not to disclose the new addresses of the spouses to each other. The duplicate notices should be addressed as shown below:

    1. John Doe and
      Mary Doe
      (John Doe's last known address)

      and

      John Doe and
      Mary Doe
      (Mary Doe's last known address)

      Note:

      The name in the above examples can also be shown as John and Mary Doe.

  3. If a spouse’s surname has changed, address that individual as follows on all letters, schedules and attachments: Alice Jones, formerly known as Alice Smith. The name can also be shown as follows: Alice Jones (formerly known as Smith). The "formerly known as Alice Smith" or "formerly known as Smith" will be deleted on the mailing envelope.

    Note:

    Do not disclose a spouse’s new surname if that name was obtained from Form 8857, Request for Innocent Spouse Relief, or if the spouse requests that the new name not be disclosed.

  4. In the following example, a notice of deficiency is being prepared for the 2008 return of Alice and John Smith. Alice Smith has remarried and changed her name to Alice Jones. (The new name was not obtained from Form 56 — No Form 8857 has been filed.) Duplicate original Notices of Deficiency are required for 2008 as shown below:

    One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

    John Smith and
    Alice Jones, formerly known as Alice Smith
    (John Smith's last known address)

    and

    One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

    John Smith and
    Alice Jones, formerly known as Alice Smith
    (Alice Jones’ last known address)

  5. In the following example, a notice of deficiency is being prepared for the 2008 return of Alice and John Smith. Alice Smith has remarried and changed her name to Alice Jones. The IRS is aware of the wife’s new name because it is shown on the Form 8857 that was filed. Therefore, the wife’s new name should not appear on any letters or forms being sent to the husband. Duplicate original Notices of Deficiency are required for 2008 as shown below:

    One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

    John Smith and
    Alice Smith
    (John Smith’s last known address)

    and

    One letter and one Form 4089 (or Form 4089-A and Form 870) addressed as follows:

    John Smith and
    Alice Jones, formerly known as Alice Smith
    (Alice Jones’ last known address)

  6. The necessary number of photocopies may be made of the remaining parts of the notice (Form 5278, explanation of adjustments, etc.) and associated with the separately typed notice of deficiency and waiver. Make sure that if there is a new name for one spouse obtained from Form 8857 that this name is not disclosed to the non-requesting spouse on any of these schedules. Also, the new address of one spouse should not be shown on any copies of these schedules sent to the other spouse.

  7. Statements attached to duplicate original notices will be computer generated originals, typed originals, or photocopies.

8.17.4.28.4  (09-27-2013)
Notice Issued to Only One Spouse

  1. Under certain circumstances, a notice of deficiency will be issued to only one spouse for a married filing joint return. Examples of this include, but are not limited to:

    1. When only one spouse signs a statute extension, or

    2. When only one spouse signs a waiver agreeing to the additional tax deficiency.

    Note:

    If a notice of deficiency is being issued to only one spouse because the other spouse has been granted full relief for the liability under IRC 6015 (innocent spouse relief), follow the procedures listed in IRM 25.15.12.23, Notice of Deficiency Under IRC 6015, rather than those listed below.

  2. If a notice of deficiency will be issued to only one spouse for a married filing joint return, prepare the notice letter as follows:

    1. Use the names of both spouses on the notice letter.

    2. Use the address of the spouse to whom the notice is being sent.

    3. Use the primary social security number as shown on the return.

    4. The salutation will be directed only to the spouse to whom the notice is being sent.

  3. The Form 4089 will reflect only the name, address and social security number of the spouse to whom the notice is being sent.

  4. Prepare Form 5278 as follows:

    1. Use the names of both spouses on Form 5278.

    2. Use the primary social security number as shown on the return.

  5. Example: John and Jane Doe timely file a joint return for 2006 reflecting John's social security number as the primary. The 2006 return was examined and a deficiency of $5,000.00 is proposed. The taxpayers filed a protest for an Appeals hearing. John Doe signed a waiver in Appeals. Jane Doe did not sign a waiver and does not agree to the tax. Consequently, an MFT 31 assessment is made for John Doe and a notice of deficiency must be issued to Jane Doe.

    1. The notice of deficiency includes Letter 894(cg), which is addressed to both John and Jane Doe, with Jane Doe's address. John's social security number is reflected on the letter. The salutation for the letter is "Dear Jane Doe:"

    2. The Form 4089 waiver is addressed to Jane Doe only and therefore, it reflects only Jane Doe's address and social security number.

    3. The Form 5278 is also addressed to both John and Jane Doe. John's social security number is reflected on the form.

8.17.4.28.5  (09-27-2013)
Issuing a Notice of Deficiency Involving Consolidated Returns (Affiliated Companies)

  1. Letter 901(cg) is used for notices issued to consolidated corporations. In these cases the taxpayer is determined to be the parent company and its subsidiaries or affiliates.

  2. It is recommended that the letter be addressed to the taxpayer in a manner similar to "ABCD Corporation and Subsidiaries" , "ABCD Corporation and Affiliated Companies" , or "ABCD Corporation and Affiliates" .

    1. The return can be used as a guide to determine the name to use on the notice letter.

    2. If the name on the return differs slightly from year to year, Form 872 and Form 2848 are valid legal documents that can be used to help determine the proper name to use.

    3. Although it is important that the notice be as accurate as possible, use of "and Subsidiaries" rather than "and Affiliated Companies" , and vice versa, will not make the notice invalid.

  3. Letter 901(cg) is a letter on APGolf:

    1. APGolf should be used to generate the Letter 901(cg).

    2. The opening paragraph of Letter 901(cg) is patterned as follows:

      "We've determined that you and your affiliated companies have a deficiency in your tax accounts. This means you owe additional tax, other amounts such as penalties or additions to tax, or both, as shown above. This letter is your NOTICE OF DEFICIENCY that the law requires. The enclosed statement shows how we figured your deficiency."

    3. The APGolf letter has a two opening paragraph options, one for affiliated companies, and one for all other cases such as corporate, estate, gift, certain excise taxes, and withholding of tax at the source. Select the affiliated companies opening paragraph option on the input screen, and APGolf will generate the above paragraph.

  4. Form 4089 or Form 4089-A should contain the name and address of the taxpayer, and a summary of tax liability for each year. It must also contain an annotation that states, "Affiliations Statement Attached" .

    1. Use the same name on the Form 4089 or Form 4089-A as that used on the letter. (ABCD Corporation and Subsidiaries, for example.)

  5. Prepare an affiliations’ statement listing the names of the parent and subsidiaries, and the years each was affiliated with the consolidated group.

    1. The following paragraph must be included on the affiliations’ statement:

      "The tax liability of (Name of parent company) and each subsidiary company named above is stated as provided for by regulations prescribed under section 1502 of the Internal Revenue Code. The deficiencies shown will be assessed severally against each corporation named above in accordance with regulations under section 1502 of the Internal Revenue Code."

  6. Form 5278 should list all companies with proposed adjustments.

    1. Next to each company, show the total adjustment attributable to that company. Do this for each year included in the notice.

    2. If there is insufficient room on Form 5278 to list all the companies, annotate "See Schedule 1A attached" on the first line under "Adjustment to Income" , and for each year provide an aggregate total of all the companies’ adjustments to income.

    3. Using Form 4549-B or similar schedule, list all the companies and the total adjustment proposed against each. Label this schedule as Schedule 1A. The total of all the adjustments listed on this schedule should equal the aggregate total described in (b) above.

      Note:

      Instead of using "Schedule 1A" to reference the schedule that lists all the companies and the total adjustment proposed against each, any schedule or exhibit number may be used for the schedule discussed in (b) and (c).

    4. It is preferable that Form 5278 and Form 4549-B list all companies with proposed adjustments, as discussed above. However, if it is impractical, the adjustments do not have to be listed by entity since this will not invalidate the notice.

  7. List separately any automatic adjustments not attributable to any particular company. List them on the second line under "Adjustment to Income" on Form 5278.

  8. The explanation of adjustment schedule (Schedule 2) should provide a detailed explanation for each issue proposed against the companies listed on Form 4549-B. Check to make sure the total of the issues listed for each company equals the adjustment amount shown on Schedule 1A for that company.

  9. See Exhibit 8.17.4-6. This exhibit is an example of the Affiliations Statement, Form 5278, Form 4549-B and explanations of adjustment schedules discussed above.

8.17.4.28.6  (09-27-2013)
Tax Required to be Withheld at Source (Form 1042)

  1. Form 1042Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is the annual taxable return used to report tax withheld on U.S. source income paid to foreign persons, including nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts.

  2. Adjustments to Form 1042 are subject to deficiency procedures. Statutory notice of deficiency procedures also apply to the failure to deposit penalty (IRC 6656) as it relates to Form 1042. See IRM 20.1.4.11.5, Deficiency Procedures Form 1042, for additional information.

  3. Notice of deficiency letter

    1. Use Letter 901(cg) for the notice. Letter 901(cg) is available on ACDS APGolf.

    2. Formerly a notice of deficiency letter issued for a Form 1042 required a special opening paragraph. Now, Letter 901(cg) is used with a general opening paragraph.

    3. When generating the Letter 901(cg) using ACDS, the APGolf letter has two opening paragraph options: one for affiliated companies, and one for all other cases such as corporate, estate, gift, certain excise taxes, and withholding of tax at the source. Select the second paragraph option, which is appropriate to use for all other cases including withholding of tax at the source.

    4. In the "Tax Type" field on the letter, enter "Withholding of Income Tax at Source" .

    5. In the Form number field, enter "Form 1042" .

  4. The rest of the notice is prepared as usual - prepare Form 4089 (or Form 4089-A and Form 870) Form 5278, explanations of adjustment, etc.

8.17.4.28.7  (09-27-2013)
Penalty Only Notice of Deficiency

  1. A statutory notice of deficiency may be issued only for penalties subject to deficiency procedures. The determination of whether a penalty will be subject to a statutory notice of deficiency procedure depends on whether the underlying tax is subject to deficiency procedures. See IRM 8.17.4.17 for additional information on penalties subject to deficiency procedures.

  2. If it is determined that a penalty is subject to notice of deficiency procedures, a "penalty only" notice of deficiency can be issued just for the penalty in certain circumstances. See examples below:

  3. Example 1: A notice of deficiency can be issued for a penalty when the underlying tax subject to deficiency procedures has been assessed and therefore can't be included in the notice of deficiency.

    1. Form 5278 should be prepared and include the assessed tax on line 19 - the "Total tax shown on return or as previously adjusted" line. That way the Form 5278 will correctly show that there is no tax to include in the notice of deficiency.

    2. A penalty computation based on the assessed tax must be included in the notice.

    3. Any payments applied towards the assessed tax are not shown in the notice of deficiency prepared for the penalty.

  4. Example 2: A penalty only notice of deficiency can also be issued if the adjustments resulted in no tax but a penalty is applicable (for example, due to a loss or credit carryback).

8.17.4.28.8  (09-27-2013)
Open Criminal Case

  1. When preparing a notice of deficiency involving open criminal aspects, Letter 894(cg) may be used, but it must be modified as outlined below:

    1. Add a new paragraph between the current paragraph 1 and paragraph 2. The new paragraph should read as follows:

      "Neither this notice, nor any related action taken by the Internal Revenue Service, affects other sanctions the law provides."

    2. Delete the following two paragraphs:

      "If you decide not to file a petition with the Tax Court, please sign the enclosed waiver form and return it to us at the IRS address on the top of the first page of this letter. This will permit us to assess the deficiency quickly and can help limit the accumulation of interest. The enclosed envelope is for your convenience."

      "If you decide not to sign and return the waiver, and you don't file a petition with the Tax Court within the time limit, the law requires us to assess and bill you for the deficiency after 90 days from the date of this letter (150 days if this letter is addressed to you outside the United States)."

    Note:

    ACDS will insert appropriate Taxpayer Advocate’s phone number and address in the last paragraph of the letter.

  2. Letter 531-C, Notice of Deficiency for Open Criminal Case, may be used instead of Letter 894(cg). No modifications are needed to the Letter 531-C.

    1. Letter 531-C is not on ACDS, but a fillable Letter 531-C may be found on the Publishing Catalog website.

    2. Letter 531-C refers the taxpayer to Notice 1214 for the Taxpayer Advocate telephone numbers and addresses. Notice 1214 must be mailed to the taxpayer with the notice of deficiency if Letter 531-C is used. Notice 1214 can be found on the Electronic Publishing Catalog website. (Notice 1214 is not required if Letter 894(cg) is prepared instead of Letter 531-C.

  3. No waiver or other form permitting the taxpayer to agree to a deficiency should be prepared. Therefore, do not include Form 4089 or Form 870 with the notice. Form 4089-A is prepared instead for a notice of deficiency prepared for an active criminal case.

  4. Area Counsel's written approval of the notice of deficiency is required prior to issuance.

8.17.4.28.9  (09-27-2013)
Notice of Final Partnership Administrative Adjustment (FPAA)

  1. Notice of deficiency procedures are generally not used in TEFRA cases.

  2. If any partner in a TEFRA partnership does not agree to the settlement, Appeals will prepare the notice of final partnership administrative adjustment (FPAA).

  3. The FPAA is similar to a notice of deficiency; however, it contains only partnership adjustments rather than a tax deficiency. See IRM 8.19,Appeals Pass-Through Entity Handbook, for complete instructions on the preparation of the FPAA.

8.17.4.28.10  (09-27-2013)
Open TEFRA Proceeding and Non-TEFRA issues adjusted

  1. When preparing a notice of deficiency for a case with an open TEFRA proceeding, the notice of deficiency for non-TEFRA items is issued at the investor level and shows the deficiency in tax and penalties attributable only to the non-TEFRA adjustments.

    1. Munro computations (Munro v. Commissioner, 92 T.C. 71 (1989)) are used, except when the returns involved are determined to be oversheltered.

    2. See IRM 8.19 for information on Munro computations and oversheltered returns.

8.17.4.29  (09-27-2013)
Tax Returns not Available

  1. The following includes instructions for preparing notices of deficiency when the original return is not available.

8.17.4.29.1  (09-27-2013)
Notice of Deficiency When the Original Tax Return is not Available

  1. An examination can be conducted on a copy of a taxpayer's return or with a BRTVU or RTVUE print.

  2. If it becomes necessary for Appeals to issue a notice of deficiency, the original return must be requisitioned through Account and Processing Support (APS). The AO is responsible for requesting that APS order the original return.

  3. For electronically filed returns such as IDRS command code TRPRT, if the Document Locator Number (DLN) appears in the upper right hand corner, then the TRPRT is considered to be the original tax return. (See IRM 8.20.3.3.57.2, Tax Period/Tax Period Modifiers.)

  4. If a statute is imminent, it may be necessary to issue a notice of deficiency based on copies of returns or BRTVU/RTVUE prints. If so, obtain a transcript to verify taxable income and tax per return.

8.17.4.29.2  (09-27-2013)
Asserting the Civil Fraud Penalty When the Tax Return is not Available

  1. If the fraud penalty is asserted on a copy of a return, immediate attempts must be made by the AO to secure the original tax return. Such attempts need to be documented and made part of the case file.

  2. See IRM 4.8.9.19, Electronically Filed Returns Where the Civil Fraud is Asserted, for information about electronic returns.

8.17.4.30  (09-27-2013)
TCS Returns Notice to AO

  1. TCS's should use secure encypted e-mail and send the AO all electronic files used to create the statutory notice of deficiency. If Word or Excel files have been converted into a PDF file, the Word and Excel files will be e-mailed in addition to the PDF file so that the AO can make small corrections or changes if necessary.

  2. TCS's have been encouraged to use the RGS generated paragraph schedules for statutory notices of deficiency when appropriate. Since these files are in a PDF format, if the AO needs to make a change to the language for those cases, the Form 3608, Request for TCS Service will need to be re-submitted to the designated Appeals Tax Computation Team Manager in order for the TCS to make the revision/correction.

8.17.4.31  (09-27-2013)
Counsel Review of Notices

  1. Counsel's review is needed prior to issuing the notice on the following cases:

    1. Any case where there is a substantial risk that a court may invalidate a regulation, revenue procedure, or revenue ruling;

    2. Any case which contains an issue which the Service has yet to successfully litigate and has lost in one or more circuits, and the National Office has not announced a uniform position;

    3. Any case in which Appeals proposes to eliminate the fraud penalty or reduce the Chief Counsel’s computation of the criminal adjustment for cases in which Counsel has recommended prosecution;

    4. Any case involving a novel or unique issue;

    5. Any case involving a substantial risk of an attorney’s fee award against the Government;

    6. Any case in which the Government has the burden of proof, including all fraud cases;

    7. Any case involving the allocation of income and deductions among taxpayers ( IRC 482);

    8. Any case in which the Service proposes to impose the accumulated earnings tax ( IRC 531);

    9. Any case involving a tax shelter Litigating Vehicle Issue;

    10. Any case in which the notice is drafted in terms of alternative positions;

    11. Any case related to a docketed case;

    12. Any case involving information obtained from a grand jury proceeding under Rule 6(e)(3)(C)(i) of Federal Rules of Criminal Procedure;

    13. Final adverse letters on issues subject to declaratory judgment procedures described in IRC 7428 or IRC 7476; and

    14. Any other case in which, in the judgment of Appeals, Counsel review would be appropriate and helpful.

  2. If the AO determines Counsel will review the proposed notice of deficiency, he/she will send the administrative file to APS, who will send it to Counsel. The AO should ensure the administrative file that will be sent to Counsel contains the following:

    1. Approved Form 5402 marked for Counsel concurrence and either a completed but unsigned statutory notice or a draft of paragraphs to be included in the statutory notice.

    2. All returns and documents which were in the case file when it was received in the Appeals office.

    3. Copies of all correspondence received or sent while the case was in Appeals.

  3. If there is no on-site APS unit, the AO may send (or deliver) the administrative file directly to Counsel.

    1. If the AO sends or delivers the file directly to Counsel and not through APS, the AO must ensure that the ACTION Code SNDC is entered on ACDS with a TODATE (the date the file is sent to Counsel).

    2. To request this update be made by APS, the AO submits an "ACDS Update Request Form" to their designated APS ACDS Update Mailbox using secure encrypted e-mail.

  4. APS ACDS Update Form and APS ACDS Update Mailbox:

    1. The AO prepares the "ACDS Update Request Form" found on APGolf under ACDS Updates, completing only the required items.

    2. On the "Other" line of the ACDS Update Request Form, the AO will enter "Action Code and TODATE Update" . The AO then includes in the "Comments" section the action code "SNDC" and the TODATE (the date the file was sent to Counsel).

    3. The AO e-mails the ACDS Update Request Form to:

      *AP-PQCS-APS-(AO's Area, East, West or Campus)-(AO's APS update office) ACDS Update Request

    4. Campus Example: *AP-PQCS-APS-Campus-FCS ACDS Update Request

    5. Field Example: *AP-PQCS-APS-East-BOS ACDS Update Request

    6. An APS employee will be assigned the "ACDS Update Request Form" within 24 hours of receipt. APS will e-mail the AO if clarification is needed to process the request.

8.17.4.31.1  (09-27-2013)
Cases Returned by Counsel - Concurrence Approved

  1. When the administrative file is returned to APS with Counsel’s approval, APS will return the file to the AO for preparation of the statutory notice and signature:

    1. The approving Appeals official signs the notice in pen and ink, on behalf of the Commissioner.

      Note:

      Copies of the notice letter which are used for the originals or duplicate originals should have a handwritten signature and not a facsimile or reproduced signature.

  2. If the administrative file is returned directly to the AO with Counsel’s approval, follow the procedures below:

    1. If Counsel sends the file back to the AO without going through APS, and an ACTION code SNDC and a TODATE is on ACDS, the AO must ensure that the FROMDATE (date the administrative file was returned by Counsel) is entered on ACDS.

    2. To request this update be made by APS, the AO submits an "ACDS Update Request Form" to their designated APS ACDS Update Mailbox using secure encrypted e-mail.

  3. ACDS Update Request Form:

    1. The AO prepares the "ACDS Update Request Form" found on APGolf under ACDS Updates, completing only the required items.

    2. On the "Other" line of the ACDS Update Request Form, the AO will enter "FROMDATE Update" . The AO then includes in the "Comments" section "Case Returned from Counsel" and the date the administrative file was returned by Counsel

    3. The AO e-mails the ACDS Update Request Form to:

      *AP-PQCS-APS-(AO's Area, East, West or Campus)-(AO's APS update office) ACDS Update Request

    4. Campus Example: *AP-PQCS-APS-Campus-FCS ACDS Update Request

    5. Field Example: *AP-PQCS-APS-East-BOS ACDS Update Request

    6. An APS employee will be assigned the "ACDS Update Request Form" within 24 hours of receipt. APS will e-mail the AO if clarification is needed to process the request.

8.17.4.31.2  (09-27-2013)
Cases Returned by Counsel - Without Concurrence

  1. Occasionally, a case referred to Counsel for consideration of the issuance of a notice of deficiency, EP or EO adverse determination letter, or for concurrence in the removal of a fraud penalty, is returned to Appeals with a memorandum stating the reason for withholding concurrence.

  2. If the administrative file is returned directly to the AO by Counsel:

    1. If Counsel sends the file back to the AO without going through APS, and an ACTION code SNDC and a TODATE is on ACDS, the AO must ensure that the FROMDATE (date the administrative file was returned by Counsel) is entered on ACDS.

    2. To request this update be made by APS, the AO submits an "ACDS Update Request Form" to their designated APS ACDS Update Mailbox using secure encrypted e-mail.

  3. ACDS Update Request Form

    1. The AO prepares the "ACDS Update Request Form" found on APGolf under ACDS Updates, completing only the required items.

    2. On the "Other" line of the ACDS Update Request Form, the AO will enter "FROMDATE Update" . The AO then includes in the "Comments" section "Case Returned from Counsel" and the date the administrative file was returned by Counsel

    3. The AO e-mails the ACDS Update Request Form to:

      *AP-PQCS-APS-(AO's Area, East, West or Campus)-(AO's APS update office) ACDS Update Request

    4. Campus Example: *AP-PQCS-APS-Campus-FCS ACDS Update Request

    5. Field Example: *AP-PQCS-APS-East-BOS ACDS Update Request

    6. An APS employee will be assigned the "ACDS Update Request Form" within 24 hours of receipt. APS will e-mail the AO if clarification is needed to process the request.

  4. When the Appeals Area Director and the Associate Area Counsel cannot agree on whether the notice should be issued or not, the matter is resolved by the Area Counsel with the advice and assistance of the Director of the Appeals Operating Unit and the Deputy Area Counsel.

8.17.4.32  (09-27-2013)
Statutory Notice Mailed to Invalid Address

  1. A statutory notice can be considered invalid if it is not sent to the taxpayer’s last known address. See IRM 8.2.2, Processing 90-Day Cases and Defaulted Notices, for information on handling a case where the notice of deficiency was mailed to an invalid address and returned as undeliverable.

  2. The statute in the case is the normal or extended statute that existed before the notice of deficiency was issued. Take the following steps depending on whether the statute is open or not:

    1. If open, Appeals issues a new notice of deficiency, unless the AO determines the returned notice was sent to the taxpayer’s last known address.

    2. If not open, Form 3999 must be prepared.

    Note:

    A notice of deficiency sent to an address other than the "last known address" is NOT valid. Therefore, an assessment may not be made as a default assessment. (In some cases, a protective assessment may be requested by Counsel until it can be determined if the notice of deficiency was mailed to the proper address.) The statute for the taxpayer with the invalid notice of deficiency is the normal or extended statute (before the notice of deficiency was issued). If the statute is still open, a new notice of deficiency must be issued to the last known address. If the statute is not open, follow established procedures for preparing Form 3999.

8.17.4.33  (11-09-2007)
Payments Received After the Notice is Issued

  1. Under IRC 6603 and Rev. Proc. 2005-18, a remittance made in response to a proposed liability, or after the issuance of a notice of deficiency, will be posted as a payment of tax, unless specifically designated as a deposit by the taxpayer.

  2. Post-statutory notice of deficiency remittances will not deprive the Tax Court of jurisdiction. Remittances made prior to the notice may deprive the Tax Court of jurisdiction. (See section 4.02 of Rev. Proc. 2005-18). In order to preserve the right to petition the Tax Court a pre-notice remittance must be posted as an "advance payment" . Interest will continue to accrue on accrued interest. In order to stop the running of any further interest, a taxpayer must make a remittance sufficient to cover all accrued interest as of the date of remittance as well as the entire amount of the underlying tax.

  3. If a taxpayer proposes to make an advance payment of the entire deficiency in a pre-90-day income, certain excise tax, estate or gift tax case after the Service proposes a liability, advise the taxpayer that assessment prior to issuance of a notice of deficiency precludes the notice and Tax Court jurisdiction. If the Service receives a full payment remittance and has not received an explanation of the foregoing, promptly contact the taxpayer to explain the impact upon the statutory notice.

  4. When an advance payment is received after agreement is tentatively reached, but before review and approval of the determination, a new agreement form reflecting receipt of the payment is not necessary. If Form 5402, Appeals Transmittal and Settlement Memorandum, is prepared before receipt of the payment, the AO should revise it to reflect the receipt and process the remittance. See IRM 8.20.6.1.1, Procedure for Assessing Advanced Remittances.

  5. In 90-day cases, do not assess liability for advance payments made after the issuance of the notice of deficiency unless specifically requested. An assessment will not deprive the taxpayer who files a petition of Tax Court jurisdiction. The assessment is usually not made until the case is closed, unless there is a large deficiency.

8.17.4.34  (09-27-2013)
Actions and Disposition Once Notice of Deficiency is Issued

  1. There are several actions that can occur once a notice of deficiency is issued. The following is a list of the potential actions and the IRM citations where additional information on each can be found:

    1. Notice of Deficiency (Appeals) is rescinded under Rev. Proc. 98-54. See IRM 8.2.2.14, Statutory Notice of Deficiency in 90-Day Cases Rescinded Under Rev. Proc. 98-54.

    2. Notice of Deficiency is returned undeliverable or unclaimed. See IRM 8.17.4.32.

    3. Taxpayer agrees during 90 (150) day period. See IRM 8.2.2.9, Disposing of 90-Day Cases.

    4. Notice of Deficiency is reconsidered during suspense period. See IRM 8.2.2.6, Conferencing and Settling 90-Day Cases from Examination.

    5. Taxpayers file Tax Court petition or complaint with District Court during suspense period. See IRM 8.4.1, Procedures for Processing and Settling Docketed Cases.

  2. Disposition of a notice of deficiency occurs in one of the following ways:

    • Taxpayer agrees to the deficiency within the 90-day (150-day) period by signing the appropriate agreement form;

    • Taxpayer fails to file the petition with the United States Tax Court within the prescribed period and the deficiency is assessable by default;

    • Taxpayer files a timely petition and the case becomes docketed in the Tax Court.

Exhibit 8.17.4-1 
Identification of Tax Years in Notice- Additional Examples

Identification of Tax Years in Notice - Additional Examples
(1) If an individual return covers the income for either a calendar or fiscal year to the date of death of the individual in the year, the beginning and closing dates of the period should be stated. For example:
  tax year January 1, 20----, to April 15, 20----, or
  tax year March 1, 20----, to October 10, 20----,
(2) If a fiduciary return covers the income of an estate for the period starting on the date on which the estate came into existence through the end of the calendar or fiscal year in which such date falls, the beginning and closing dates of the period should be stated (this includes estates created when a person is deemed disabled). For example:
  tax year April 16, 20----, to December 31, 20----, or
  tax year October 11, 20----, to February 28, 20----,
(3) In the case of the first return of a corporation, or the final return of a corporation, the beginning and closing date of the period covered by the return should be stated; for example:
  tax year March 5, 20----, to December 31, 20----, if the corporation came into existence in a calendar year:
  tax year April 10, 20----, to November 30, 20----, if the corporation came into existence in a fiscal year:
  tax year January 1, 20----, to October 31, 20----, if the corporation’s existence ended in a calendar year:
  tax year February 1, 20----, to August 25, 20----, if the corporation’s existence ended in a fiscal year.
(4) If a return is for a period of less than 12 months due to change in accounting period, the taxable year should be stated as:
  tax year March 1, 20----, to December 31, 20----, where a change from a fiscal year basis to a calendar year basis is involved, or
  tax year January 1, 20----, to April 30, 20----, where a change is made from a calendar year basis to a fiscal year basis.
(4) If a separate return, due to the creation or termination of an affiliated status, is filed by a corporation covering a period of a year, the beginning and closing date of the period during which the corporation was not affiliated should be designated; for example:
  tax year January 1, 20----, to April 25, 20----, for a period prior to affiliation, or
  tax year October 16, 20----, to December 31, 20----, for a period following termination of an affiliation.
   

Exhibit 8.17.4-2 
Notice of Deficiency - Partnership Adjustments

John Smith Schedule 2
Explanation of Adjustments
a) Partnership Net Income – XYZ Company
It is determined that your distributive share of the net income from the partnership known as XYZ Company is $135,000.00, rather than the $100,000.00 shown on your tax return. See Exhibit A for details. Accordingly, your taxable income is increased $35,000.00 for the year ended December 31, 2002.
   
b) Partnership Capital Gain Income – XYZ Company
It is determined that your distributive share of capital gain income from the partnership known as XYZ Company is $30,000.00, rather than the $10,000.00 shown on your tax return. See Exhibit A for details. Accordingly, your taxable income is increased $20,000.00 for the year ended December 31, 2002.
   

Notice of Deficiency - Partnership Adjustments (Cont 1)

John Smith   Exhibit A
XYZ Company Partnership
It is determined from examination of the books and records of the partnership known as XYZ Company that your share of distributive income for the taxable year ended December 31, 2002 is $135,000.00 and your distributive share of capital gain net income is $30,000.00, based on the following adjustments to the XYZ Company partnership:
     
Ordinary net income per partnership return   200,000.00
Adjustments to return:    
(1) Business promotion expenses 15,000.00  
(2) Travel expenses 25,000.00  
(3) Interest expense 30,000.00 70,000.00
Ordinary income as determined   270,000.00
Ownership percentage   .50
Distributive share of partnership income   135,000.00
Partnership income claimed on your return   100,000.00
Increase to ordinary income   35,000.00
======
     
Capital gain net income per partnership return   20,000.00
(4) Sale of business   40,000.00
Capital gain net income as determined   60,000.00
Ownership percentage   .50
Distributive share of capital gain net income   30,000.00
Capital gain net income claimed on your return   10,000.00
Increase to capital gain net income   20,000.00
======
Explanation of Partnership Adjustments
(1) It is determined that the deduction of $27,000.00 shown on the XYZ Company partnership return as business promotion expenses is reduced by $15,000.00 because it has not been shown that more than $12,000.00 was for an ordinary and necessary business expense, or was expended for the purpose designated. Also, the substantiation requirements of section 274 of the Internal Revenue Code have not been met. Accordingly, income is increased $15,000.00 for the tax year ended December 31, 2002.
(2) It is determined that the deduction of $45,000.00 shown on the XYZ Company partnership return as travel expenses is reduced by $25,000.00 because it has not been shown that more than $20,000.00 was for an ordinary and necessary business expense, or was expended for the purpose designated. Accordingly, income is increased $25,000.00 for the tax year ended December 31, 2002.
(3) It is determined that the deduction of $40,000.00 shown on the XYZ Company partnership return as interest expense is reduced by $30,000.00 because it has not been established that any amount greater than $10,000.00 was paid during the tax year ended December 31, 2002. Accordingly, income is increased $30,000.00 for the tax year ended December 31, 2002.
(4) It is determined that the long term capital loss of $50,000.00 reported on the XYZ Company partnership return is allowable in the amount of $10,000.00. It has not been established that any amount greater than $10,000.00 is a deductible capital loss under the provisions of the Internal Revenue Code. Accordingly, income is increased $40,000.00 for the tax year ended December 31, 2002.

Exhibit 8.17.4-3 
Claim Invitation Letter


Internal Revenue Service
Department of the Treasury

Appeals Office
(Address)
Person to Contact:
Appeals Officer’s name
Employee ID

Date:
Refer Reply to:
AP:XX:XX:XX

JOHN Q TAXPAYER
100 MAIN STREET
ANYTOWN CA 90000-1111
In Re:
Income Tax
  SSN/EIN Number:
XXX-XX-XXXX
  Tax Period(s) Ended:
12/31/XXXX
         
Dear Mr. Taxpayer:
 
We are sending you a notice of deficiency of (kind of tax) for the (year/ period) ended (date). We are also considering your returns for the (year or period) ended (date) for which we have tentatively determined (an overassessment/overassessments) of $(amount) for (year); $(amount) for (year); (etc.)
 
The amount of a tax refund resulting from an overassessment is affected by the amount of any outstanding tax deficiency. We will therefore withhold making the overassessment(s) until any such (deficiency has/deficiencies have) been determined. However, since the time in which we may allow refund claims for (this overassessment/these overassessments) may expire before we can process your claim, we suggest you protect your rights by immediately filing (a refund claim/refund claims) for the (year(s)/ (period(s)) under consideration.
 
Blank forms are enclosed for this purpose. You should file a separate form for each (year/period), and you may use the information contained in (the enclosed examination report/the enclosed Revenue Agent’s report/this letter) as grounds for your claim. (Note to Tax Computation Specialist: The "blank forms" mentioned in the letter are the claim forms (Form 1040X, Form 1120X, or Form 843). Give reasons for the overassessment unless they are given in an enclosed statement or report.)
 
When you send us your claim(s), please enclose the copy of this letter. It will help us identify your account. If you have any questions, please contact the person whose name and telephone number are shown above.
 
Thank you for your cooperation.
 
      Sincerely,
(Name)
Appeals Officer
         
Enclosures:
Blank Forms
Copy of Letter
Report
   

Exhibit 8.17.4-4 
Notice of Deficiency Letter 894 with IRC section 6651(a)(2)

Department of the Treasury
Internal Revenue Service
Letter Number: 894(cg)-c

Appeals Office
(Address)
Person to Contact:
Appeals Officer’s name
Employee ID
Tel: (XXX) XXX-XXXX
Fax: (XXX) XXX-XXXX

Date:
Refer Reply to:
AP:XX:XX:XX
  In Re:
Income Tax
JOHN Q. TAXPAYER
200 MAIN STREET
ANYTOWN, CA 90000-1111
Form Number:
1040
  SSN/EIN Number:
XXX-XX-XXXX
  Last Day to File a Petition with the United States Tax Court:
 
Certified Mail
Notice of Deficiency
Tax Year(s) Ended Tax Penalties or Additions to Tax
    IRC 6651(a)(1) IRC 6651(a)(2)  
December 31, 2009 $5,000.00 $1,125.00 *  
* The IRC 6651(a)(2) addition to the tax is a penalty of 0.5 percent of the unpaid tax liability that will be added to the tax for each month, or fraction thereof, of nonpayment, up to a maximum of 25 percent, based upon the liability shown on the section 6020(b) return, or the final determined liability, if less.

Exhibit 8.17.4-5 
Tip Income and FICA Tax Informational Notice

FOR INFORMATIONAL PURPOSES ONLY
The adjustment to your income contained in this report has increased your FICA tax (social security tax plus medicare tax) liability. Therefore, we have assessed (or will assess) the FICA tax and the applicable penalty in the amounts shown below.
     
A separate notification should have been (or will be) sent to you on the FICA tax and penalty assessment from the Campus of the Internal Revenue Service.
     
Please note that the FICA tax and penalty assessments from the Campus of the Internal Revenue Service are not part of the deficiency shown in the attached Notice of Deficiency and may not be contested in the U.S. Tax Court.
     
Unreported Tip Income subject to FICA (Social Security)
$_
 
Social Security Tax Rate x_  
Increase in Social Security Tax   +_
Unreported Tip Income subject to Medicare
$_
 
Medicare Tax Rate x_  
Increase in Medicare Tax   +_
50% penalty for failure to report tips in accordance with IRC 6652(b)  

+_
Total Amount Due   =_
If you wish to make a payment at this time, you must specify the amount of the payment that is for the FICA tax and/or the penalty.

Exhibit 8.17.4-6 
Affiliated Companies Statements, Computations, and Explanations

Attachment to Form 4089-A: Affiliations Statement

ABCD Corporation and Subsidiaries EIN : XX-XXXXXXX
Tax Years : 9/30/1990, 9/30/1991
Attachment to Form 4089-A: Affiliations Statement
    Years Affiliated
Name of Corporation 9/30/1990 9/30/1991
Parent Company:    
  ABCD Corporation X X
Subsidiary Companies:    
  Bayside Company, Inc. X X
  Pretty Properties, Inc. X  
  Eager Sales Company, Inc. X  
  Simple Systems, Inc. X X
  Technologies International, Inc.   X
  Roger Redevelopment Corporation X  
  ABC Company   X
  Downside Development Company X X
The tax liability of ABCD Company and each subsidiary company named above is stated as provided for by regulations prescribed under Section 1502 of the Internal Revenue Code. The deficiencies shown will be assessed severally against each corporation named above in accordance with regulations under section 1502 of the Internal Revenue Code.
This image is too large to be displayed in the current screen. Please click the link to view the image.

Schedule 1A Adjustments on Form 4549B

Department of the Treasury - Internal Revenue Code
INCOME TAX EXAMINATION CHANGES
Name of Taxpayer
ABCD Corporation and Subsidiaries
SSN or EIN
XX-XXXXXXX
     
Adjustments to Income
9/30/1990

9/30/1991
Parent Company:    
1 ABCD Corporation 8,392,200 18,017,604
Subsidiary Companies:    
2 Bayside Company, Inc. 8,815,355 8,445,249
3 Pretty Properties, Inc. 2,370,199  
4 Technologies International, Inc.   4,407,778
       
       
       
       
       
       
       
       
Total Adjustments This Page 19,577,754 30,870,631

Schedule 1B Adjustments on Form 4549B


ABCD Corporation and Subsidiaries
Schedule 1B
     
Adjustments to Income    
Parent Company:    
1 ABCD Corporation    
   
9/30/1990

9/30/1991
  Interest Expense 4,828,678.00 4,400,901.00
  Depreciation Expense 3,563,522.00 13,616,703.00
  Total to Line 1 - F 4549-B 8,392,200.00
==========
18,017,604.00
===========
Subsidiary Companies:    
2 Bayside Company, Inc.    
  Entertainment Expense 8,815,355.00 8,445,249.00
       
3 Pretty Properties, Inc.    
  Interest Income 2,370,199.00  
       
4 Technologies International, Inc.    
  Depreciation Expense   4,407,778.00
       
       
       
       
       
       

Schedule 2 - Explanation of Adjustments (Cont 4)

ABCD Corporation and Subsidiaries Schedule 2
Explanation of Adjustments
Schedule 1B Adjustments
ABCD CORPORATION (Parent)
Interest Expense  
It is determined that you are entitled to a deduction for interest expense in the amount of $3,000,000.00 rather than $7,828,678.00 as claimed on your return for tax year ended September 30, 1990, and $1,000,000.00 rather than $5,400,901.00 as claimed on your return for tax year ended September 30, 1991. Accordingly, taxable income is increased $4,828,678.00 for tax year ended September 30, 1990 and $4,400,901.00 for tax year ended September 30, 1991.
Depreciation Expense
It is determined that the depreciation of $3,563,522.00 for tax year ended September 30, 1990 and $13,616,703.00 for tax year ended September 30, 1991 is not allowed because it has not been established that the property was used in a trade or business or in the production of income. Accordingly, taxable income is increased $3,563,522.00 for tax year ended September 30, 1990 and $13,616,703.00 for tax year ended September 30, 1991.
BAYSIDE COMPANY, INC.  
Entertainment Expense  
It is determined that the deductions of $8,815,355.00 for tax year ended September 30, 1990 and $8,445,249.00 for tax year ended September 30, 1991 shown on your returns as entertainment expense are not allowed because it has not been established that they were for ordinary and necessary business expenses or were expended for the purposes designated. Accordingly, taxable income is increased $8,815,355.00 for tax year ended September 30, 1990 and $8,445,249.00 for tax year ended September 30, 1991.
PRETTY PROPERTIES, INC.  
Interest Income  
It is determined that you received interest income totaling $2,370,199.00 for tax year ended September 30, 1990 that was not reported on your income tax return. Accordingly, taxable income is increased $2,370,199.00.
TECHNOLOGIES INTERNATIONAL, INC.
Depreciation Expense  
It is determined that the depreciation of $4,407,778.00 for tax year ended September 30, 1991 is not allowed because it has not been established that the property was used in a trade or business or in the production of income. Accordingly, taxable income is increased $4,407,778.00.
Line 7b. of Form 5278 : ENVIRONMENTAL TAX DEDUCTION
It is determined that your environmental tax deduction is $25,890.00 rather than $14,144.00 as shown on your return for tax year ended September 30, 1990, and $35,780.00 rather than $22,694.00 as shown on your return for tax year ended September 30, 1991. Accordingly, taxable income is decreased by $11,746.00 and $13,086.00 for the respective tax years ended September 30, 1990 and September 30, 1991. See Schedule 3 for a computation.
Line 17a. of Form 5278 : ENVIRONMENTAL TAX
It is determined that your environmental tax is $25,890.00 rather than $14,144.00 as shown on your return for the tax year ended September 30, 1990 and $35,780.00 rather than $22,694.00 as shown on your return for the tax year ended September 30, 1991. Accordingly, tax is increased by $11,746.00 and $13,086.00 for the respective tax years ended September 30, 1990 and September 30, 1991. See Schedule 3 for a computation. :
(Note to TCS : Schedule 3 computation not included in this IRM exhibit.)

More Internal Revenue Manual