PSP is responsible for identifying, selecting, and delivering returns to SB/SE Field Exam. Those returns can come from a variety of sources. This section addresses case building, classification, and delivery of the returns.

IRM 1.1.16.3.5.3, Exam Case Selection.

IRM 1.2.1.2.36, Policy Statement 1-236, Fairness and Integrity in Enforcement Selection.

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

IRM 1.2.1.5.10, Policy Statement 4-21, Selection of Returns for Examination.

Director, Exam Case Selection (ECS) is the executive responsible for providing policy guidance on the selection of cases and delivery of inventory for SB/SE Examination.

Program Manager, Field Case Selection is the program manager responsible for providing policy guidance on the selection of cases and delivery of inventory for SB/SE Field Exam.

The PSP Territory Manager is the territory manager responsible for the selection of cases and delivery of inventory within an SB/SE Exam Area.

The following are systems or reports that may be used to monitor the classification, storage, and delivery of inventory.

This is a list of acronyms and their definitions.

See IRM 4.1.1.1.6, Terms for a listing of common terms used in PSP.

IRM 4.1.1, Planning, Monitoring, and Coordination.

IRM 4.1.2, Workload Identification and Survey Procedures.

Case building tools help determine whether a return should be selected for audit, what issues should be audited, and how the audit should be conducted.

Case building data provides taxpayer specific research to identify possible compliance issues.

Case building data in conjunction with the return (original, CDE facsimile or Modernized E-File (MeF) print) provides a broader working knowledge of the taxpayer's financial activities to make an informed decision to accept or examine specific items on the return.

Case building data can corroborate items on the return so they don't have to be raised with the taxpayer.

IDRS is an internal database accessed by various command codes, each of which provides specific information.

IDRS can provide:

The IDRS information should be compared against the return information to determine if there are discrepancies, amended returns, or activity after the return was filed.

An IDRS Command Code Job Aid can be found at serp.enterprise.irs.gov/job-aids/command-code/command-code.html

FinCEN provides an on-line database containing reports of cash transactions in excess of $10,000. Cash transactions include deposits, withdrawals, check cashing, wire transfers, sales and redemption of money orders, travelers’ checks or stored value, casino activity, payments for certain services and information on foreign bank accounts. In addition, FinCEN reports cash and/or other monetary instruments in excess of $10,000 used as payment for certain goods.

FinCEN provides the following forms:

FinCEN data can be used to generate leads for potential unreported income, money laundering transactions and other tax avoidance schemes.

Consider FinCEN activity in relation to the overall financial status of the taxpayer. FinCEN "hits" along with Information Returns Processing (IRP) documents, CDE 3 year facsimiles, and taxpayer locator data will provide a better picture of the taxpayer’s financial situation. Compare the contents of these case building tools with the return.

Taxpayer locator services provides information on an individual or business, and is designed as a general combination report with data from multiple sources to provide a snapshot of the subject's identity.

At least one consumer reporting agency is scanned and the information found is utilized to search over 2 billion public records and generate a single report that may include:

This information is useful in determining the taxpayer’s lifestyle or business history and aids in determining net worth.

Examples of public search data that could indicate audit potential include:

The RPD is a repository of return preparers who prepare and sign 10 or more returns. It contains more than 500 data elements and can be used as an investigative tool when researching return preparers for compliance and misconduct issues.

Some of the items RPD can provide (this list is not all-inclusive):

The RPD information could be used to determine potential discrepancy in income reporting, level of employee/employer relationship, and potential IRC 6694 and IRC 6695 penalty application.

Questions regarding RPD case building material or any additional information regarding a return preparer can be made to your Area RPC at http://mysbse.web.irs.gov/examination/tip/rp/contacts/12293.aspx

Field Exam needs to achieve consistency nationwide by using colored file folders on cases to develop national standards for processing. This subsection provides guidance to establish a uniform list of colored file folders exam will use to identify specific types of cases. The use of colored folders also helps Centralized Case Processing (CCP) when closing cases.

For case building purposes, whether performed by area PSPs or at the campus, the following file folder color guidelines will be used:

The list above is not all-inclusive. From time to time there will be various projects that will require the use of a particular colored folder, exclusive of the colors listed above.

If a case falls into more than one of the above listed categories, place the colored folders in the order listed above with the highest importance as the outermost folder.

If the case is delivered electronically, worked electronically, and closed electronically, color folders are not required.

Classification should be conducted by an experienced examiner who has received appropriate tax law training. Examiners with specialized expertise may be used to classify business returns. Classification using online systems (such as CDE and Modernized E-file (MeF)) can be done at remote locations via approved procedures. See IRM 4.103.2, CDE Procedures.

National SB/SE Classification Guidelines provide guidance to enable greater classification consistency nationwide and to select returns for audit with issues that are material in scope. The classification guidelines can be found at: http://mysbse.web.irs.gov/examination/tip/classification/default.aspx.

Tax returns are to be selected and classified for audit by employees who will not be the examiner of the return.

DIF returns are scored using algorithms/models designed to score returns and deliver in descending DIF score order for classification by examiners.

Non-DIF returns will be classified to select returns that contain significant issues likely to result in tax changes or that require audit to achieve voluntary compliance.

All returns will be identified for assignment to an RA, TCO, or a TCO Grade 11 (TCO-11). The designation as RA, TCO, or TCO-11 will be based upon the complexity of the issues involved and the degree of accounting and auditing skills required to conduct a quality audit. See IRM 1.4.40.4.6.5.2.1, Part 1 - Chart of Case Grading Factors, for additional information.

Returns should be classified by examiners possessing experience commensurate with the type of return and activity code they are classifying.

Individual returns selected for audit for revenue agents should contain issues requiring accounting skills of a revenue agent. Individual returns selected for audit not requiring the accounting skills of a revenue agent may be selected for audit for revenue agents if tax compliance officers (TCOs) (including traveling TCOs) are not available in the geographic location of the taxpayer or if the returns are needed for training.

The primary objective in selecting returns for audit is to promote the highest degree of voluntary compliance on the part of taxpayers while making the most efficient use of finite examination staffing and other resources. Employees must exercise their professional judgment, not personal opinions, when making return selection decisions. The subsections below discuss the instructions for performing return classification.

The PSP Territory Manager (or designee) has primary responsibility for assuring the quality of returns selected for audit whether classification is done at the campus or electronically. This is accomplished by assuring all classifiers have received appropriate training on tax law and area classification instructions. During each classification detail the PSP Territory Manager (or designee), should review a representative sample of selected and accepted returns for each classifier and provide appropriate feedback to the classifier and PSP Classification Section Chief. See IRM 4.1.5.3.3.2, Review of Performance.

For national or centralized classification details, the headquarters representative is responsible for assuring the quality of returns selected for audit. Form 5126, Classification Quality Review Record, may be used to provide feedback. During each classification detail the headquarters representative should review a representative sample of selected and accepted returns for each classifier and provide appropriate feedback.

The goal of the classification guidelines is to achieve greater efficiency in the way we classify and conduct exams. Please be specific in the selection of issues. Do not select "all" expenses or "other" expenses – BE SPECIFIC.

Questionable business schedules will be identified during the classification process. As noted in IRM 4.1.5.3.4.2, Potentially Productive Issues on an Individual Business Return, we have designed a process requiring managerial concurrence to allow for selection of "all expenses" on these returns when this is appropriate.

When a Schedule C, E, or F does not appear to be a legitimate business or has a questionable preparer (QP) known to inflate expenses, understate income, or include fictitious schedules; classify the appropriate income or appropriate expenses and notate in the "Remarks" section either "Is this a legitimate business?" or "QP."

When a Schedule C, E, or F appears to be an activity not engaged in for profit (hobby loss), the audit should focus on whether this is an income producing business. Gross receipts and all expenses should generally not be classified.

If a potential questionable preparer is identified, these returns should be given to the manager assigned to the detail to share with the rest of the classifiers and complete Form 14719, SB/SE Return Preparer Referral, and e-mail to the applicable address on the form. The area Return Preparer Coordinator will make a decision concerning any further consideration of potential program action against the preparer.

Corporate returns are identified by three categories; DIF, non-DIF, and automatics. Returns which do not meet automatic criteria, are scored under the DIF system. Returns which meet automatic criteria, regardless of size, are not computer scored. Automatic criteria are contained in IRM 3.11.16.9.1, Audit Codes.

Screening procedures for DIF scored 1120 returns are essentially the same as for other DIF returns.

The corporate DIF system includes returns in Activity Codes 203 through 217. All other corporate returns are Non-DIF.

Classification of the corporation return must include the balance sheet and Schedule M items. Substantial change in accounts receivable, reserve for bad debts, loans to or from stockholders, accounts payable, treasury stock, capital stock, or retained earnings would indicate an audit of these items may be warranted. In addition, such potential issues such as "Thin Corporation," IRC 531, substantial changes in accruals, and decreases in assets which are not accounted for on Schedule D of the return may be identified from an inspection of the balance sheet.

All Schedule M items should be scrutinized to determine the difference between income shown on the books and taxable income shown on the tax return.

The following general items must also be considered during classification:

Significant issues identified on manually classified Form 1120 returns will be reflected on Form 10264, Revenue Agent - Classification Checksheet.

Form 1120S returns are identified by three categories; DIF, non-DIF, and automatics. Returns which do not meet automatic criteria, are scored under the DIF system. Returns which meet automatic criteria, regardless of size, are not computer scored. Automatic criteria are contained in IRM 3.11.217.13.1, Audit Codes.

Screening procedures for DIF scored 1120S returns are essentially the same as for other DIF returns.

Significant issues identified on 1120S returns will be reflected on Form 10264, Revenue Agent - Classification Checksheet.

Partnership returns are identified by three categories; DIF, non-DIF, and automatics. Returns which do not meet automatic criteria, are scored under the DIF system. Returns which meet automatic criteria, regardless of size, are not computer scored. Automatic criteria are contained in IRM 3.11.15.19.1, Audit Codes.

Screening procedures for DIF scored partnership returns are essentially the same as for other DIF returns.

Significant issues identified on partnership returns will be reflected on Form 10264, Revenue Agent - Classification Checksheet.

Be cognizant of potential employment tax issues when classifying income tax returns.

Known or probable areas on non-compliance are listed in IRM 4.23.3, Employment Tax - Examination Programs and Procedures.

Be cognizant of potential excise tax liabilities when screening income tax returns. Be alert for:

Excise classification procedures can be found in IRM 4.24.18.14, Classification.

Screening of fiduciary returns requires consideration of issues peculiar to fiduciary returns. While income tax issues will not be overlooked, quality classification requires consideration of the following issues and areas:

Distributions to Beneficiaries:

Capital Transactions:

Expenses and Deductions:

As selected field returns are received by CF&S from centralized classification, the AIMS status will be updated to Status 08 with one of the following EGCs: 1020, 1066, 1067, 1068, 2020, 2050, 2051, or 2066.

Selected returns received from classification will be placed inside a file folder and filed in AIMS serial number sequence. The returns are updated to status 08 and one of the appropriate EGCs.

The following EGCs are used to store selected exam returns:

The following EGCs are used to virtually store selected exam returns:

There are plans to standardize the EGC’s starting October 1, 2020. See Exhibit 4.1.5-1, CDE Employee Group Codes for a listing of the new EGCs.

Periodically, there will be requests for returns assigned to an area office in status 08 EGC 2050, which indicates the return is part of the CSDB. These requests may come from exam personnel in the area or from functions other than exam, such as criminal investigation.

Area personnel should be instructed to contact a PSP Territory Manager (or designee) if they need a return which is currently assigned to CF&S. In addition, area personnel should be instructed never to update a record from status 08 EGC 2050 even if they are working from a copy.

Specific returns requested by an area examination function must be deleted from the CSDB. The return will be updated on AIMS to the requesting status and EGC by CF&S and forwarded to the area.

Requests for returns from area functions other than exam are handled differently. The returns are assigned on AIMS to a specific area. The returns will be deleted from the CSDB and forwarded to exam in an area office for coordination with the requesting function. A copy will be provided to the requester until the original return is received in the area office.

Employee returns require special processing depending on what system was used to classify the return.

Problems identified with returns received from CF&S should be brought to the immediate attention of the CF&S manager by either the PSP Territory Manager or the group manager.

It is important for the area PSP Territory Manager to have frequent discussions with CF&S management to keep abreast of the return orders and other issues.

Centralized storage related return(s) are two or more returns for the same taxpayer where one or more of the taxpayer's returns are being maintained in centralized storage (status 08), while another return is open in an exam status 10 or 12.

For returns located in the area office, the CF&S will pull the centralized stored return, update AIMS to status 10 for the same EGC as the other return(s) located in the area, and mail the return to that group for association.

For returns located in correspondence examination (EGC 5XXX) no action will be taken.

Multiple Returns: Multiple returns occur when two or more returns for the same taxpayer are concurrently maintained in centralized storage (status 08). CF&S will match the primary return to the multiple return, cross reference the folders, and file both returns in the file by the respective AIMS serial number.

Survey of returns from centralized storage: It is the responsibility of the area PSP staff to inform the campus when it is time to survey returns from centralized storage. See IRM 4.1.2.11, Procedures for Surveying Inventory in PSP, for more information. Returns should be surveyed as they become out-of-cycle or more frequently if needed.

EGC 2066 will also be used to store certain office examination returns with errors. Area PSP staff should review the EGC 2066 inventory to ensure these returns are ordered out. There should be a minimum number of these returns.

Returns are assigned from Central Storage and Centralized Files and Scheduling as outlined in IRM 4.1.5.4.2, Stored at the Campus.

Field Exam cases are generally assigned to the receiving group in status 10 from Central Storage. Office exam cases are generally assigned to the receiving group from Centralized Files and Scheduling in status 10 as "Pre-contact" cases.

All tax return information, including Compliance Data Environment (CDE), TRDBV, and RTVUE/BRTVU facsimiles, must be distributed to the offices outside PSP via a Form 3210, Document Transmittal. The sender must retain a copy of the Form 3210 for group control to monitor the transmittal of tax returns or return information via Form 3210. If acknowledgement is not received within 10 days, immediate follow-up should be made by phone, secured e-mail, or mail.

The same level of security should be provided for any tax return information produced or received in connection with other source work as is given an actual tax return and all other confidential taxpayer information. Tax return information includes, but is not limited to CDE, TRDBV, and RTVUE/BRTVU prints and copies of taxpayer returns from external sources. Any documents containing taxpayer identifying information distributed outside the PSP office should be transmitted via Form 3210.

Returns and facsimiles distributed for the purpose of making an audit determination must be returned to PSP within 30 calendar days. PSP staff will dispose of them as soon as it is determined they are no longer needed. If the audit determination is made within PSP, the AIMS controls should be perfected or updated.