Part 8. Appeals

Chapter 17. Settlement Computations and Statutory Notices of Deficiency

Section 4. Notices of Deficiency

8.17.4  Notices of Deficiency

Manual Transmittal

October 19, 2012

Purpose

(1) This transmits a revised IRM 8.17.4, Settlement Computations and Statutory Notices of Deficiencies, Notices of Deficiency.

Material Changes

(1) Revised IRM to reflect new organizational titles resulting from the Appeals 2012 Alignment Project.

Effect on Other Documents

This supersedes IRM 8.17.4 dated 11/9/2007.

Audience

Appeals employees who request, prepare or issue statutory notices of deficiency.

Effective Date

(10-19-2012)


Susan L. Latham
Director, Policy, Quality and Case Support

8.17.4.1  (11-09-2007)
Introduction to Notices of Deficiency Prepared in Appeals

  1. This section covers the procedures followed when Appeals issues a notice of deficiency. It details what Appeals employees must do when requesting, preparing and issuing a notice of deficiency. It also covers procedures to follow when rescinding a notice of deficiency.

  2. Procedures covering what happens once the notice is issued are covered in IRM 8.2.2, Pre-90-Day and 90-Day Cases, Processing 90-Day Cases and Defaulted Notices.

  3. A Notice of Deficiency consists of a letter stating the amount of the deficiency and the statement showing the computation of the deficiency.

  4. There are core procedures which must be followed when preparing a notice of deficiency no matter what type of case. These core procedures are covered in this section.

  5. However, some cases with special taxes or special situations require additional and/or slightly different procedures. The procedures for these type cases are found in the following IRM sections:

    • Notices of Deficiency for Estate and Gift Tax Cases - IRM 8.7.4.

    • Notices of Liability for Transferee Cases - IRM 8.7.5.

    • Notices of Deficiency on Cases in Bankruptcy - IRM 8.7.6.

    • Notice of Claim Disallowance - IRM 8.7.7.

    • Appeals TEGE Cases - IRM 8.7.8.

    • Notices Of Determination Concerning Relief From Joint And Several Liability Under Section 6015 - IRM 25.15.12, Relief From Joint and Several Liability.

    • Notices Of Determination Concerning Worker Classification Under Section 7436 - IRM 4.23.16, Employment Tax - Appeals Procedures.

  6. If it is concluded that a statutory notice of deficiency is to be issued, advise the taxpayer or taxpayer’s representative of this conclusion prior to the mailing of the statutory notice. Such advice need not be in writing unless circumstances warrant such written notice.

8.17.4.2  (10-01-2012)
Information to Know Before Preparing Notices of Deficiency

  1. References to an Appeals Officer (AO) within this section include both an Appeals Officer and an Appeals Team Case Leader (ATCL).

  2. Notices of Deficiency are issued by Appeals in pre-90-day income, estate, gift, and Chapters 41, 42, 43, and 44 excise tax cases when no mutually satisfactory basis of settlement is reached. The TCS is responsible for the preparation of the notice except in the situation noted below.

    Exception:

    For listed transaction cases not yet closed with a statute of limitations expiring after January 7, 2007 and the taxpayer and Appeals are unable to reach a satisfactory settlement, Notices of Deficiency are not issued by Appeals but instead the case is returned to the appropriate Operating Division for further handling. See IRS Announcement 2006-100 for details.

  3. Generally, the AO provides the Tax Computation Specialist (TCS) with the explanatory paragraphs to be used in the notice. However, the AO may want the TCS to prepare the explanatory paragraphs, in which case he/she provides the TCS with a copy of the Appeals Case Memo (ACM). For guidelines on preparing explanatory paragraphs see subsequent subsection Guidelines for Preparing Explanation of Adjustments (Explanatory Paragraphs). See IRM 8.17.4.11.

  4. When the case involves certain issues or when the AO determines it is necessary, the notice is referred to Counsel for consideration before issuance. See IRM 8.17.4.28.

  5. Notices of Deficiency must contain current transcript information from Master File and/or Non-Master File. IRM 8.20.2, IDRS Transcripts and AIMS Controls, contains detailed information on transcripts, including a discussion of the new MFT 31 accounts.

  6. If it becomes necessary for Appeals to issue a notice of deficiency, the original return must be requisitioned through Account and Processing Support (APS).

8.17.4.3  (11-09-2007)
Adjustments Requested by AO Prior to Issuing Notice of Deficiency

  1. The Tax Court does not have jurisdiction over certain underpayments of tax/penalties and overstatements of payments/credits. Therefore, when these underpayments/overstatements exist in a case, request that APS make the appropriate assessment or adjustment (which will not be reflected in the notice of deficiency).

    1. Estimated tax payments and credits ( IRC 6211(b)(1)).

    2. Withholding tax, including over-withheld Windfall Profits Tax ( IRC 31 and IRC 6211(b)(1)).

    3. Certain credits for tax withheld at source ( IRC 32 and IRC 6211(b)(1)).

    4. FICA tax on tip income and penalty under IRC 6652(b). (See IRM 8.17.4.24. This section includes the informational notice for tip income cases that can be mailed to the taxpayer with the notice of deficiency.)

    5. IRC 6654 and IRC 6555penalties, except where no return was filed.

      Note:

      If no return was filed for the taxable year, include any applicable penalties under IRCs 6654 and 6655 in the notice. If a return was filed, then assess the penalties prior to the expiration of the statute of limitations on assessment from the original return. These penalties are not included in the notice.

    6. IRC 6651 addition (including the fraud delinquency penalty under IRC 6651(f)) where such addition applies only to tax shown on a filed return. If the addition is applicable to a deficiency, show it in the notice. (See IRM 20.1.2.7.1 and IRM 25.1.7 for further information.)

    7. Household employment taxes.

    8. Underpayments resulting from non-rebate erroneous refunds not recoverable by issuance of a deficiency notice. (See IRM 21.4.5, Erroneous Refunds, for discussion of non-rebate erroneous refunds.)

  2. Prior to issuing the notice of deficiency, assess any partial agreements for increases in tax.

  3. In addition, assess the following:

    • Advance payments (IRC 6213(b)); and

    • Partial agreements (IRC 6213(d)).

8.17.4.4  (11-09-2007)
How an AO Requests Preparation of a Notice of Deficiency

  1. Generate Form 3608, Request for Tax Computation Specialist (TCS) Service from APGolf. ACDS automatically completes Box 1 of the form with essential information - AO name; phone number; symbols; and post of duty.

  2. Create a Schedule of Adjustment showing changes, if any, to the Compliance or Campus determination.

  3. If there are supplemental instructions to the Schedule of Adjustments, complete Box 12.

  4. Send the Form 3608 and the Schedule of Adjustments to the designated Appeals Tax Computation Team Manager (ATCTM) by secure messaging.

  5. If access to APGolf is not available, complete Form 3608 available on the TCS web site at http://appeals.web.irs.gov/taxcomput/documents/Form 3608 CG.DOC.

  6. Provide the Tax Computation Specialist (TCS) with the explanatory paragraphs to be used in the notice or provide a copy of the Appeals Case Memo (ACM) and request they prepare the explanatory paragraphs.

  7. The ATCTM determines the grade of the case and assigns the case using the TCS Program on ACDS. For additional information on the procedures taken by the ATCTM, see IRM 1.4.28.

  8. The ATCTM notifies the requester which TCS will work the case. Transmit the case file to the TCS as soon as possible.

  9. If preparation of the notice of deficiency must be done immediately, walk the request to a local TCS and concurrently E-mail the ATCTM.

8.17.4.5  (11-09-2007)
General Instructions for TCS Preparing a Notice of Deficiency

  1. Review and perform necessary technical/computational work on the case file, order current transcripts, and notify the AO to request any necessary returns or documents.

  2. Prepare the notice in accordance with procedures outlined here. IRM 4.14, Statutory Notices of Deficiency, may also be used as a reference.

  3. Accuracy is very important in Notices of Deficiency. Errors or omissions can affect the legality of the notice. Although legal means are available to correct errors, the Government's position can be undermined by having to bear the burden of proof.

  4. Discuss any possible new issues with the Appeals Officer to ensure adherence to Policy Statement P-8-2 (formerly P-8-49) of IRM 1.2.1.8, Policies of the Internal Revenue Service, Appeals, and IRM 8.6.1.4, New Issues and Reopening Closed Issues.

  5. Since a copy of the notice of deficiency is attached to the petition filed with the Tax Court, notice letters and statements must be computer generated or typed. There can be no handwritten pages.

    Note:

    It is acceptable to neatly print the page numbers on the notice.

  6. Show kind of tax, tax years involved, amount of deficiency, and additions to the tax (penalties) in the notice. An interest amount is not shown in the notice.

8.17.4.6  (11-09-2007)
When Should TCS Prepare Duplicate Original Notices

  1. Duplicate original notices, a term used throughout this text, describes when more than one notice is mailed to the same taxpayer, and each notice of deficiency letter contains an original signature. The following are some examples of situations where duplicate original notices are needed:

    1. Taxpayer has more than one address.

    2. Husband and wife, filing a joint return, have separate addresses.

    3. Valid Power of Attorney directs an original notice be sent to the representative.

  2. If there is any doubt about the last known address, send duplicate original notices by certified mail to each address within the United States or by registered mail to each address outside the United States.

  3. When the notice letter is generated in ACDS, click the "Duplicate Original" box on the letter generation input screen. When there are multiple addresses, use the "Duplicate Original" notation on each notice letter prepared.

  4. If there is an alternative address, consider sending duplicate notices to the taxpayer.

8.17.4.7  (11-09-2007)
TCS Preparation of the Notice of Deficiency Letter

  1. The information contained in this subsection covers steps for the TCS to follow when generating the Notice of Deficiency letter:

    • Which letter to use.

    • How to generate letter on APGolf.

    • What general guidelines must be followed.

    • How to address the letter.

    • What format to use for the taxpayer's name.

    • How to find the taxpayer's last known address.

    • What to do if there is a Power of Attorney.

    • How to indicate enclosures.

8.17.4.7.1  (11-09-2007)
Determining the Appropriate Letter to Use

  1. The notice letter is one of the following letters.

    If the case involves... Then use... Other Information
    individual income tax liability. Letter 894(cg). May also be used for termination assessment cases.
    corporate income tax liability Letter 901(cg). May also be used for other cases such as, estate or gift tax cases, jeopardy assessment cases, excise tax cases, withholding at the source cases and cases involving affiliated groups.
    transferee liability Letter 3424(cg) See IRM 8.7.5, Transferee/Transferor Liabilities.
    bankruptcy Letter 1384(DO) Send copy to the trustee in bankruptcy. See IRM 8.7.6, Appeals Bankruptcy Cases, or IRM 4.27, Bankruptcy, for more information on bankruptcy notices of deficiency.
    excise tax Letter 531-B May be used in cases involving certain Chapter 43 excise taxes such as IRC 4971 taxes on failure to meet minimum funding standards, and IRC 4975 taxes on prohibited transactions. See IRM 8.17.4.2.
    open criminal aspects modified Letter 894 No waiver or agreement permitting the taxpayer to agree to a deficiency is prepared. Also see IRM 4.14, Statutory Notices of Deficiency, for more information. See IRM 8.17.4.7.1(2) below.

  2. When preparing a statutory notice involving open criminal aspects, modify Letter 894 as follows:

    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.

8.17.4.7.2  (11-09-2007)
Generating the Letter Using APGolf

  1. Most of these letters are available on the Appeals Centralized Database System (ACDS) through the Appeals Generator of Letters and Forms (APGolf). Use ACDS to generate the notice letter when possible because the letters are updated regularly with the latest language and Commissioner information.

  2. Never modify or alter the content of the APGolf letter without proper authorization.

  3. APGolf generates the name and address in all capital letters, without punctuation, per the IRS Addressing Standards ( Document 12019). It also generates the SSN or EIN, and power of attorney information. Ensure the information is correct.

  4. Convert the APGolf letter to Word if changes need to be made to correct input errors in the name, address, etc. Formatting changes (font type, font size, spacing, margins, etc.) can also be made.

  5. When an error is found on the ACDS information, tell the AO so corrections can be made.

  6. The APGolf letter automatically generates the Taxpayer Advocate language, and the Taxpayer Advocate address and telephone number. Check to make sure this information is correct.

8.17.4.7.3  (11-09-2007)
General Guidelines for Preparing the Letter

  1. Include the type of tax in the notice of deficiency letter. When the letter used has a heading that includes a line entitled "In Re" , enter the type of tax in a format similar to "In Re: Income Tax" , "In Re: Estate Tax" , etc. If the letter used does not have the "In Re" line, such as Letter 1384(DO), show the type of tax above the salutation line.

  2. If the notice of deficiency letter includes a field for "Form Number" , complete it with the form number shown on the letter - Form 1040, Form 1120, Form 1042, etc.

  3. Show the details of the tax period(s) and the deficiency for tax and penalties (or additions to the tax) above the salutation line on the notice letter. Insert the code section for each penalty or addition to tax.

  4. Do not date the notice of deficiency letter. The date is added when the notice is issued.

  5. Whoever issues the notice must enter the date on the "Last Date to File a Petition with the United States Tax Court" line.

8.17.4.7.4  (11-09-2007)
AO's Name, Phone Number and Identifying Number

  1. Include the Appeals Officer’s name, telephone number, and unique identifying number. In Appeals, the unique identifying number is the Appeals Officer’s badge number.

8.17.4.7.5  (11-09-2007)
IRS Addressing Standards for Notice Letter

  1. Use the guidelines outlined in the IRS Addressing Standards ( Document 12019) when preparing the notice letter:

    • Capitalize ALL letters in the name and address.

    • Don't use punctuation (periods, commas, etc.)

    • Left-justify every line in the address block on the letter.

    • Use the U.S. Postal Service designated two-letter state abbreviations.

    • Use the U.S. Postal Service street designators. ("AVE" for "Avenue" , "BLVD" for "Boulevard" , "APT" for "Apartment" , etc.) A list of the street designators can be found in the IRS Addressing Standards document.

    • Use one (1) space between city and state, and two (2) spaces between state and ZIP Code.

    • Use the most complete Zip Code which is a 9 digit number consisting of 5 numbers, a hyphen, and 4 numbers, which the U.S. Postal Service refers to as the Zip + 4 Code. If unknown, use the 5 digit Zip Code. Verify the Zip Code on the U.S. Postal Service's web site at http://www.usps.com/.

8.17.4.7.6  (11-09-2007)
Format to Use for Taxpayer's Name

  1. Carefully check the name of the taxpayer.

  2. Depending on the type of case, select which name format to use:

    1. Use the name of the corporation as shown on the tax return. If the name of the corporation has changed, address that corporation as follows on the letter, schedules and attachments: "ABC Corporation, formerly known as XYZ Corporation" .

    2. On a joint return where the same last name is used, show the names on the notice as "John and Mary Doe" .

    3. On a joint return where the last names are different, show both names on the notice as "John Smith and Mary Jones."

    4. There are specific guidelines iff a taxpayer has remarried since the return was filed, and has a different last name. See IRM 8.17.4.26.3.

    5. If it is determined that the taxpayer used more than one name, include both names on the notice with "also known as" or "AKA" . For example, "John T. Smith, AKA J. Thomas Smith" .

8.17.4.7.7  (11-09-2007)
Taxpayer's Last Known Address

  1. Carefully check the address of the taxpayer. Several large deficiencies have been lost because of typographical errors in the address or because the last known address of the taxpayer was not used. Rev. Proc. 2001-18 defines the taxpayer's last known address as the address on the most recently filed and properly processed tax return unless the taxpayer clearly and concisely notifies the IRS that there is a change in address.

  2. A deficiency notice can be considered invalid if it is not sent to the taxpayer's last known address. The Tax Court lacks jurisdiction over a case that is based upon an invalid notice.

    1. Handle these situations on a case by case basis.

    2. If the statute of limitations is still open, Appeals may reissue the notice of deficiency to the correct address

  3. Use only one address on the letter, Form 4089 and/or Form 4089-A, etc. For example, if there are two alternative addresses for a taxpayer, prepare two Notices of Deficiency using one of the addresses on each.

  4. Address information must be obtained from IDRS by accessing the following command codes in the order listed:

    1. Check an ENMOD either with no definer or with an "A" definer. If "A" is entered with ENMOD and there is data available, ENMODA will give you the same result as ENMOD. If "A" is entered with ENMOD and there is no ENMOD data available, ENMODA will automatically default to AMDIS for further search for address information.

      Note:

      If an ENMOD is not available, use command code IMFOLB or BMFOLB to obtain the ENMOD.

    2. If an ENMOD cannot be obtained, check INOLE (definer code "S" ).

    3. On joint accounts, check SPARQ to determine the most current address for both taxpayers at once.

    4. If none of the above are available, check IRPTRO, IROLE, and IMFOLE.

  5. Review the administrative case file for documentation to help determine if the taxpayer's address has changed since the return was filed. (While some of this documentation does not officially update the taxpayer's last known address, it puts the Service on notice to research whether the taxpayer's address was updated.) Examples of documentation include:

    1. Addresses shown on correspondence in the file, especially any sent to the taxpayer by the Appeals Officer, or any received after the latest return was filed.

    2. New address on a return envelope.

    3. New address on a power of attorney form. Review the power of attorney form for a different address. Compare the signed dates found on the power of attorney to those found on the most current filed return.

    4. An address on the case summary card different than what is shown on the return or IDRS.

  6. For any case where the last known address is in doubt, review a transcript for any year that is within three years of the period(s) included in the notice of deficiency.

    1. Review transcripts to determine if other functions (Collections, Compliance, etc.) have had contact with the taxpayer.

    2. If so, contact the function(s) to access their databases to research a current address. In each case where a database is accessed, keep evidence of the research in the case file.

  7. For information on addressing Notices of Deficiency to incarcerated taxpayers, see IRM 4.14.1.

  8. For information on addressing Notices of Deficiency to APO addresses, see IRM 4.14.1.

8.17.4.7.8  (11-09-2007)
Power of Attorney in Notices

  1. If a taxpayer is represented by a duly authorized Power of Attorney who is not authorized to received an original notice, use Letter 937 to send a photocopy of the signed notice to the representative using regular mail.

  2. Send duplicate originals by certified mail when the taxpayer directs that all original notices and other written communications be sent to the representative.

    1. If the Power of Attorney (usually Form 2848) states "If you want the first representative listed on line 2 to receive the original and yourself a copy, of such notices or communications, check this box" and the box is checked, or "Notices and other written communications will be sent to the first representative listed in Line..." , or similar wording, duplicate original notices must be sent to the taxpayer in care of the Power of Attorney to the address listed on the Power of Attorney.

    2. In order to protect the interests of the government, also send a duplicate original notice to the taxpayer at the last known address of the taxpayer. (Additional addresses for the taxpayer will require additional duplicate original notices.)

    3. Therefore, if there is one address for the taxpayer, and only one representative is authorized to receive original notices, then duplicate original notices are required: One to the taxpayer at the taxpayer’s last known address, and one to the taxpayer in care of the Power of Attorney to the representative’s address listed on the Power of Attorney. See example below:

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

      and

      John and
      Mary Doe
      c/o Power of Attorney’s Name
      (Power of Attorney’s address)

    4. If the taxpayer designates a second representative to receive notices and other communications (as shown on line 7a of the 1991 and 1993 revisions of Form 2848), send a duplicate original to the taxpayer in care of that Power of Attorney to the address listed on the Power of Attorney.

      Note:

      (The language on line 7a of the 1991 and 1993 revisions of Form 2848 is different from the language on line 7b in later revisions of Form 2848. In the 1991 and 1993 revisions of Form 2848, the representatives are to be sent the originals of the notice, not copies. In later versions of Form 2848, the taxpayer may only specify that the second representative receive a copy of the notice, not an original.)

  3. If the notice of deficiency contains more than one taxable year and the Power of Attorney does not specify all of the same years, do not send a notice to a representative unless a duly authorized Power of Attorney is in effect for all years covered by the notice. Therefore, it is recommended that a new Power of Attorney be obtained for any years not covered prior to issuing a notice of deficiency. (See procedures to follow in (4) and (5), below, if a new Power of Attorney cannot be obtained.)

  4. If a new Power of Attorney cannot be obtained, and the current Power of Attorney states that the original notice will be sent to the taxpayer and a copy to the representative, do not send a copy of the notice to the representative. Rather, send a copy of the notice of deficiency to the taxpayer with a separate letter explaining why the copy cannot be sent directly to the representative.

    1. Suggested language to include in the separate letter is:

      "Since you have not granted a power of attorney to your authorized representative to represent you for all of the tax periods included in the enclosed notice of deficiency, a copy of the notice of deficiency has not been sent to the representative that you appointed for some of the tax periods. You may want to consider providing a copy of the notice of deficiency to your representative, if you deem appropriate."

      Note:

      Although this information is not part of the notice of deficiency, it can be mailed in the same envelope.

  5. If a new Power of Attorney cannot be obtained, and the current Power of Attorney states that all original notices and other written communications be sent to the representative, it is recommended three notices of deficiency be prepared:

    1. Address one notice to the taxpayer only, and include only the year(s) not covered by the Power of Attorney.

    2. Address the second notice to the taxpayer only and include the year(s) covered by the Power of Attorney.

    3. The third notice is a duplicate original of the second notice but is addressed to the taxpayer in care of the representative, at the representative’s address listed on the Power of Attorney. The only years included are those covered by the Power of Attorney.

  6. Use Command Code CFINK to verify the name and address of the Power of Attorney on the Centralized Authorization File (CAF) database.

8.17.4.7.9  (11-09-2007)
Taxpayer Identification Numbers on Notice of Deficiency Letters

  1. Include the Taxpayer's Identification Number (TIN) on each notice of deficiency letter issued by Appeals.

  2. Show the TIN, either SSN or EIN, as appropriate in the upper right portion of the letter.

8.17.4.7.10  (11-09-2007)
Identifying the Tax Years in the Notice

  1. Income tax cases:

    • Identify a calendar year as "Tax year ended December 31, ___" .

    • Identify a fiscal year as "Tax year ended June 30, ___" .

    • Identify a period of less than a year as "Tax year March 1, ___, to September 30, ___."

  2. In estate tax cases, change "Tax Year Ended" to "Date of Death."

  3. In gift tax cases, change "Tax Year Ended" to "Calendar Year" .

  4. See Exhibit 8.17.4-1.

8.17.4.7.11  (11-09-2007)
Salutation in Notice of Deficiency

  1. Use the following salutations in the notice of deficiency letter:

    1. For individual taxpayers, use names such as "Dear Mr. and Mrs. Smith" . ("Dear Taxpayer" may also be used.)

    2. For all other entities (corporate, estate, gift, etc.) use "Dear Taxpayer" .

8.17.4.7.12  (11-09-2007)
Including Enclosures in the Notice of Deficiency

  1. Generally enclosures listed on the last page of the notice of deficiency letter include the following:

    • Statement

    • Waiver

    • Envelope

  2. Because the notice of deficiency "Statement" consists of the Form 4089-A, (or Form 4089), the tax computation, the explanation of adjustments, and any attachments, simply list "Statement" rather than individually listing the Form 4089/4089-A, tax computation form such as Form 5278, paragraphs, etc.

  3. Do not list the settlement computation as an enclosure since a settlement computation is NOT included as part of the notice of deficiency.

8.17.4.8  (11-09-2007)
Parts of the Notice of Deficiency Statement

  1. The notice of deficiency statement includes the parts listed below:

    1. face sheet;

    2. adjustment to income, taxable gifts, etc.; and computation of tax;

    3. explanation of adjustments; and

    4. schedules and exhibits.

8.17.4.9  (11-09-2007)
Face Sheet (Form 4089/4089A)

  1. Use either Form 4089 (Notice of Deficiency-Waiver) or Form 4089-A (Notice of Deficiency-Statement) as the first page of the notice of deficiency statement.

    1. A separate agreement form is not necessary when a Form 4089 is used since it is a combination summary face sheet and agreement form.

    2. Prepare and include an agreement form such as Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, or Form 890, Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment-Estate, Gift, and Generation-Skipping Transfer Tax, when a Form 4089-A is used. Notices involving jeopardy assessment cases is an exception to this general rule. See IRM 8.17.4.18.

  2. Form 4089 and Form 4089-A are available on ACDS APGolf.

8.17.4.9.1  (11-09-2007)
Name and Address of Taxpayer

  1. Show the name and address of the taxpayer on the face sheet exactly as it appears in the letter. There is an exception when preparing notices for transferee cases. See IRM 8.7.5.

8.17.4.9.2  (11-09-2007)
Summary of Liabilities for Tax, Additions to Tax and Penalties

  1. The captions on Form 4089 and Form 4089-A provide for the tax year and the deficiencies in tax.

  2. Enter any additions to the tax or penalties in columnar form under and to the right of the Deficiency block.

  3. Separately list each addition to the tax or penalty. Separately total the deficiency and addition to the tax or penalty columns.

8.17.4.9.3  (11-09-2007)
Additional Information on Face Sheet

  1. The following sections discuss additional information that may be required on the face sheet.

  2. Show the additional information after the summary of the tax liability on Form 4089 or Form 4089-A, or on a continuation sheet attached to these forms.

8.17.4.9.4  (11-09-2007)
Prepayment Credit (Refundable Credit) Adjustments on Face Sheet

  1. How the prepayment (refundable) credit is handled on the face sheet depends on whether the Tax Court has jurisdiction of that credit and whether the credit is understated or overstated.

  2. If the Tax Court does not have jurisdiction and the credit is understated, withhold adjustments until final disposition of the case and insert the following explanation on the face sheet in the following format:

    1. Statutory deficiency   $ 13,563.00
           
      Prepayment credit adjustment    
      Correct amount of prepayment credits:    
       Tax withheld 2,000.00  
       Payments and credits on
        estimated tax       		600.00 2,600.00
      Prepayment credits claimed on return:    
       Tax withheld 1,000.00  
       Payments and credits on
       estimated tax       		600.00 1,600.00
      Understatement of prepayment credit   1,000.00
      Net additional tax (net overpayment)   12,563.00
      ______
           

      Caution:

      The notice of deficiency letter and waiver will show the full statutory deficiency before adjustments to the prepayment credits. So in the above example, $13,563.00 will be reflected on the letter and waiver forms.

    Note:

    Earned income credit, the refundable additional child tax credit, and the credit for tax paid on fuels are credits that the Tax Court does have jurisdiction over. Adjustments to these credits are included in the statutory deficiency and are not shown on the face sheet. See IRM 8.17.4.19.

  3. If the Tax Court does not have jurisdiction and the credit is overstated, adjustments to decrease the credits are made prior to issuing the notice of deficiency. See IRM 8.17.4.3.. Do not reflect the adjustment on the face sheet since under IRC 6201(a)(3) these adjustments are not subject to deficiency procedures.

8.17.4.9.5  (11-09-2007)
Overpayment Claimed in Deficiency Year not Refunded

  1. Insert an explanation on the face sheet if an overpayment claimed on the return has not been refunded. Use the following format:

    Statutory deficiency $5,000.00
    Less overpayment claimed (and not refunded) 1,200.00
    Net underpayment /(Net overpayment) $3,800.00
    ========

8.17.4.9.6  (11-09-2007)
Unassessed Payment

  1. Include the following paragraph on the face sheet if the taxpayer has made a partial payment that has not been assessed:
     
    "The deficiency shown above does not take into account a payment of $____ made on ____, which amount will be applied upon the final disposition of this case."

8.17.4.9.7  (11-09-2007)
Interest Statements on Face Sheet

  1. Include the following interest statement on Form 4089/4089-A: "Interest, as provided by law, will be charged on the unpaid liability until it is paid in full."

  2. The Form 4089/4089-A generated by ACDS includes this interest statement.

  3. Subsequently information is provided on how to show interest in the notice of deficiency. See IRM 8.17.4.16.

8.17.4.9.7.1  (11-09-2007)
Explaining IRC 6621(c)

  1. If IRC 6621(c) applies, include an explanatory paragraph after the summary of tax liability on the face sheet. IRC 6621(c) can be either interest on a substantial underpayment attributable to tax motivated transactions or interest on large corporate underpayments.

  2. Show the explanatory paragraph on Form 4089/4089-A, or on a continuation sheet attached to these forms.

8.17.4.9.7.2  (11-09-2007)
IRC 6404(g) Interest Suspension

  1. If IRC 6404(g) applies, include an explanatory paragraph after the summary of tax liability on the face sheet.

  2. Show the explanatory paragraph on Form 4089/4089-A, or on a continuation sheet attached to these forms.

8.17.4.9.7.3  (11-09-2007)
Restricted Interest

  1. If restricted interest is involved, include the following paragraph on the face sheet:

    "Interest for (Insert year) will be computed under section _______of the Internal Revenue Code."

  2. Insert the appropriate restricted interest code sections, such as IRC 6601(d) and IRC 6611(f)(1), etc., in the blank above.

8.17.4.9.8  (11-09-2007)
Claims for Refund When Notice of Deficiency is Issued

  1. If the taxpayer files a claim for refund that has not been processed, and a notice of deficiency is being issued, notify the taxpayer in the notice of deficiency that the claim has been considered.

  2. The Appeals Officer must inform the TCS when a claim is filed and what action to take with respect to it. It is the responsibility of the TCS to insert the proper paragraph in the statement.

  3. Use the following paragraphs on the face sheet whenever applicable.

    1. Issue in claim not conceded:  
      "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. It is determined that the issue raised in your claim (identify the subject matter) is not allowable because (state reason). If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."

    2. Multiple issues in claim not conceded:
      "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. It is determined that the issues raised in your claim are not allowable as discussed below: (list each issue and the reason for disallowance). If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issues set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."

    3. Issue in claim conceded:

      "In making this determination of your income tax liability, careful consideration has been given to your claim(s) for refund filed on __. The issue raised in your claim for refund with respect to (identify the subject matter) has been allowed in the notice of deficiency. However, other adjustments result in a deficiency. If a petition is not filed, a statutory notice of disallowance will be forwarded to you in accordance with the provisions of section 6532(a)(1) of the Internal Revenue Code."

    4. If the issue in a claim is partially conceded:

      Example:

      The taxpayer files a claim requesting that Schedule E income reported on the return of $15,000 be reduced to $1,000. It is determined in Appeals that $10,000 of the income is still reportable on the tax return. See suggested format below:

      "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. It is determined that Schedule E income of $10,000 must be reported on your return rather than the amount shown in your claim of $1,000. The notice of deficiency adjusts the Schedule E income. Other adjustments to your return result in a deficiency. If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."

    5. If the claim contains multiple issues and some are adjusted:

      "In making this determination of your income tax liability, careful consideration has been given to your claim for refund filed on __. The issue raised in your claim for refund with respect to (identify the subject matter of the first issue) has been allowed herein. However, it is determined that the issue raised in your claim with respect to (identify the subject matter of the second issue) is not allowable because (state reason). Other adjustments to your return result in a deficiency. If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made a part of the petition to be considered by the Tax Court in any redetermination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by certified mail in accordance with section 6532(a)(1) of the Internal Revenue Code."

8.17.4.9.9  (11-09-2007)
Additional Issues Raised by Taxpayer not Allowed

  1. If the taxpayers say they are entitled to additional deductions not claimed on the return, or that income reported on the return should be excluded in whole or in part, include the following paragraph on the face sheet:
     
    "The issue raised (in your protest) (at the hearing) requesting a deduction in the amount of $____ for ____has been given careful consideration and it has been determined that no deduction is allowable (follow with proper explanation of reason for non-allowance)."

8.17.4.9.10  (11-09-2007)
Power of Attorney Annotation on Face Sheet

  1. When the Power of Attorney authorizes the representative to receive copies, check the block "Copy to Authorized Representative" on Form 4089/4089-A and list the representative’s name and address to the right of the block.

  2. If more than one representative is authorized to receive copies, list all representatives on Form 4089/4089-A.

  3. If a duplicate original is sent to the representative, change "Copy to Authorized Representative" on the face sheet to read "Duplicate Original Sent to Authorized Representative."

8.17.4.9.11  (11-09-2007)
Additions to the Tax/Penalties on the Face Sheet

  1. Include explanatory paragraphs for the additions to tax or penalties in the notice of deficiency. Show the paragraphs on Form 4089/4089-A, on a continuation sheet attached to these forms, or behind the paragraphs explaining the various adjustments to income, credits, etc.

  2. A subsequent section contains a detailed discussion about including penalty paragraphs in the notice of deficiency. See IRM 8.17.4.15.

8.17.4.10  (11-09-2007)
Notice of Deficiency Adjustment and Tax Computation Forms

  1. Use Form 5278 as the notice of deficiency adjustment and tax computation forms when preparing income tax notice of deficiency computations.

    1. Generate an original tax computation Form 5278 to include in the notice of deficiency. Do not photocopy prior reports prepared by Compliance to use in the notice of deficiency.

    2. Use Form 5278 on income tax cases. Do not useForm 4549 or Form 4549-A for a notice of deficiency since these forms include an interest field and interest computations should not be sent to the taxpayer with the notice of deficiency.)

8.17.4.10.1  (11-09-2007)
Starting Point for Notice of Deficiency

  1. The starting point for taxable income, taxable estate, and taxable gifts is usually the return as filed or the latest processed amended return.

  2. If a year was previously examined and there was a change in tax liability that was assessed, and now that year is open for recapture of a tentative allowance, the starting point is the taxable income shown on the previous examination report.

    1. If a statute on a carryback year is held open only by the loss year’s statute, the recapture cannot be more than the tentative allowance shown on Form 1045 (Individuals) or Form 1139 (Corporations), or the carryback allowed in an amended return.

  3. If a partial agreement has been secured and the tax assessed, then the starting point for taxable income in the notice of deficiency is either the taxable income from the partial agreement or the taxable income per the return:

    1. Starting point is the partial agreement: Preferably the starting point for taxable income in the notice of deficiency is the taxable income from the partial agreement.

    2. Starting point is the original return: If it is necessary to show the agreed adjustments, then the starting point for taxable income in the notice of deficiency is the taxable income from the original return. On the tax computation form such as Form 5278, enter "Previously agreed adjustments" and show the total of all previously agreed adjustments.

  4. Annotate the starting point regardless of whether it is the original return, a processed amended return, a previous examination report, or a partial agreement. Use a format such as "Taxable Income per Amended return," "Tax Income as Previously Determined."

8.17.4.10.2  (11-09-2007)
Listing Adjustments and Computing Tax

  1. If logical and practical, list the increases first followed by the decreases. The items in each group should follow, as closely as possible, the sequence and wording used in the return. Label each adjustment with a letter of the alphabet.

    Note:

    Computer programs may not allow the adjustments to follow the sequence and wording used on the return.

  2. Schedule all assessments for the tax period on the tax computation form.

    1. This should be shown on the bottom of the tax computation form or on an attachment.

    2. See IRM 8.17.2, General Settlement and Rule 155 Computations, for illustration of how this should be scheduled.)

  3. Rules and guidelines for computing tax set out in IRM 8.17.2 apply equally to tax computations in notice of deficiency statements with the exceptions noted in this subsection.

8.17.4.11  (11-09-2007)
Guidelines for Preparing Explanation of Adjustments (Explanatory Paragraphs)

  1. An explanatory paragraph in a notice of deficiency has a twofold purpose:

    1. to inform the taxpayer in clear and concise language of the adjustment; and

    2. to state the position or positions of the Service with respect to the adjustments being made.

  2. Identify each explanation of adjustment to income, estate, or gifts in the order shown on the tax computation schedule.

  3. Identify explanations of adjustments to credits by subject matter, schedule number or exhibit, whichever method is most logical in the circumstances.

  4. In cases where a partial agreement has been secured, the format for the explanations of adjustment depends upon the starting point used for taxable income in the notice of deficiency.

    1. Starting point is the original return: If the starting point for taxable income in the notice of deficiency is the taxable income from the original return, then on the tax computation schedule such as Form 5278 the total of all previously agreed adjustments will be listed, and identified as "Previously agreed adjustments" . The explanation of adjustments will read, "You have previously indicated your agreement to the following adjustments by executing waiver Form ___on (DATE)." The issue and the agreed adjustment amounts should then be listed below this paragraph.

    2. Starting point is the partial agreement: If the starting point for taxable income in the notice of deficiency is the taxable income from the partial agreement, then no explanation of the previously agreed adjustments is required.

  5. Explain each adjustment on a Form 886-A, available on the Tax Computation Specialist web site, or on a separate schedule, such as a Word document. Use separate exhibits or schedules to support the explanations, whenever appropriate.

  6. When adjustments to Non-TEFRA partnerships, Non-TEFRA Sub-chapter S corporations, or fiduciary income distributions are involved, include a brief explanation that the taxpayer’s share of income from the flow-through entity is adjusted. Include reference to a separate exhibit or schedule that includes detailed explanations of the adjustments to the flow-through entity. See Exhibit 8.17.4-2..

  7. Alternative positions are only shown in the explanation of adjustments and not the letter, the summary of tax and penalty liability on Form 4089/4089-A, or the tax computation.

  8. The AO generally provides explanatory language for the notice of deficiency which the TCS uses when preparing the notice. However in some cases, the Appeals Officer may want the TCS to prepare explanatory paragraphs. If so he/she must provide the TCS with the Appeals Case Memo.

  9. The TCS is responsible for the grammar, spelling and sentence structure of the explanatory paragraphs they prepare.

  10. When the TCS prepares the explanatory paragraphs, the AO is responsible for reviewing the paragraphs to ensure they are technically accurate before mailing the notice.

8.17.4.11.1  (11-09-2007)
Available Sample Paragraphs

  1. Sample paragraphs used in explaining adjustments may be found as outlined below. Modify these suggested or sample paragraphs to suit facts and circumstances.

    1. The TCS page on the Appeals web site contains a link to an exhibit containing sample explanatory paragraphs. These sample paragraphs are not required to be followed verbatim, but may be modified to fit facts and circumstances in each case or revised to provide further clarity. See SND Paragraphs at http://appeals.web.irs.gov/taxcomput/procedures-resource.htm

    2. Many of the paragraphs are also available on ACDS in the APGolf section. (Go to the "Statutory Notice" category, and select "Form 886-A" .)

    3. Many additional paragraphs may be found in IRM 4.10.10, Standard Paragraphs and Explanation of Adjustments. See IRM Exhibit 4.10.10-1 (Index to Standard Explanations) and IRM Exhibit 4.10.10-2 (Standard Explanations). These paragraphs have been approved by Chief Counsel and most of them may be used when preparing notices. It is recommended that these paragraphs be modified to conform to Appeals’ suggested guidelines for preparing explanations of adjustment. See IRM 8.17.4.11.

      Note:

      Be careful when using the paragraphs used by Compliance in their examination reports, since some may not be suitable for Notices of Deficiency.

    4. The paragraphs from IRM Exhibit 4.10.10-2 are also available in RGS.

  2. The Compliance paragraphs in IRM Exhibit 4.10.10-2 do not include the adjustment made to taxable income or tax. If used, these paragraphs need to be adjusted to include an explanation for the adjustments to taxable income or tax.

8.17.4.11.2  (11-09-2007)
Sentence Structure and Content

  1. Use the present tense in wording paragraphs rather than the past tense. This presents the Service’s position as of the issuance date and does not affirm a prior decision.

  2. Use positive phrasing when possible. State that the "allowable amount is" rather than the "disallowance is" . However, the more basic principle that the position of the Service should be clearly stated should govern.

  3. Do not use qualifying phrases such as "based on the information in our files" since it implies the Service is using information unknown to and withheld from the taxpayer. Instead, use the phrase "it is determined" where appropriate.

  4. Do not describe an item as a "deduction" and then disallow it because it does not qualify as an allowable deduction.

    For Example: Do not say, "It is determined that the deduction of $1,000 claimed as rent expense is not deductible since the amount was not paid or accrued during the taxable year." Instead say, "It is determined that the amount of $1,000 claimed as rent expense is not deductible since the amount was not paid or accrued during the taxable year."

  5. Avoid so-called "net adjustments" since they tend to be difficult to follow and may present a question as to the actual amount at issue.

  6. The following phrases are often used at the end of a paragraph to clarify how the adjustment affects the tax return:

    1. Accordingly/Therefore, taxable income is increased/decreased ___.

    2. Accordingly/Therefore, tax is increased/decreased ___.

  7. The length of the paragraphs should be sufficient to clearly state the conclusions embraced by the Commissioner’s determination. Additional information may be needed to show the detail of certain determinations.

    1. For example, an explanatory paragraph which determines that an unreported capital gains transaction results in $10,000 of long-term capital gain may be supplemented with a computation setting forth the amount realized, adjusted basis, gain to be taken into account and other pertinent figures, etc.

    2. Use a separate exhibit or schedule to show voluminous details and reference this exhibit or schedule in the explanatory paragraph, such as "See Exhibit A attached."

    3. Depreciation: Form 1914 may be included to show the depreciation computations.

    4. Identify the source of unreported income in the explanatory paragraph.

    5. Indirect Method: Include an exhibit to show the computation. Sample formats for net worth computations, source and application of funds and the bank deposit method of determining income are shown in IRM Exhibit 4.10.4-4, IRM 4.10.4.6 for additional information.

  8. State the taxable year involved in each explanatory paragraph. It is not necessary to state the taxable year if only one year is involved in the notice.

  9. In some situations it may be necessary to include a copy of a document as part of the notice. If this happens, refer to the document in the explanatory paragraph by stating "See Exhibit A." To supplement Exhibit A, attach a separate worksheet showing a description of the information in the exhibit.

    For example: When the issue is capital gain or ordinary gain from the sale of lots in a subdivision, and the taxpayer has developed a drawing or a plat map prepared showing the lot numbers, easements, alleyways, road construction, and other details of the improvement of the tract, include a copy of this document in the notice and refer to it in the appropriate explanatory paragraph. Attach a separate worksheet showing lot numbers, the year in which each lot was sold, sales price received, the assigned adjusted basis (original cost plus allocated cost of subsequent improvements) and any other material deemed to be relevant. This technique, applied with good judgment, will result in a complete summary of the transaction being placed before the Court prior to the trial testimony.

8.17.4.11.3  (11-09-2007)
Citing Code Sections in the Paragraphs

  1. Cite code sections only to the extent necessary to inform the taxpayer of the real nature of the adjustment. Use of code sections can unnecessarily limit or narrow the Commissioner’s position. Make sure all applicable codes sections are cited.

    1. Never use code citations as the only explanations for disallowance.

    2. Do not use references to regulations or decided court cases.

  2. As a general rule it is preferable to use exact Code language rather than attempt to paraphrase Code language. For example, the statement, "Since it has not been established that your farm was operated with the intention of making a profit, the amounts deducted are not ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." should be used rather than "You have not shown that such claimed deductions were connected with a business activity during your taxable year."

8.17.4.11.4  (11-09-2007)
Explanatory Paragraphs for Additions to Tax or Penalties

  1. Include explanatory paragraphs for the additions to tax or penalties. For suggested paragraphs see the exhibit on the TCS page of the Appeals web site.

  2. Show the paragraphs on Form 4089/4089-A, or on a continuation sheet attached to these forms. The paragraphs may also be placed behind the paragraphs explaining the various adjustments to income, credits, etc.

    Reminder:

    In addition to explanatory paragraphs, include a computation of the penalty/addition to tax in any notice imposing a penalty or addition to tax that is issued after December 31, 2000.

  3. RGS penalty schedules:

    1. The penalty schedules generated by RGS can be attached to Form 4089/4089-A, or placed behind the explanations of adjustment.

    2. If the RGS penalty schedules are included in the notice, the explanatory paragraphs discussed in paragraphs (1) and (2) will most likely not be needed since the RGS penalty computation schedules include appropriate explanatory paragraphs.

    3. If the explanatory paragraphs included on the RGS penalty schedules are not acceptable, then also include explanatory paragraphs with the notice.


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