Campus classification is responsible for identifying, selecting, and delivering returns to campus Correspondence Exam (CE), SB/SE, Large Business & International (LB&I), Federal, State, & Local Governments (FSLG), and Employment Tax (ET) field exam. The returns can come from a variety of sources. This IRM addresses case identification, classification, and delivery of the returns for examination.

IRM 1.1.16.3.5.1.5, Campus Exam and Field Support.

IRM 1.2.1.5.10, Policy Statement 4-21, Selection of returns for examination.

IRM 1.2.1.5.7, Policy Statement 4-9, Highest Integrity Expected.

IRM 1.2.1.2.35, Policy Statement 1-236, Fairness and Integrity in Enforcement Selection.

IRM 1.2.1.5.22, Policy Statement 4-76, Disallowed claims may be reconsidered on the merits.

IRM 1.2.1.5.23, Policy Statement 4-77, Claims may be allowed without examination.

IRM 1.2.1.5.31, Policy Statement 4-103, Abatement claims considered only in exceptional circumstances.

Director, Examination Field and Campus Policy is responsible for leading the development and delivery of policy and guidance that impacts SB/SE taxpayers and SB/SE Campus and Field examination processes.

Campus Exam and Field Support, which is under the Director, Exam - Field and Campus Policy, is the group responsible for providing Servicewide policy guidance on compliance processes that relate to campus examination classification operations and support Field Exam and Specialty programs.

The IRS formally adopted a Taxpayer Bill of Rights in June 2014, which provides the nation’s taxpayers with a better understanding of their rights and helps reinforce the fairness of the tax system. In 2015, Congress charged the Commissioner with ensuring IRS employees are familiar with and act in accord with the taxpayer rights as afforded by the IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights.

Program Reports: The following reports may be used to monitor classification assigned inventory.

The following table lists commonly used acronyms and their definitions used throughout this IRM.

National Office Tax Compliance Officer (TCO) and Revenue Agent (RA) Classification Guidelines http://mysbse.web.irs.gov/exam/tip/classification/default.aspx.

IRM 21.5.3-2, Examination Criteria (CAT A)- General.

IRM 21.5.3-3, Examination Criteria (CAT A)- Credits.

IRM 21.5.3-4, First-Time Homebuyer Credit-Additional CAT A Criteria.

IRM 21.8.1.2.10, Examination Criteria CAT-A International.

IRM 21.8.2.2.12, Examination Criteria.

IRM 21.5.2.4.23.6, Discriminant Index Function (DIF) SCORE or Classification Send Return(s) to Examination for Review.

IRM 4.19.15 ,Discretionary Programs.

IRM 4.19.14, Liability Determination, Refundable Credits Strategy.

IRM 25.23, Identity Protection and Victim Assistance.

IRM 21.7.4.4.2.9, Form 1065 and 1065X, Amended Return, Administrative Adjustment Request (AAR) and Bipartisan Budget Act (BBA).

Once you determine that the return will be selected, decide if the examination should be conducted by a:

This determination is based upon:

Do not exclude substantial issues to convert what would be a Revenue Agent examination to a Tax Auditor examination.

Do not exclude substantial items from the checksheet to convert what might be an interview examination to a correspondence examination.

The number of issues, standing alone, do not determine whether or not the return is to be examined by a Revenue Agent or a Tax Auditor.

Examples of items which generally cause the return to be excluded from correspondence examination:

Training Returns—Selected returns meeting training criteria are identified during each classification detail.

Single issues should generally not be examined. Experience has shown that when other questionable items are not present on the return, these examinations frequently result in insignificant or no tax change. Corporate returns with Activity Code 219 or higher may be classified for single issues for LB&I Remote Examinations.

Considerations which should cause a return to be selected for Correspondence Examination:

The following are examples of issues for the specified program areas.

The table below describes which classification area works Filing Status and/or Exemption issues.

The table below describes which classification area works Income Issues.

Adjustment to Income issues are only worked by Small Business/Self Employed (SB/SE) Correspondence Exam. Issues include one half of the self-employment tax and health insurance deduction, Self-employed SEP, SIMPLE, IRA Deductions, Moving expenses, and Alimony paid.

The table below describes which classification area works Itemized Deductions versus Standard Deductions Issues.

The table below describes which classification area works Tax Issues.

The table below describes which classification area works Refundable Credits (Pre-Refund) issues.

The table below describes which classification area works Refundable Credits (Post-Refund) issues.

The table below describes which classification area works Other Credit issues.

Discriminate Function (DIF) and Non-DIF tax returns are selected for examination:

Lower activity code IMF DIF returns are usually classified by the area offices through the Compliance Data Environment (CDE). The table below describes differences between DIF and Non-DIF tax returns.

Some returns are identified as Specials via audit codes placed on the return during processing based on special features on the return. They are normally delivered automatically to the campus Centralized Scheduling & Files (CF&S) teams for field exam. These returns are already established on AIMS at the time they are delivered to exam. See IRM 3.12.2-5, Audit Codes, for audit codes and definitions.

The Discretionary Exam Business Rules (DEBR) contains issue specific filters which automatically select returns with certain compliance issues. Returns are scored by applying a set of business rules in a post refund environment and stores the results in a DB2 relational database for future workload selection.

Returns that bypass the automatic DIF scoring are referred to campus classification when exam criteria is met. See IRM 21.5.2.4.23.6, Discriminant Index Function (DIF) SCORE or CLASSIFICATION Send Return(s) to Examination for Review.

Account Management refers claims meeting "Category A" (CAT A) criteria. See IRM 21.5.3-2, Examination Criteria (CAT A)- General, IRM 21.5.3-3, Examination Criteria (CAT A) Credits, and IRM 21.5.3-4, First-Time Homebuyer Credit - Additional CAT A Criteria.

Automated Substitute for Returns (ASFR) from Collection. ASFR returns and ASFR Reconsiderations meeting SFR Screening Matrix Criteria are referred to classification after the return has been processed and the adjustments posted to IDRS.

The Dependent Database (DDb) is a 'Rules Based' system that examines EITC tax returns and applies a set of rules and SRA Model to determine residency and relationship issues. When inconsistencies are found the return is selected for audit.

For procedures for working IMF audit reconsiderations see IRM 4.13, Audit Reconsideration.

Audit Reconsiderations for BMF are routed through Accounts Management (AM) to BMF Classification at the Cincinnati and Ogden campus for determination

The DIF system is used to evaluate the examination potential of:

Some returns are identified as Specials.

When working DIF returns for the following forms, refer to the applicable Audit Code and Classification IRMs as follows:

The following are returns that do not receive a DIF score.

Identify all returns with international characteristics. See IRM 21.8.1.2.14, International Forms Processing.

SB/SE campus Classification no longer receives original filed International returns to classify.

Campus Classification provides back-end support by reviewing International claims and returns with Exam and Category A criteria. See IRM 21.8.2.2.12, Examination Criteria.

Every foreign corporation that is engaged in trade or business in the United States or is subject to tax under Subtitle A of the Internal Revenue Code must file a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. However, a foreign corporation which at no time during the taxable year is engaged in a trade or business in the United States:

If required to file a return, a foreign corporation that has no gross income for the taxable year is not required to complete the return schedules but:

Form 1120-F returns are filed at the Ogden Campus.

See IRM 21.8.2.2.12, Examination Criteria, for claims and examination referral issues. Amendments to Form 1120-F are forwarded to Ogden and Cincinnati campuses for classification.

Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation Return, is an informational return and is filed by a domestic corporation that has elected to be treated as an IC–DISC and has satisfied the requirements under IRC 992. It is also filed by a domestic corporation that is a former DISC or former IC-DISC. Generally, an IC-DISC is not taxed on its income. Shareholders of an IC-DISC are taxed on its income when the income is actually (or deemed) distributed. See IRM 21.7.4.4.4.11.6, Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation Return for additional information.

An 1120-IC-DISC is required to make an election using Form 4876-A, Election To Be Treated as an Interest Charge DISC in order for it to be treated as an IC-DISC. Form 4876-A must be filed within 90 days after the beginning of the tax year if it is the taxpayer’s first tax year. For any tax year other than the taxpayer’s first tax year, the election must be made during the 90 days preceding the first day of that tax year. If the election is not timely filed, then the corporation must file the appropriate corporate (or other) return and pay income tax.

The Form 4876-A election determination is made by Cincinnati Submission Processing (SP). A data file is kept by Code and Edit during the processing of these forms. For additional information see IRM 3.11.16.38.1, Form 4876-A and Form 1120-IC-DISC Data File.

Generally 1120-IC-DISC are not subject to tax.

However, the shareholders of an IC-DISC are:

If a corporation files as an IC-DISC but does not qualify as an IC-DISC:

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, is filed for transfers made after August 4,1997:

Claims filed with a Form 926 are considered Examination International Category A (CAT-A) criteria and are classified by an LB&I International Examiner. See IRM 21.8.1.2.10, Examination Criteria CAT-A International.

A Section 761(a) partnership return is an unincorporated organization which qualifies under IRC 761(a) as:

Additional processing information and Exam criteria can be found in the following:

For the first year for which it wants the exclusion, the unincorporated organization should make the election in a statement attached to the Form 1065, U.S. Partnership Return of Income.

Submission Processing (SP) suspends processing 761(a) elections until a review is made by the classification department.

The classification department will review returns that are identified as potential IRC 761(a) elections. Classification is responsible for making classifiers available to Code and Edit in SP to determine if IRC 761(a) elections will be accepted or rejected before processing is completed.

If the classifier determines missing information needs to be obtained to validate the IRC 761(a) election:

Phone inquires and technical responses by taxpayers on the aforementioned letters are also directed to the classification department.

Classifiers of IRC Sec. 761(a) elections should have experience in tax shelters.

Classifiers reject elections that are determined to be invalid. Valid elections are accepted as filed.

After a determination is made on an IRC 761(a) election, SP processes the return as follows:

Returns selected for examination are forwarded to their respective area offices.

The inventory of individual returns for area offices is based on the Zip Code of the address shown on the return. When transferring returns check http://mysbse.web.irs.gov/examination/mis/default.aspx for the Audit Information Management System (AIMS) listing, which is updated monthly, to determine the proper area office.

The inventory of corporation, partnership and fiduciary returns for an area office is based on the area office in which a return is filed and not the area office location indicated by the address shown on the return.

When a return is to be transferred to another area office, prepare Form 3185, Transfer of Return, in accordance with IRM 4.4.33, Transfers.

The taxpayer may request abatement of interest due to an error or delay in the performance of a ministerial/managerial act.

The Accounts Management Operation at each campus generally receives requests for abatements of interest and determines which functional area is the source of the claimed error or delay. See IRM 21.5.2.4.10.1, Ministerial/Managerial Interest Abatement. Accounts Management will:

Accounts Management will forward claims originating in Customer Account Services (CAS) to examination as technical advice requests. Examination will review and return them with a recommendation whether to allow or disallow the claims.

Interest abatement claims may also be received directly in examination either in the processing of an examination program, or in a prior examination reconsideration request.

See IRM 20.2.7.5, IRC 6404(e)(1), Unreasonable Error or Delay in Performing a Ministerial or Managerial Act, for additional information.

Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), is used to provide notification of inconsistencies between the tax treatment of an item and the way the pass-through entity treated and reported the same item in it’s return. It is also used as an administrative adjustment request with amended returns. See IRM 4.31.4, TEFRA Administrative Adjustment Requests (AAR), for information concerning these returns.

Additional references with exam referral criteria:

When Examination receives information of sufficient compliance value to warrant enforcement follow-up concerning a return filed or to be filed by a taxpayer:

Forms 5346, once approved by the PSP Territory Manager, are sent to the Ogden and Cincinnati campus Case Building teams.

Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, is required for each year after February 28, 1986 when a taxpayer completes a long-term contract that was accounted for using either the percentage of completion method or the percentage of completion - capitalized cost method for Federal income tax purposes.

Form 8697 is required for any tax year in which the contract price or contract costs are adjusted for one or more of these long-term contracts from a prior year. See IRM 20.2.11.12, Look-Back Interest, and IRM 20.1.3.2.6, Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, for additional information.

Examination is responsible for processing prompt assessment requests under IRC 6501(d) as follows:

Classification will determine if the request is complete and valid, the person making the request is authorized to do so, and all returns referenced have been filed. Refer to Treasury Regulation 301.6501(d)-1 for reference in making these determinations. The request must clearly show:

If the request is incomplete or invalid for any reason and could not be determined by research, contact and advise the requestor accordingly. If unable to obtain the information by telephone, Letter 621-C, Prompt Assessment Request; Acknowledgment/Reply/Additional Information Requested, can be used.

Classification will input TC 560 using REQ77 on all cases selected for examination (this allows the input of a date that is earlier than the original date thus identifying the correct assessment statute expiration date and primary and/or secondary TIN for each return considered).

If the returns referenced in the request are accepted as filed, classification will send Letter 621-C to the requestor.

If the returns referenced in the request are selected for examination, they will be controlled on AIMS to the appropriate area office. Send Letter 621-C to notify the requestor that the request has been transferred to the area office for consideration.

If it is determined upon review of the case that Information Reporting Document Matching (IRDM) has an open control on a related period, examination will contact the area to determine the status of their case.

Claims contending the taxpayer’s signature was forged or they were not legally married may be referred to campus classification by Accounts Management. See IRM 21.6.1.5.7, Married Filing Joint or Married Filing Separate is Invalid or Filed with Incorrect Status, for exam referral criteria.

Allow claims based on unlawful filings where the marriage was not valid if the following is present:

In accordance with IRC 6064 , the taxpayer must prove that he/she did not intend to file jointly and that the signature was forged. If the claim cannot be allowed, follow selection criteria for field and campus exam for audit referrals. Classifiers should be alert if it appears there are indictions of identity theft on BMF accounts. Suspected Identity Theft Category A claim referrals should be returned back to Accounts Management for research and processing as outlined in IRM 25.23, Identity Protection Program. The following subsection contains procedures on identity theft for BMF accounts. IRM 4.19.15.39, Multiple Filers, provides guidance for Correspondence exam to process the claim.

IRM 25.23.9, BMF Identity Theft Processing, provides servicewide guidance on BMF identity theft issues, including documentation and actions required for general processing of BMF Identity Theft (IDT) claims.

See IRM Exhibit 25.23.9.2, Business Master File (BMF) Identity Theft - Overview, for a definition of BMF identity theft and examples.

BMF accounts include the following entity types; corporations, partnerships, estate trust, exempt organization, employment tax, or government entity.

BMF IDT indicators are not applied until required research has been completed to rule out a possible mixed entity issue. Never assume identity theft prior to completion of the preliminary research. Refer to IRM Exhibit 25.23.9-7, BMF Identity Theft Research Requirement, and IRM Exhibit 25.23.9-2, BMF ID Theft Indicators-TC 971 AC 522 IDTCLM Initial Allegation or Suspicion of BMF Identity Theft.

The Low-Income Housing Credit under IRC 42 provides an incentive for taxpayers to invest in affordable housing. The taxpayer receives tax credits for ten years (credit period). To keep the credit, the taxpayer must provide affordable housing for fifteen years (compliance period). After IRS jurisdiction ends, the taxpayer must continue to provide affordable housing under the terms of the extended use agreement, which is at least another fifteen years. Altogether, the taxpayer is obligated to provide affordable housing for at least thirty years.

The LIHC credit is co-administered by the IRS and state agencies. The state agencies receive a specific amount of credit each year (based on population) and are responsible for determining which housing projects will receive credits, and how much credit. They are also responsible for monitoring the housing projects to ensure that taxpayers remain compliant throughout the 15-year compliance period and reporting any identified noncompliance to the IRS.

A centralized LIHC Unit is located at the Philadelphia Campus, and is responsible for the following:

Under Federal/State Exchange Agreements, classification in the campuses and area offices may receive information which applies to returns beyond the 26/27 month examination cycle.

If the information is substantial, the return will not be rejected or surveyed solely because old years are involved.

The selected old year returns are not included in the prior year percentiles for 270 days from establishment on AIMS.

Under the State Audit Report Program (SARP) state agencies submit electronic referrals to the campus for filtering process. The electronic files are then delivered to the SARP Shared Drive for PSP Fed-State Coordinators to manually classify or are given to a campus headquarters analyst to be filtered for selection in campus correspondence examination and if selected then controlled on the Audit Information Management System (AIMS) in a batch process. If selected by the PSP Fed-State Coordinator, the cases will be controlled on AIMS and put into available inventory for TCO or RA groups.

Refer to IRM 25.4, Employee Protection, for the guidelines and criteria established to identify caution upon contact taxpayers- Caution Indicator taxpayers.

Employee returns will not be worked in Campus Correspondence Examination.

Cases worked in Campus Correspondence Examination are stored on the Correspondence Examination Automated Support (CEAS) server that allows for universal view in all campuses.

In order to ensure impartiality, independence, and privacy, the classification and examination of employee returns will not be performed by subordinates, associates or co-workers of the affected employee.

All identified employee returns selected for examination will be sent to the appropriate area office PSP Employee Audit Coordinator and screened by the PSP section chief.

The appropriate PSP area office is the office closest to where the employee lives.

The return will be forwarded to an office examination or field group where an objective examination will be conducted. This includes:

The original return will be secured from Files and the return and case file will be shipped in a "confidential" envelope to the area office PSP Employee Audit Coordinator closest to where the employee lives.

The instructions in this subsection are used to process the state business license compliance initiative known as the California Department of Labor and Standards Enforcement (DLSE) Program. The DLSE Program provides taxpayers with certifications of compliance for Federal employment tax return filing and payment in order for them to obtain certain industry business licenses in their states. Currently, the only participant is the state of California.

The DLSE Program is centralized at the Ogden Compliance Services Campus. The process is co-administered by the IRS and the respective state Division of Labor Standards. Guidance for the program must be a mutually agreed upon process with SB/SE Campus Compliance, the appropriate IRS State Governmental Liaison, and the State Division of Labor Standards Enforcement staff.

IRS and the California State Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE) have a mutual interest in accurate wage reporting by those parties who are licensed by DLSE. The DLSE is concerned with the success of these businesses and that they pay the proper wage and withhold and transmit fiduciary funds. IRS is concerned about licensees becoming delinquent in the payment of federal taxes and the resulting burden on the government.

The instructions in this subsection are used to process Form 8282, Donee Information Return, as part of the Form 8282/Form 8283 , Noncash Charitable Contribution match program.

Ogden Campus Compliance Examination Field Support Operation conducts the Form 8282/8283 Match Program under direction from Exam Quality and Technical Support (EQ&TS). The Exam Policy headquarters analyst with oversight for the program will coordinate technical issues with EQ&TS. The program screens Forms 8282 for potential selection for audit. Cases are selected when non-cash contribution deductions do not meet the criteria established for substantiation. Cases may be selected for Area Office or Campus examination.

IRC 170, Charitable Contributions and Gifts, IRC 6050(L), Returns Relating to Certain Donated Property; and Treasury Regulation 1.170A-13, Recordkeeping and Return Requirements for Deductions for Charitable Contributions, provide authority for processing non-cash charitable contributions.

Process cases under OFP 91717, Form 8282 Cases.

Non-cash contributions larger than $5,000 made to an organization eligible to receive tax deductible contributions are not tax deductible unless:

The Informant Referrals are taxpayer-generated. Taxpayers submit Form 3949-A, Informant Referral or informant letters to the IRS to report suspected/perceived tax law violations by other taxpayers. These referrals are mailed to Ogden Campus, Entity Mail Stop 6273 where they are screened and routed to various stakeholders per the established routing guide. See IRM 3.28.1.2.1, Form 3949-A Information Referral Routing Guide.

W&I TCOs and SB/SE Tax Analysts classify, select, and introduce into the work stream those referrals which meet their respective selection criteria in order to satisfy the volumes in their work plans. A record of the volumes and dispositions of the referrals will be maintained by each area.

In order to provide feedback on the screening process, W&I and SB/SE will return to Ogden Entity those referrals which were received but did not meet the established routing guidelines for their area. Ogden will re-route the referrals to the appropriate area.

W&I and SB/SE will retain rejected referrals for 90 days after classification and selected referrals for three years after the examination closing date.

W&I and SB/SE management will conduct periodic reviews of the rejected referrals using appropriate start and skip intervals to ensure the fairness and integrity of the classification process.

Exam will monitor for incoming AUR technical advice and CAT A referrals daily. Referrals will be received physically from co-located sites and via e-Fax inbox from non-co-located sites. Incoming referrals will contain: a fax cover sheet (if applicable), an AUR/Examination CAT A Referral Form, AUR case contents (including a copy of the last CP 2000 or CP 2501 Notice), and the document the taxpayer submitted.

Exam Classification will review the referral to determine if the expenses are allowable or if the case meets audit criteria within 15 days of receipt.

Exam classification will work AUR referrals from the aligned SBSE Exam site(s) as outlined below.

If Classification determines the referral should be selected for audit:

If Classification determines the referral should be accepted as filed:

If Classification determines the additional expense is not allowable by law: