8.17.4  Notices of Deficiency

Manual Transmittal

September 27, 2013

Purpose

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

Material Changes

(1) This IRM is an extensive revision of the previous version. The IRM has been reorganized and revised to add clarity, and significant amounts of new content added. Throughout this IRM, clarified terms such as "face sheet" and "waiver" . Emphasized use of Form 4089 over Form 4089-A. Editorial changes have been made throughout this IRM. Web site addresses, legal references, code sections and IRM references were reviewed and updated accordingly. Some sections have been deleted here and will be moved due to the APS IRM reorganization.

(2) IRM 8.17.4.1: New paragraph (1) was paragraph (2) from IRM 8.17.4.2. Expanded definition of a notice of deficiency in paragraph (4), and added paragraph (5) discussing the purpose of a notice of deficiency.

(3) IRM 8.17.4.2: Added information that a notice is sent certified or registered mail. Added paragraph about unagreed employment tax cases, which are not subject to notice of deficiency procedures. Added information about original returns versus copies, and issuing a notice of deficiency based on a copy of the return if a statute is imminent. Revisions made to provide more guidance for when the AO may ask the TCS to prepare explanatory paragraphs.

(4) IRM 8.17.4.3: Added employee share of FICA to the list of adjustments which must be requested by the AO prior to issuing a notice of deficiency. Clarified procedures for assessment of partial agreements, added content discussing full payment by the taxpayer with references to Rev. Proc. 2005-18.

(5) IRM 8.17.4.4: Added information about TCS assignment grid on the TCS website, and additional information clarifying what the AO must provide the TCS when requesting preparation of a notice of deficiency. Included time limit (5 business days) for the AO to provide documents to the TCS after case assignment, and procedures on closing cases as premature referrals if documents are not timely received by TCS. Updated procedures if the notice of deficiency must be prepared immediately. Added information on how to find the TCS assigned to a case.

(6) IRM 8.17.4.5: Deleted part of paragraph (1), since it is the responsibility of the AO to make sure the admin file has all the returns and all necessary documents. Editorial changes also made.

(7) IRM 8.17.4.6: Deleted paragraph (1)(c) since the information has been obsolete since 2004 Deleted paragraph (4) since it was a duplicate of paragraph (1)(a).

(8) IRM 8.17.4.7: Old IRM 8.17.4.26.5 moved here. Subsequent sections renumbered.

(9) IRM 8.17.4.8.1: Paragraph (1) table updated. Paragraph (2) moved to new IRM section 8.17.4.28.8.

(10) IRM 8.17.4.8.2: Taxpayer Advocate information expanded.

(11) IRM 8.17.4.8.3: Removed information about adding type of tax to Letter 1384 since the official letter doesn't have a type of tax field. Corrected reference to form number.

(12) IRM 8.17.4.8.5: Modified addressing standards requirements to be used in the notice of deficiency.

(13) IRM 8.17.4.8.6: Reorganized information and added IRM cites.

(14) IRM 8.17.4.8.7: Modified requirement to review the administrative file for the last known address to clarify responsibilities of the AO and TCS. Moved paragraphs (7) and (8) to separate subsections.

(15) IRM 8.17.4.8.7.1: Old IRM 8.17.4.7.7 paragraph (7) moved here, added paragraph (2) as clarification.

(16) IRM 8.17.4.8.7.2: Old IRM 8.17.4.7.7 paragraph (8) moved here. Information on mailing notices sent to APO addresses added.

(17) IRM 8.17.4.8.8: Power of Attorney information extensively revised due to changes in Form 2848. Added reference to Letter 4368.

(18) IRM 8.17.4.8.9: New IRM section added for unenrolled return preparer. Includes information about the new category of registered tax return preparers and reference to Letter 4369.

(19) IRM 8.17.4.8.10: Added reference to ITN (Individual Taxpayer Identification Number).

(20) IRM 8.17.4.8.11: Removed references to estate and gift tax cases, since those procedures are now in IRM 8.7.4.

(21) IRM 8.17.4.8.13: Information added that "Audit Statement" should not be listed as an enclosure on the notice letter.

(22) IRM 8.17.4.9: Moved agreement form information from IRM 8.17.4.27 here, but did not include the estate and gift tax information since estate and gift tax information is now located in IRM 8.7.4. Added information to clarify where to find the amounts to include on Form 870, and updated prepayment credit information.

(23) IRM 8.17.4.11: Reworded IRM section since generally TCS's now use Form 4089 instead of Form 4089-A with Form 870. Removed estate and gift tax information.

(24) IRM 8.17.4.11.2: Removed requirement for totals on the face sheet (Form 4089 or Form 4089-A).

(25) IRM 8.17.4.11.4: This was former IRM 8.17.4.9.4, discussing prepayment (refundable) credit adjustments on the face sheet. Rewrote paragraphs to clarify procedures, added definitions of terms to paragraph (1). Moved paragraphs (2) and (3) to new subsections IRM 8.17.4.11.4.1 and IRM 8.17.4.11.4.2 discussing refundable credit adjustments.

(26) IRM 8.17.4.11.4.1: New IRM subsection discussing procedures for understated prepayment credit adjustments when Tax Court does not have jurisdiction. Paragraph (2) from former IRM 8.17.4.9.4 moved here, plus additional information to clarify procedures added.

(27) IRM 8.17.4.11.4.2: New IRM subsection discussing procedures for overstated prepayment credit adjustments when Tax Court does not have jurisdiction. Paragraph (3) from former IRM 8.17.4.9.4 moved here, plus additional information to clarify procedures added.

(28) IRM 8.17.4.11.4.3: New IRM subsection discussing procedures for refundable credit adjustments when Tax Court does have jurisdiction. The note to paragraph (2) from former IRM 8.17.4.9.4 moved here, plus additional information to clarify procedures added.

(29) IRM 8.17.4.11.5: If an overpayment claimed on the return has not been refunded, it is commonly called a frozen refund. Added the term frozen refund to this IRM section, plus additional information to clarify procedures added.

(30) IRM 8.17.4.11.6: Information added to clarify when procedures are needed for partial payments.

(31) IRM 8.17.4.11.7.1: IRC 6621(c) interest paragraph added.

(32) IRM 8.17.4.11.7.2: IRC 6404(g) interest paragraph added.

(33) IRM 8.17.4.11.7.3: Restricted interest paragraph modified to remove code section requirement, consistent with change made in IRM 8.17.6.4.4. Added paragraph explaining where to show the restricted interest statement in the notice.

(34) IRM 8.17.4.11.8: Added discussion in paragraph (2) that the AO must provide the TCS with the reason that issues raised in the claim were adjusted or not allowed. Information added to paragraph (3) on where to show the claim paragraphs. Revised claim language in paragraph (3)(c) to remove reference to issuing statutory notice of claim disallowance, since if the claim is allowed, the statutory notice of claim disallowance is not issued.

(35) IRM 8.17.4.11.9: Added paragraph (2) discussing that the AO must provide information to the TCS when there are additional issues raised by the taxpayer that weren't allowed. Paragraph (3) added to discuss where to include the required explanatory paragraph in the notice when additional issues raised by the taxpayer are not allowed.

(36) IRM 8.17.4.11.10: Information added discussing how to show the Power of Attorney information on Form 4089 or Form 4089-A. Change in October 2011 revision of Form 2848 requires IRM updates. Procedures added for how to prepare Form 4089 or Form 4089-A when spouses submit separate Form 2848's. Deleted old paragraph (3) since Form 2848 has had no option to send original notices to the Power of Attorney since 2004

(37) IRM 8.17.4.12.1: Procedures for starting point of SFR return added. Additional information added to starting point discussion.

(38) IRM 8.17.4.12.2: Procedures for listing adjustments simplified. The "Tax as previously adjusted" computation requirement changed to a recommendation, which is consistent with IRM 8.17.2.10.

(39) IRM 8.17.4.13: Reorganized paragraphs. Added information to clarify how to show adjustments on Form 5278. Updated Form 886-A information. Revised language used to refer to prior agreed adjustments, and discussion of the starting point to use for taxable income when a partial agreement has been secured. Revised discussion of explanations of adjustments made to the flow through entity to add reference to Form 4605 or 4605-A. Revisions made to provide more guidance for when the AO may ask the TCS to prepare explanatory paragraphs.

(40) IRM 8.17.4.13.1: Revised and updated discussion of sample paragraphs to use in the notice and the use of RGS paragraphs.

(41) IRM 8.17.4.13.2: Added discussion of the use of the RGS paragraph formats in the notice, and the information the AO must provide to the TCS in order to prepare computations and exhibits. Corrected references to IRM exhibits that show sample formats for indirect methods of computing income.

(42) IRM 8.17.4.13.4: Old IRM 8.17.4.9.11 discussion of additions to the tax/penalties on the face sheet was deleted and consolidated with information in IRM 8.17.4.13.4 (which was former IRM section 8.17.4.11.4). These 2 sections contained similar information, so they have been consolidated into one section. Added references to the TCS Excel penalty spreadsheets available on the Technical Support SharePoint site.

(43) IRM 8.17.4.14: IRM language updated to clarify content.

(44) IRM 8.17.4.15: Eliminated procedures in paragraph (4) since they are duplicated in IRM section 8.17.4.14.4.

(45) IRM 8.17.4.16.1: Deleted the first part of paragraph (1), which refers to the procedure in Compliance of including a paragraph in the notice about the overassessment. Appeals has no such procedure and instead sends a claim invitation letter.

(46) IRM 8.17.4.17: This is former IRM 8.17.4.15. Paragraphs (1) and (2) added with information on the penalties subject to deficiency procedures.

(47) IRM 8.17.4.18: Reorganized IRM penalty information with separate sections for delinquency penalties, estimated tax penalties, and accuracy related and fraud penalties. IRM 8.17.4.18 is the new introduction to the delinquency penalties section.

(48) IRM 8.17.4.18.1: Old IRM 8.17.4.15.3 section discussing IRC 6651(a)(1) failure to file (FTF) penalty and IRC 6651(a)(2) failure to pay (FTP) penalty when the taxpayer filed a return moved here. Information updated and additional content added.

(49) IRM 8.17.4.18.1.1: Old IRM 8.17.4.15.3.1 section discussing non filers and Substitute for Return (SFR) procedures moved here. Section reorganized and significantly rewritten. Statements in the old IRM that the FTF penalty is computed at 4.5% when the FTP penalty also applies were rewritten to more accurately state that the FTF penalty amount is reduced by the concurrent FTP penalty amount, Discussion of the use of the RGS penalty schedule and the 4.5% rate shown on the RGS IRC 6651 penalty schedule added. Discussion of the use of Excel penalty spreadsheets added. Sentence added to clarify that the AO determines if a valid SFR was prepared. Table that was below old paragraph (6)(b) moved to IRM Exhibit 8.17.4-4. Penalty paragraphs that were in this section deleted since TCS's generally use the RGS or Excel penalty schedules which already include appropriate paragraphs. If paragraphs are needed, the reference of where to find them is in paragraph 9(b).

(50) IRM 8.17.4.18.2: New IRM section added for IRC 6651(f) fraudulent failure to file penalty.

(51) IRM 8.17.4.18.3: Old IRM 8.17.4.15.2 discussion of the alternative to IRC 6651(f) moved here, and additional information added.

(52) IRM 8.17.4.19: New section on estimated tax penalties and notices of deficiency added.

(53) IRM 8.17.4.20: IRM 8.17.4.20 is the introduction to a new section added with instructions for preparing notices of deficiency with accuracy related and fraud penalties.

(54) IRM 8.17.4.20.1: New section added discussing accuracy related penalties (IRC 6662 and 6662A).

(55) IRM 8.17.4.20.2: New section added discussing the civil fraud IRC 6663 penalty.

(56) IRM 8.17.4.20.2.1: New section added discussing the IRC 6663 penalty when joint returns filed.

(57) IRM 8.17.4.20.2.2: New section added discussing procedures for the spouse liable for the fraud penalty.

(58) IRM 8.17.4.20.2.3: New section added discussing procedures for the spouse not liable for the fraud penalty.

(59) IRM 8.17.4.20.3: IRM section discussing the IRC 6662 alternative to IRC 6663 moved here from old IRM 8.17.4.15.1.

(60) IRM 8.17.4.22: Information added discussing where the prepayment/refundable credit adjustments are shown on RGS 5278. References to IRM 8.17.4 sections discussing earned income credit (EIC), additional child tax credit (ACTC) and fuel tax credit procedures deleted, since old IRM sections 8.17.4.19, 8.17.4.20, and 8.17.4.21 have been removed. Procedures for these types of refundable credits included in IRM 8.17.4.22.

(61) IRM 8.17.4.23: References to Compliance's jeopardy assessment letters updated with current letters. Information added to clarify which forms to use. Years in examples updated.

(62) IRM 8.17.4.25: This is former IRM 8.17.4.22 discussing notices of deficiency involving conversion of Form 1120-S to Form 1120. This section has been moved from before the termination assessment IRM section to after it.

(63) IRM 8.17.4.27: Updated accumulated earnings tax section since Letter 572 replaces Exhibit 4.10.13-4 Pattern letter P-572 found in IRM 4.10.13.

(64) IRM 8.17.4.28: This is old IRM 8.17.4.26 section discussing specialized procedures for certain kinds of cases. Section expanded from 7 to 10 subsections. "Separate Notices sent to Joint Filers" moved to IRM 8.17.4.7.

(65) IRM 8.17.4.28.1: Since the TCS usually does not have the administrative file, added information stating that the AO must provide Form 8857 information to the TCS. Added IRM references.

(66) IRM 8.17.4.28.2: Fiduciary relationships section in old IRM 8.17.4.26.7 moved here and combined with deceased taxpayer subsection since a lot of the procedures are the same. Modified and simplified IRM formats.

(67) IRM 8.17.4.28.2.1: Old IRM 8.17.4.26.2 information concerning deceased taxpayers when a joint return was filed has been moved here, Formats updated and simplified.

(68) IRM 8.17.4.28.4: This is from old IRM section 8.17.4.26.4, but the section completely rewritten and expanded to include more discussion and specific procedures for when a notice is issued to only one spouse.

(69) IRM 8.17.4.28.6: New section added with procedures for Form 1042 returns (Tax Required to be Withheld at Source.

(70) IRM 8.17.4.28.7: New section added with procedures for penalty only notice of deficiency.

(71) IRM 8.17.4.28.8: Procedures for notices of deficiency involving open criminal aspects moved here from old IRM 8.17.4.7.1. Information from Table in paragraph (1) and all of paragraph (2) moved here. Added information on Letter 531-C, Notice of Deficiency for Open Criminal Case.

(72) IRM 8.17.4.28.9: Added paragraph (1) stating notice of deficiency procedures are generally not used in TEFRA cases, and removed reference to FSAA.

(73) IRM 8.17.4.28.10: Added new section with information about procedures for cases where there is a open TEFRA proceeding and non-TEFRA issues are adjusted. Added reference to IRM 8.19.4.11 for information on Munro computations. and oversheltered returns.

(74) IRM 8.17.4.29: This section and IRM subsections 8.17.4.29.1 and 8.17.4.29.2 added to discuss procedures when tax returns are not available, including the assertion of the fraud penalty.

(75) IRM 8.17.4.30: New section added with procedures for how the TCS returns the notice to the AO.

(76) IRM 8.17.4.31: This was old IRM 8.17.4.28; paragraphs (3), (4), and (5) contain APS procedures and were deleted - will be moved to IRM 8.20.6 due to the APS IRM reorganization. New paragraph (3) added to include AO procedures when there is no on-site APS unit and the AO sends or delivers a case directly to Counsel and not through APS. Paragraph (4) added which discusses how the AO should complete the APS ACDS Update Form and send to the APS ACDS Update Mailbox.

(77) IRM 8.17.4.31.1: APS procedural information was deleted from paragraph (1), and moved to IRM 8.20.6. Corrections made to paragraph (1) to state that APS sends back files returned from Counsel to the AO, not the ATM or TCS. New paragraphs (2) and (3) added to include AO procedures that may be needed when Counsel sends the file back to the AO without going through APS.

(78) IRM 8.17.4.31.2: APS procedural information was deleted from paragraph (1), and moved to IRM 8.20.6. New paragraphs (2) and (3) added to include AO procedures that may be needed when Counsel sends the file back to the AO without going through APS.

(79) IRM 8.17.4.32: Additional information added to clarify procedures for invalid notices.

(80) IRM 8.17.4.34: Deleted APS information in paragraph (1). Added IRM cites. TEFRA information in paragraph (3) moved to IRM 8.17.4.28.9.

(81) Old IRM 8.17.4.29, Account and Processing Support (APS) Issues Notices of Deficiency, has been deleted and will be moved to IRM 8.20.6 due to the APS IRM reorganization.

(82) Old IRM 8.17.4.31, Updates to ACDS When Notice of Deficiency Issued has been deleted and will be moved to IRM 8.20.6 due to the APS IRM reorganization.

(83) IRM Exhibit 8.17.4-1: Updated all years in the exhibit.

(84) IRM Exhibit 8.17.4-3: Additional explanation of what is meant by "blank forms" is added to the exhibit.

(85) IRM Exhibit 8.17.4-4: New exhibit - Paragraph (6)(b) example from old IRM 8.17.4.15.3.1 moved to become new exhibit. Remaining exhibits renumbered accordingly.

Effect on Other Documents

This supersedes IRM 8.17.4 dated 10/19/2012.

Audience

Appeals employees who request or prepare statutory notices of deficiency.

Effective Date

(09-27-2013)


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

8.17.4.1  (09-27-2013)
Introduction to Notices of Deficiency Prepared in Appeals

  1. 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. See IRC 6212.

  2. This section covers the procedures followed when Appeals must issue a notice of deficiency. It details what Appeals employees must do when requesting and preparing a notice of deficiency.

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

  4. A notice of deficiency, also called a "statutory notice of deficiency" , "statutory notice" or "90 Day Letter" , is a legal notice in which the Commissioner determines the taxpayer's tax deficiency. The notice of deficiency is a legal determination that is presumptively correct and consists of:

    1. A letter explaining the purpose of the notice, the tax period(s) involved, the amount of the deficiency and the taxpayer’s options,

    2. An agreement form (waiver) to allow the taxpayer to agree to the additional tax liability,

    3. A statement showing the computation of the deficiency and

    4. An explanation of the adjustments.

  5. The purpose of a notice of deficiency is:

    • To ensure the taxpayer is formally notified of the IRS's intention to assess a tax deficiency, and

    • To inform the taxpayer of the opportunity and right to petition the Tax Court to dispute the proposed adjustments.

  6. 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.

  7. 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 for Cases in Bankruptcy - IRM 8.7.6.

    • Notice of Claim Disallowance - IRM 8.7.7.

    • Appeals TEGE Cases - IRM 8.7.8.

    • Appeals Excise Tax Cases - IRM 8.7.10.

    • Notices Of Deficiency concerning "Innocent Spouse" relief under Section 6015 - IRM 25.15.12, Relief From Joint and Several Liability, Appeals Procedures.

    • Notices Of Determination Concerning Worker Classification Under Section 7436 - IRM 8.7.16, Appeals Employment Tax Procedures.

  8. If it is concluded that a statutory notice of deficiency is to be issued, the Appeals Officer or Appeals Team Case Leader advises 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  (09-27-2013)
Information to Know Before Preparing Notices of Deficiency

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

  2. References to a penalty or penalties within this IRM section also apply to additions to tax.

  3. A taxpayer must be formally notified by certified or registered mail when the Internal Revenue Service issues a notice of deficiency.

  4. A notice of deficiency is not issued for employment tax cases (including cases with Form 945 backup withholding adjustments). Unagreed employment tax cases may require immediate assessment of the tax, issuance of a Notice of Determination of Worker Classification under IRC 7436, Proceedings for Determination of Employment Status, or transfer to Counsel for trial preparation, depending on the type of case. See IRM 8.7.16, Appeals Employment Tax Procedures, for further information.

  5. The Appeals Tax Computation Specialist (TCS) is responsible for the preparation of the notice of deficiency 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.

  6. Generally, the AO provides the TCS with the explanatory paragraphs to be used in the notice. However in some cases, the AO may ask the TCS to prepare explanatory paragraphs when the available standard paragraphs (discussed in IRM 8.17.4.13.1) are appropriate. In such cases the AO must provide the TCS with a copy of the Appeals Case Memo (ACM). For guidelines on preparing explanatory paragraphs see IRM 8.17.4.13.

  7. 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 8.17.4.31.

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

  9. Original returns versus copies:

    1. 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. See IRM 8.17.4.29.1 for further discussion of original returns when returns are filed electronically.

    2. However, if a statute is imminent, it may be necessary to issue a notice of deficiency based on copies of returns or a BRTVU/RTVUE. See IRM 8.17.4.29.1 for more information.

      Note:

      Generally an imminent statute is one in which there are fewer than 180 days remaining.

8.17.4.3  (09-27-2013)
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, the AO requests 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 (IRC 31 and IRC 6211(b)(1)).

    3. Certain credits for tax withheld at source (IRC 33 and IRC 6211(b)(1)).

    4. FICA tax on tip income and penalty under IRC 6652(b). (See IRM 8.17.4.26. This section includes the informational notice for tip income cases that can be mailed to the taxpayer with the notice of deficiency.)

    5. Employee share of FICA taxes (IRC 3101).

    6. IRC 6654 and IRC 6655 penalties, except where no return was filed.

      Note:

      If no return was filed for the taxable year, include any applicable penalties under IRC 6654 and IRC 6655 in the notice. If a return was filed, then the AO requests that APS 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.

    7. IRC 6651 addition (including the fraudulent failure to file 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 4.8.9.16.2.3, Fraudulent Failure to File (FFTF) Penalty, and IRM 25.1.7.7, Assessment Procedure for the Fraudulent Failure to File (FFTF) Penalty, for further information.)

    8. Household employment taxes.

    9. 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, the AO requests that APS assess any partial agreements for increases in tax. The assessment should be made before requesting preparation of the notice of deficiency if the statute is not imminent.

  3. Full payment by the taxpayer is considered an agreement to the deficiency (see Rev. Proc. 2005-18, 2005-1 C.B. 798, section 4.03).

    1. Rev. Proc. 2005-18, section 4.03: "Treatment of an undesignated remittance in the full amount of a proposed liability - If an undesignated remittance is made in the full amount of a proposed liability, such as an amount proposed in a revenue agent's or examiner's report, the undesignated remittance will be treated as a payment of tax, a notice of deficiency will not be mailed and the taxpayer will not have the right to petition the Tax Court for a redetermination of the deficiency" .

    2. However, remittances designated as a cash bond or an IRC 6603 deposit under Rev. Proc. 2005-18 do not result in an agreed case. Cash bond deposits and IRC 6603 deposits are not agreed payments because they are made to stop the accrual of interest. When an examination is complete, if a taxpayer who made a deposit does not execute a waiver of restrictions on assessment and collection, the Service will mail the taxpayer a notice of deficiency. See Rev. Proc. 2005-18, section 4.02(2). If the taxpayer executes a waiver or otherwise agrees to the full amount of the deficiency, the tax will be assessed and no notice of deficiency will be sent to the taxpayer. See Rev. Proc. 2005-18, section 4.02(1).

8.17.4.4  (09-27-2013)
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. If access to APGolf is not available, complete the Form 3608 available on the TCS web site in the "AO & ATM resources" section.

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

  4. If there are supplemental instructions to the Schedule of Adjustments, complete Box 12 of Form 3608.

  5. Send the Form 3608 and the Schedule of Adjustments to the designated Appeals Tax Computation Team Manager (ATCTM) per the TCS assignment grid. The grid is located on the TCS web site under "AO & ATM resources" . Use secure encrypted e-mail to send all requests.

    Note:

    Include the Schedule of Adjustments even if sustaining the Compliance report (RAR) in full for the statutory notice of deficiency. This is needed for case grading and assignment to a TCS.

  6. The AO must provide the TCS with the following Information:

    1. The explanatory paragraphs to be used in the statutory notice, or

    2. A copy of the Appeals Case Memo (ACM) and request that the TCS prepare the explanatory paragraphs when the available standard paragraphs (discussed in IRM 8.17.4.13.1) are appropriate. (See IRM 8.17.4.13, paragraph (2).)

    3. The Power of Attorney (POA) information if the information in ACDS is not current. Also, the AO must notify the TCS if the taxpayers have different POA's, or a POA is applicable for only one spouse.

      Note:

      Since the TCS usually does not have the complete administrative file, the TCS will generally use the POA information shown in ACDS when preparing the notice of deficiency. However, since the AO will be aware of the most current POA information for the taxpayers, it is the responsibility of the AO to provide this information to the TCS, and to ensure that the POA information on the notice of deficiency prepared by TCS is accurate.

    4. The latest address of the taxpayer if the information in ACDS is not current or the AO is aware of a new address.

    5. Documents needed to prepare the notice of deficiency - such as return information, amended returns, partial agreements, information from RAR, etc.

  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, Appeals Managers Procedures.

  8. The ATCTM notifies the requester which TCS will work the case. The AO transmits the documents needed to prepare the notice of deficiency to the TCS as soon as possible (within 5 business days).

  9. If the TCS does not receive the documents needed to prepare the notice of deficiency within 5 business days from the date of assignment, the ATCTM has the discretion to close the case in ACDS as a premature request. The ATCTM should e-mail the requestor when closing the case in ACDS, using encrypted e-mail.

  10. If the notice of deficiency must be prepared immediately, the AO should notify the ATCTM that the request is an expedite in the e-mail subject line. The AO can follow up with the ATCTM to find out who is assigned the case. Then the AO should immediately deliver the documents to the TCS either by fax, secure e-mail, or walk the documents to the TCS if the TCS is local.

  11. The AO can locate the TCS to whom a case is assigned via ACDS (use the "Search" function, then select the TCS button at the bottom of the screen).

8.17.4.5  (09-27-2013)
General Instructions for TCS Preparing a Notice of Deficiency

  1. Review and perform necessary technical/computational work on the case file and order current transcripts.

  2. Prepare the notice in accordance with procedures outlined here.

  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 of IRM 1.2.17, Policy Statements for Appeals Activities, and IRM 8.6.1.6, 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 the kind of tax, the tax years involved, amount of the deficiency, and the additions to the tax (penalties) in the notice. An interest amount is not shown in the notice.

  7. IRM 4.8.9, Statutory Notices of Deficiency, may also be used as a reference.

8.17.4.6  (09-27-2013)
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.

  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.

8.17.4.7  (09-27-2013)
Separate Notices Sent to Joint Filers

  1. Any notice relating to a joint return must be sent separately to each individual filing the joint return. This means that each spouse must be mailed a copy of the notice (even if they have the same address).

  2. Duplicate original notices are NOT required if both spouses are at the same address. The original notice may be sent to one spouse and a copy of the signed notice of deficiency sent to the other spouse.

    1. The name and address on the notice will be the joint name and the correct address for the taxpayers.

    2. The original signed notice will be mailed to one spouse in one envelope, and a copy of the signed notice will be mailed to the other spouse in a separate envelope. Making a copy of the notice is the responsibility of APS.

    3. The mailing envelope for each notice will be addressed solely to one spouse. (For example, one envelope would be addressed to John Smith while the other is addressed to Mary Smith.) Addressing the envelopes is the responsibility of APS.

    4. Both notices should be sent by certified mail if the notice is mailed within the United States and registered mail if mailed outside the United States.

8.17.4.8  (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 the 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.

8.17.4.8.1  (09-27-2013)
Determining the Appropriate Letter to Use

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

    If the case involves... Then use... Other Information
    Individualincome tax liability. Letter 894(cg). Letter 894(cg) may also be used for non affiliated corporate income tax liability and termination assessment cases.
    Corporate income tax liability Letter 901(cg). 1) May be used for corporate income tax liability.
    2) Generally used for affiliated corporations since a special opening paragraph can be selected for these entities in APGolf. See IRM 8.17.4.28.5.
    3) May also be used for other cases such as: estate or gift tax cases, jeopardy assessment cases, certain excise tax cases, and withholding at the source cases.
    Trust or decedent's estate (Form 1041) Letter 894(cg) or Letter 901(cg) Generally Letter 894(cg) is used for Form 1041 notices, but Letter 901(cg) may also be used.
    Transferee liability Letter 3424(cg) See IRM 8.7.5, Transferee and Transferor Liabilities.
    Bankruptcy Letter 1384(SC) See IRM 8.7.6, Appeals Bankruptcy Cases, or IRM 4.27, Bankruptcy, for more information.
    Excise tax Letter 531-B or Letter 901(cg) See IRM 8.7.10.4, Unagreed Excise Tax Cases, for procedures.
    Open criminal aspects Modified Letter 894(cg) or Letter 531-C See IRM 8.17.4.28.8 for procedures.

8.17.4.8.2  (09-27-2013)
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 deficiency notice must advise taxpayers of their right to contact the local office of the Taxpayer Advocate and must provide the location and telephone number of the appropriate office.

    1. Letter 894(cg) and Letter 901(cg) inform the taxpayer that the Taxpayer Advocate can be contacted by calling the national Taxpayer Advocate phone number, or contacting the Taxpayer Advocate for the IRS office that issued the notice of deficiency.

    2. The APGolf letters will fill in the phone number and address information for the local Taxpayer Advocate office closest to the AO's office. Check to make sure this information is correct.

8.17.4.8.3  (09-27-2013)
General Guidelines for Preparing the Letter

  1. Include the type of tax in the notice of deficiency letter, if the letter has an appropriate field. 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" .

  2. If the notice of deficiency letter includes a field for "Form Number" , complete it with the return form number - 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.

8.17.4.8.4  (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.

8.17.4.8.5  (09-27-2013)
IRS Addressing Standards for Notice Letter

  1. It is recommended that notice letters use the guidelines outlined in the IRS Addressing Standards ( Document 12019) when preparing the notice letter:

    • Capitalize ALL letters in the name and address.

    • 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 the most complete Zip Code which is a 9 digit number consisting of 5 digits, a hyphen, and 4 digits, 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/.

8.17.4.8.6  (09-27-2013)
Format to Use for Taxpayer's Name

  1. Carefully check the name of the taxpayer.

  2. For corporations, 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: "ABC Corporation, formerly known as XYZ Corporation."

  3. For married persons filing joint returns:

    1. If both spouses use the same last name, the notice letter should reflect either "John and Mary Doe" or "John Doe and Mary Doe."

    2. If the spouses use different last names, show both names on the notice letter as "John Doe and Mary Smith" .

    3. If the spouse remarries, the notice letter should reflect a new name, such as: "John Doe and Mary Smith, formerly known as Mary Doe" . The name can also be shown as "John Doe and Mary Smith (formerly known as Doe)"

    4. See IRM 8.17.4.28.2.1 for information on how to prepare the notice of deficiency if one spouse has died since the joint return was filed.

    5. See IRM 8.17.4.28.3 for information on how to prepare the notice of deficiency for divorced or separated taxpayers.

    6. See IRM 8.17.4.28.4 if a joint return was filed and a notice of deficiency needs to be issued to only one spouse.

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

8.17.4.8.7  (09-27-2013)
Taxpayer's Last Known Address

  1. The mailing address for a notice of deficiency must be the taxpayer’s last known address.

  2. 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. Section 301.6212-2(a) of the Treasury Regulations 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.

  3. 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. See IRM 8.17.4.32 for additional information on invalid notices.

  4. Use only one address on the letter, Form 4089 (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. See IRM 8.17.4.6 for information about duplicate original notices.

  5. 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.

  6. 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. If Form 2848 is in the file, 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.

      Note:

      Since the notice of deficiency request sent to the TCS often includes no administrative file (or an incomplete administrative file), it is the responsibility of the Appeals Officer to review the administrative file and notify the TCS of any pertinent information concerning the last known address of the taxpayer. It is also the responsibility of the Appeals Officer to review the statutory notice of deficiency prepared by the TCS to ensure that the address is correct.

  7. 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 IRS 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.

8.17.4.8.7.1  (09-27-2013)
Incarcerated Taxpayers

  1. For information on addressing Notices of Deficiency to incarcerated taxpayers, see IRM 4.8.9.8.2.8, Incarcerated Taxpayers.

  2. When referring to IRM 4.8.9.8.2.8, Appeals employees should substitute "Letter 894 (cg), Notice of Deficiency" when "Letter 531, Notice of Deficiency" is cited in the text.

8.17.4.8.7.2  (09-27-2013)
APO Addresses

  1. Deficiency notices sent to Army Post Office (APO) / Fleet Post Office (FPO) addresses must be mailed to such addresses by registered mail.

  2. For information on addressing Notices of Deficiency to APO addresses, see IRM 4.8.9.8.2.9,APO Addresses.

8.17.4.8.8  (09-27-2013)
Power of Attorney in Notices

  1. If a taxpayer is represented by a duly authorized Power of Attorney (POA) and the Form 2848 is appropriately annotated, a copy of the notice mailed to the taxpayer(s) will be sent to the representative by regular mail.

  2. Letter 937, Transmittal Letter For Power of Attorney, is used as the cover letter to transmit the copy of the notice. Generally the TCS will prepare the Letter 937 when preparing the notice, but local procedures may vary.

  3. Effective with the March 2004 revision, Form 2848 no longer provides the taxpayer an option to have the representative receive the original of all correspondence (including notices of deficiency).

  4. Effective with the October 2011 revision, Form 2848 requires an affirmative action by the taxpayer to check a box to indicate that a copy of notices and other written communications will be sent to the representative. The taxpayer may elect to have copies of notices and other written communications routinely sent to up to two representatives listed in section 2 of the Form 2848.

  5. If the power of attorney does not cover all years in the notice of deficiency, do not send a copy of the notice to the representative. It is recommended that the AO obtain a new Power of Attorney for any years not covered prior to issuing a notice of deficiency.

  6. If a new Power of Attorney is not obtained, do not send a copy of the notice to the representative. Instead a copy of the notice of deficiency should be sent to the taxpayer with a separate letter explaining why the copy cannot be sent directly to the representative. Letter 4368, Statutory Notice Not Sent to Representative - Tax Periods Not Specified, may be used for this purpose.

    1. Letter 4368 is available as a fillable Adobe Acrobat form on the Electronic Publishing Catalog website.

    2. The AO may prepare the Letter 4368, or request that the TCS prepare the letter.

  7. The AO should use Command Code CFINK to verify the name and address of the Power of Attorney on the Centralized Authorization File (CAF) database. The AO must provide the TCS with the most current POA information when requesting preparation of the notice of deficiency.

8.17.4.8.9  (09-27-2013)
Unenrolled Return Preparer

  1. Unenrolled return preparers and registered tax return preparers are not permitted to represent taxpayers before Appeals. Therefore a copy of a notice of deficiency will not be sent to an unenrolled return preparer or a registered tax return preparer.

    • Unenrolled return preparers and registered tax return preparers are authorized to represent taxpayers only before revenue agents, customer service representatives or similar IRS employees and only in connection with an examination of the taxable year or period covered by a return prepared and signed by the unenrolled return preparer or registered tax return preparer. (See Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service.)

  2. Letter 4369, Statutory Notice Not Sent to Representative - Limitations to Practice Before the IRS may be used to notify the taxpayer that a copy of the notice was not sent to the unenrolled return preparer or registered tax return preparer.

    • Letter 4369 is available as a fillable Adobe Acrobat form on the Electronic Publishing Catalog website.

    • The AO may prepare the Letter 4369, or request that the TCS prepare the letter.

8.17.4.8.10  (09-27-2013)
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, (SSN, ITIN, or EIN), as appropriate in the upper right portion of the letter.

    Note:

    ITIN is the "Individual Taxpayer Identification Number" .

8.17.4.8.11  (09-27-2013)
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. See Exhibit 8.17.4-1.

8.17.4.8.12  (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" .

8.17.4.8.13  (09-27-2013)
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, (or Form 4089-A), the tax computation, the explanation of adjustments, and any attachments, you may 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 "Audit Statement" or "settlement computation" as an enclosure since an Audit Statement or settlement computation is NOT included as part of the notice of deficiency.

8.17.4.9  (09-27-2013)
Waiver (Agreement) Forms for Notices of Deficiency

  1. Form 4089, Notice of Deficiency-Waiver, includes a preprinted agreement form and may be used as the agreement form for most cases. See IRM 8.17.4.11 for information on how to prepare Form 4089.

  2. If Form 4089-A, Notice of Deficiency-Statement, is used in the notice, also prepare Form 870 for inclusion with the notice.

  3. IRM 8.17.4.11 explains how to prepare Form 4089 and Form 4089-A, including discussion of additional information that may be required on the forms. If Form 4089-A and Form 870 are prepared, additional information is only required to be shown on Form 870 when there is an adjustment to prepayment credits. See discussion in paragraph (4) below.

  4. If Form 870 is prepared and there is an adjustment to prepayment credits such as withholding on line 22 of Form 5278:

    1. The amount to include on Form 870 is the full statutory deficiency (from line 21 of Form 5278) before any adjustments to the prepayment credits.

    2. Then, insert a statement similar to the following on Form 870 showing net additional tax due or net overpayment resulting after a proposed deficiency is reduced by understatement of prepayment credits:

    Statutory deficiency $13,000.00
    Prepayment credit adjustment (Understatement) 1,000.00
    Net Additional Tax $12,000.00
    =========

    Note:

    The above procedure only applies to refundable credit adjustments not included in the statutory deficiency such as withholding credits. See IRM 8.17.5.17.1, Adjustments to Refundable Credits Not Included in the Statutory Deficiency, for a list of these credits. The above format is not used for adjustments to refundable credits such as earned income credit, additional child tax credit, first time home buyer credit, etc. (credits shown on line 20 of Form 5278), since the statutory deficiency amount includes these adjustments.

8.17.4.10  (09-27-2013)
Parts of the Notice of Deficiency Statement

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

    1. Face sheet (Form 4089 or Form 4089-A );

    2. Adjustment to income, taxable gifts, etc.; and computation of tax (Form 5278 );

    3. Explanation of adjustments; and

    4. Schedules and exhibits.

8.17.4.11  (09-27-2013)
Face Sheet (Form 4089/4089A)

  1. Form 4089, Notice of Deficiency-Waiver is generally used as the first page of the notice of deficiency statement, but Form 4089-A, Notice of Deficiency-Statement may also be used.

    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. If Form 4089-A is used in the notice instead of Form 4089, also prepare Form 870 for inclusion with the notice.

    3. See IRM 8.17.4.23 for discussion of Form 4089/4089-A procedures for jeopardy assessment cases.

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

8.17.4.11.1  (09-27-2013)
Name and Address of Taxpayer

  1. Show the name and address of the taxpayer on Form 4089 (or Form 4089-A), exactly as it appears in the letter. There is an exception when preparing notices for transferee cases. See IRM 8.7.5, Transferee and Transferor Liabilities.

8.17.4.11.2  (09-27-2013)
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.

8.17.4.11.3  (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.

8.17.4.11.4  (09-27-2013)
Prepayment Credit (Refundable Credit) Adjustments on Face Sheet

  1. Tax Court generally does not have jurisdiction over prepayment/refundable credit adjustments that are not part of the statutory deficiency per IRC 6211(b)(4). The most common example of this type of credit is withholding credits. Adjustments to this type of credit may require a special format on the face sheet (Form 4089 or Form 4089-A) depending on whether the credit is understated or overstated.

    1. "Understated" means the IRS has determined that the credit amount should be increased.

    2. "Overstated" means the IRS has determined that the credit amount should be decreased.

  2. Refundable credits listed in IRC 6211(b)(4) such as earned income credit, first time homebuyer credit, etc. are included in the statutory deficiency, and so Tax Court does have jurisdiction over these refundable credit adjustments. Special formats on the face sheet are not required for adjustments to these credits.

8.17.4.11.4.1  (09-27-2013)
Understated Prepayment Credits (Non IRC 6211(b)(4) credits)

  1. Tax Court generally does not have jurisdiction over prepayment credit adjustments that aren't included in the statutory deficiency. These credit adjustments are found on line 22 of Form 5278. The most common example of this type of credit is withholding credits. See IRM 8.17.5.17.1, Adjustments to Refundable Credits Not Included in the Statutory Deficiency, for a list of these prepayment credits.

  2. If the Tax Court does not have jurisdiction and the credit is understated, the adjustment to increase the credit is not made until the final disposition of the case. Insert the following explanation on the face sheet in the following format. (Show the explanatory paragraph on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms).

    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 must show the full statutory deficiency before adjustments to the prepayment credits. (The full statutory deficiency is the amount shown on line 21 of Form 5278.) So in the above example, $13,563.00 will be reflected on the letter and waiver forms.

8.17.4.11.4.2  (09-27-2013)
Overstated Prepayment Credits (Non IRC 6211(b)(4) credits)

  1. Tax Court generally does not have jurisdiction over prepayment credit adjustments that aren't included in the statutory deficiency. These credit adjustments are found on line 22 of Form 5278. The most common example of this type of credit is withholding credits. See IRM 8.17.5.17.1, Adjustments to Refundable Credits Not Included in the Statutory Deficiency, for a list of these prepayment credits.

  2. 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. The AO must request that APS make this adjustment before issuing the notice of deficiency.

    1. Do not reflect the prepayment credit adjustment on Form 4089 or Form 4089-A since under IRC 6201(a)(3) these adjustments are not subject to deficiency procedures.

    2. Since the adjustment to decrease the credits should be made prior to issuing the notice of deficiency, the adjustment is not reflected in the notice of deficiency. Therefore, do not show the prepayment credit adjustment on line 22 of the Form 5278 included in the notice.

8.17.4.11.4.3  (09-27-2013)
Refundable Credits (IRC 6211(b)(4) credits)

  1. Refundable credits such as earned income credit, the refundable additional child tax credit, first time homebuyer credit, etc. are credits that the Tax Court does have jurisdiction over since these credits are included in the definition of a deficiency per IRC 6211(b)(4). See IRM 8.17.5.17.2, Adjustments to Refundable Credits Included in the Statutory Deficiency, for a list of IRC 6211(b)(4) refundable credits.

  2. Any adjustments to these refundable credits are included on line 20 of Form 5278 and are not shown on Form 4089 or Form 4089-A.

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

8.17.4.11.5  (09-27-2013)
Overpayment Claimed in Deficiency Year not Refunded (Frozen Refund)

  1. Insert an explanation on the face sheet if an overpayment claimed on the return has not been refunded. (The term "frozen refund" is often used to refer to a claimed overpayment that has not been refunded.)

  2. The explanation can be shown on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms. 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
    ========

  3. The statutory deficiency is the amount shown on line 21 of Form 5278. This amount ($5,000.00 in the above example) is used on Form 4089 (or Form 4089-A) and the notice of deficiency letter as the tax deficiency, not the underpayment amount ($3,800.00 in the above example).

8.17.4.11.6  (09-27-2013)
Unassessed Payment

  1. Include the following paragraph on the face sheet (Form 4089, Form 4089-A, or on a continuation sheet attached to these forms) 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."

  2. The above paragraph is not needed for the following types of payments:

    1. A credit balance on the account that is not due to a partial payment.

    2. A cash bond payment.

    3. An IRC 6603 deposit.

    4. A designated payment of interest (since interest amounts aren't included in the notice of deficiency).

8.17.4.11.7  (09-27-2013)
Interest Statements on Face Sheet

  1. Include the following interest statement on Form 4089 or Form 4089-A:

    "Interest, as provided by law, will be charged on the unpaid liability until it is paid in full."

  2. The Form 4089 and Form 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 8.17.4.21.

8.17.4.11.7.1  (09-27-2013)
Explaining IRC 6621(c)

  1. If IRC 6621(c) applies, include an explanatory paragraph after the summary of tax liability on the face sheet. As of January 1, 1991, IRC 6621(c) refers to interest on large corporate underpayments.

  2. See suggested language for explanatory paragraph below:

    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 ____.

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

8.17.4.11.7.2  (09-27-2013)
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, Form 4089-A, or on a continuation sheet attached to these forms.

  3. See suggested language for explanatory paragraph below:

    It is determined that IRC section 6404(g) applies for the tax year ended ____, and notice was provided on ____(enter date of notice).

8.17.4.11.7.3  (09-27-2013)
Restricted Interest

  1. When Form 2285 is prepared and restricted interest applies, include the following suggested language on the face sheet:

    "Restricted Interest applies for __(enter tax year)" .

  2. The restricted interest code sections are no longer required.

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

8.17.4.11.8  (09-27-2013)
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. Special language may be required on the face sheet, as discussed in paragraph (3) below.

    1. It is the responsibility of the TCS to insert the proper paragraph in the statement.

    2. However, the AO must provide the TCS with the reason that issues raised in the claim were adjusted or not allowed, so that the correct paragraph can be selected and properly completed.

  3. Use the following paragraphs on the face sheet whenever applicable. (Show the explanatory paragraphs on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms.)

    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. All Issues in claim(s) 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 and taken into account in the computation of tax in the notice of deficiency. However, other adjustments result in a deficiency. "

    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 conceded:

      "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."

8.17.4.11.9  (09-27-2013)
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)."

  2. The AO must notify the TCS that additional issues raised by the taxpayer were not allowed, and provide all required information so that the above paragraph can be completed and included on the face sheet.

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

8.17.4.11.10  (09-27-2013)
Power of Attorney Annotation on Face Sheet

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

  2. If two representatives are authorized to receive copies, list both representatives on Form 4089 (or Form 4089-A). Generally all the POA's are listed on one Form 4089 or Form 4089-A. If additional space is needed, a continuation sheet may be used.

  3. Effective with the October 2011 revision, Form 2848 requires that when a joint return is filed, each spouse or former spouse must submit a separate Form 2848. Any listed representative on the Form 2848 is permitted access to the tax information related to the joint tax return, but can only represent the authorizing spouse.

    1. There is no disclosure violation if the Form 2848 POA information of one spouse is included on a Form 4089 (or Form 4089-A) sent to the other spouse.

    2. There is also no disclosure violation if one spouse’s POA receives a Form 4089 (or Form 4089-A) that includes the POA information of the other spouse.

  4. Form 4089 (orForm 4089-A) procedures when spouses submit separate Form 2848's are shown below.

    1. Spouses at the same address - both have the same POA - Follow normal notice procedures and just prepare one Form 4089 (or Form 4089-A) for the joint statutory notice with the POA address listed.

    2. Spouses at the same address - each spouse has different POA - Prepare one Form 4089 (or Form 4089-A), addressed to both spouses. Generally the POA information for each spouse should be entered on the one Form 4089 (or Form 4089-A).

    3. Spouses at the same address - only one spouse has POA - Prepare one Form 4089 (or Form 4089-A), addressed to both spouses Generally the POA information for the one spouse should be entered on the Form 4089 (or Form 4089-A).

    4. Spouses at different addresses - Since duplicate originals are required if the spouses have different addresses, prepare two Form 4089's (or Form 4089-A's). Include the names of both spouses on each Form 4089 (or Form 4089-A). Each Form 4089 (or Form 4089-A)) should include address information for only one spouse. The Form 4089 (or Form 4089-A) addressed to a particular spouse must show the POA information for that spouse.

8.17.4.12  (11-09-2007)
Notice of Deficiency Adjustment and Tax Computation Forms

  1. Use Form 5278 as the notice of deficiency adjustment and tax computation form 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.

8.17.4.12.1  (09-27-2013)
Starting Point for Notice of Deficiency

  1. The starting point for taxable income is usually the return as filed, the latest processed amended return, or an assessed partial agreement.

  2. If the taxpayer did not file a return, Compliance should have followed substitute for return (SFR) procedures. The starting point for taxable income 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.

  3. 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 usually 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.

  4. 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: The starting point for taxable income in the notice of deficiency may be the taxable income from the original return. Usually "Previously agreed adjustments" is entered on line 7 of Form 5278 along with the total of all previously agreed adjustments . (This procedure may need to be modified depending on the computer software program used. For example, if RGS is used and itemized deductions are adjusted, then it may be difficult to follow this procedure and list the total of all previously agreed adjustments.)

  5. If permitted by the computation software used, annotate the starting point regardless of whether it is the original return, a processed amended return, or an assessed partial agreement. Use a format such as "Taxable Income per Amended return," "Taxable Income as Previously Determined," etc.

8.17.4.12.2  (09-27-2013)
Listing Adjustments and Computing Tax

  1. List the adjustments to income on Form 5278. The adjustments 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 such as RGS may not allow the adjustments to follow the sequence and wording used on the return. It is not necessary to change the wording or order of adjustments used by a computer program.

  2. It is recommended that the notice include a computation of the amount shown on line 19 of Form 5278, "Total tax shown on return or as previously adjusted" , if the liability per the return was adjusted.

    1. This can be shown on the bottom of Form 5278 or on an attachment.

    2. See IRM 8.17.2.10, Completing the Adjustment and Tax Computation Schedule, for an illustration of how this can be scheduled.

  3. Rules and guidelines for computing tax set out in IRM 8.17.2, General Settlement and Rule 155 Computations, apply equally to tax computations in notice of deficiency statements.

8.17.4.13  (09-27-2013)
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. 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 ask the TCS to prepare explanatory paragraphs when the available standard paragraphs (discussed in IRM 8.17.4.13.1) are appropriate. If so the AO must provide the TCS with the Appeals Case Memo.

  3. When the TCS prepares the explanatory paragraphs:

    1. The TCS is responsible for the grammar, spelling and sentence structure.

    2. The AO is responsible for reviewing the paragraphs to ensure they are technically accurate before mailing the notice.

  4. Identify each explanation of adjustment in the order shown on the Form 5278 to the extent possible. However, it is not necessary for items to be in order when it is not expedient to change them.

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

  6. Explain each adjustment on a Form 886-A, or on a separate schedule, such as a blank Word or Excel document.

    1. Form 886-A is available on ACDS or in the TCS spreadsheets located on the Technical Support SharePoint site. (The Technical Support SharePoint site is reached by the "Spreadsheets SharePoint" link on the TCS web site. Form 886-A is located in the "General" spreadsheets.)

    2. Use separate exhibits or schedules to support the explanations, whenever appropriate.

  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 (or Form 4089-A), and the Form 5278

  8. 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. See further discussion in paragraphs (9) and (10) below.

  9. 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, and then no explanation of the previously agreed adjustments is required.

  10. 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:

    1. "Previously agreed adjustments" is entered on Form 5278 (or on Form 4549-B, if used) along with the total of the previously agreed adjustments.

      Note:

      This procedure may need to be modified depending on the computer software program used. For example, if RGS is used and itemized deductions are adjusted, then it may be difficult to follow this procedure and list the total of all previously agreed adjustments.

    2. Suggested language for the explanation of adjustments when the administrative file contains the signed waiver form is: "You have previously indicated your agreement to the following adjustments by signing the waiver form on (DATE)."

    3. Another paragraph that may be used for the explanation of adjustments is: "The adjustments listed below were previously agreed and the tax assessed on (DATE)."

    4. The issue and the agreed adjustment amounts should then be listed below the paragraph.

  11. When adjustments to Non-TEFRA partnerships, 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. Also include explanations of adjustments made to the flow through entity, as discussed below.

    1. Include a separate exhibit or schedule with detailed explanations of the adjustments to the flow-through entity. See Exhibit 8.17.4-2 for a suggested format.

    2. In the alternative, Form 4605 or Form 4605-A with explanations can be used as the exhibit providing the explanations of adjustments made to the flow-through entity are sufficiently detailed to allow the taxpayer to understand why the adjustments were made.

8.17.4.13.1  (09-27-2013)
Available Sample Paragraphs

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

  2. RGS paragraphs - RGS may be used to generate paragraphs. TCS's may use the RGS paragraphs, when appropriate, in the statutory notice. If the RGS paragraphs are used, care should be taken to make certain that the paragraphs accurately and clearly explain the adjustments.

    1. The Form 886-A paragraph schedule generated by RGS may be used in the statutory notice. No modification of this schedule is needed for any sort of Appeals format. (So no modification is needed to add wording such as "It is determined" , "Accordingly taxable income is increased/decreased" , etc.)

    2. The RGS paragraphs may also be found in IRM 4.10.10, Standard Paragraphs and Explanation of Adjustments. See IRM 4.10.10-1, Index to Standard Explanations and IRM 4.10.10-2, Standard Explanations. These paragraphs have been approved by Chief Counsel and most of them may be used when preparing statutory notices.

    3. The RGS paragraphs may also be copied to another schedule (such as a Form 886-A, or a blank Word or Excel document).

      Caution:

      Be careful when using the paragraphs shown in the RAR, since some paragraphs may not be suitable for statutory notices.

  3. Appeals paragraphs:

    1. TCS web site: Paragraphs are available on the TCS web site. Click on the "Procedures and Resources" link on the TCS web site, and then see the "Statutory Notice Paragraphs" folder which contains sample explanatory paragraphs.

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

8.17.4.13.2  (09-27-2013)
Sentence Structure and Content

  1. Generally, the present tense is used 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.

    1. Some of the RGS paragraphs use phrases such as "From records and information available, we determined" , or "From records and information available, it has been determined" . It is acceptable to use this wording in the paragraphs.

  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 may be 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. 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. If the AO wants the depreciation computations included in the notice, the AO must provide information so that the TCS can prepare the computations.

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

    5. Indirect Method: An exhibit generally is included to show the computation. The AO must provide information so that the TCS can prepare the exhibit. IRM 4.10.4, Examination of Income, has detailed information on indirect methods. The following exhibits have sample formats:

      • Bank deposits method: IRM 4.10.4-9, The Bank Deposits and Cash Expenditures Method: Example of Computation of Gross Receipts.

      • Source and application of funds method: IRM 4.10.4-10, Source and Application of Funds Method: Example of Computation for Cash and Accrual Based Taxpayer.

      • Net worth method: IRM 9.5.9-1, Net Worth Statement.

  8. State the taxable year involved in each explanatory paragraph, except as discussed below:

    1. It is not necessary to state the taxable year if only one year is involved in the statutory notice.

    2. If the RGS generated Form 886-A paragraph schedule is used, the format includes a header for each paragraph where the year(s) is listed. Therefore, it is not necessary to also include the year in the explanatory paragraph.

  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" , "See Schedule 3" , "See attached schedule" , etc.

8.17.4.13.3  (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."

8.17.4.13.4  (09-27-2013)
Explanatory Paragraphs for Additions to Tax or Penalties

  1. Include explanatory paragraphs for the additions to tax or penalties in the statutory notice of deficiency. See IRM 8.17.4.13.1 for available sample paragraphs.

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

    Reminder:

    In addition to explanatory paragraphs, include a computation of the penalty/addition to tax in the statutory notice.

  3. Generally the RGS penalty schedules or the TCS Excel penalty spreadsheets on the Technical Support SharePoint site are used for the statutory notice:

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

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

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

8.17.4.14  (09-27-2013)
Tentative Allowances and Other Carryback Claims in Notice of Deficiency Statement

  1. This section discusses cases where a notice of deficiency is being prepared, and the taxpayer claimed a tentative allowance on Form 1045 (individual) or Form 1139 (corporation), or a carryback claim on a Form 1040X (individual) or a Form 1120X (corporation), for one or more of the years included in the notice of deficiency. These procedures apply when the tentative allowance or carryback claim has been processed and allowed.

  2. The procedures for Form 1045/1139 and Form 1040X/1120X differ slightly:

    1. A tentative allowance on Form 1045/1139 may be ignored for purposes of preparing a notice of deficiency.

    2. A claim for credit or refund on Form 1040X/1120X may not be ignored in a notice of deficiency.

  3. The following briefly describes Form 1045/1139:

    1. It is used to apply for a quick tax refund resulting from the carryback of a net operating loss ("NOL" ), unused credit, a net IRC 1256 contracts loss, or claim of right adjustment under IRC 1342(b)(1). It is generally referred to as a tentative allowance or a tentative carryback.

    2. It must be filed within one year after the end of the year in which an NOL, unused credit, a net IRC 1256 contracts loss, or claim of right adjustment arose.

    3. Generally the application is processed within 90 days. If the taxpayer's application on Form 1045 or Form 1139 is not allowed by the IRS during the initial processing, the taxpayer can't file suit in any court since the Form 1045/1139 is not treated as a claim for credit or refund.

  4. The following briefly describes Form 1040X/1120X:

    1. It is an amended return used to file a regular claim for credit or refund before the limitation period expires.

    2. Generally, an amended return must be filed no later than 3 years after the due date of the return for the applicable tax year or two years after the tax was paid, whichever is later.

    3. It is not required to be processed within 90 days. However, if it is not processed within 6 months, the taxpayer can file suit in court.

  5. Prepare restricted interest Form 2285 when tentative allowances and other carryback claims are involved. See IRM 8.17.6.4, Preparation of Form 2285. for more information.


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