4.2.2 Miscellaneous Examination Procedures

Collateral Examinations

  1. A collateral examination is requested when an exchange of information between areas is essential to resolve an issue of material consequence. Collateral examinations are used only when the information cannot be obtained from the taxpayer, the taxpayer's representative, or third parties. Every reasonable effort must be made to secure the information rather than to routinely request a collateral examination.

  2. Collateral activity is the performance of work of short duration, work that does not require the examination of books and records, and work that calls for little independent judgement or conclusions. For example, a collateral examination would be justified where:

    1. An interview is required to get specific information for the examiner;

    2. A document is to be obtained;

    3. A transcript of an account or a listing of invoices is needed; or

    4. A summons needs to be served.

  3. All collateral requests must receive priority treatment. If the collateral examination results in a finding of nationwide interest, the receiving area will furnish the information to Headquarters. A Technical Coordination Report would be used to furnish this information to Headquarters (See IRM 4.2.3).

  4. Collateral examination requests involving tax shelter cases will be identified as such on the top of Form 6229, Collateral Examination. The receiving area will acknowledge receipt of the collateral request and provide a status report to the requesting office within 45 days and provide status reports to the initiating area every 30 days.

Collateral Examination Procedures: Initiating Area

  1. Form 6229, Collateral Examination, is used by all areas to request or exchange information between areas to resolve an issue(s) of material consequence. Form 6229 is prepared as early as possible in each examination when a collateral examination is needed from another area.

  2. The examiner assigned the return will prepare the original Form 6229. Part 2 of the form is retained in the case file. The original Form 6229 and three copies are forwarded.

    1. The narrative section of Form 6229 must include sufficient background information to clearly state the problem. Additional schedules and attachments are included as needed. A copy of the out-of-area return is also included, if available.

    2. Be specific on the exact information requested.

    3. The examiner's name and telephone number must be included so the receiving area has the correct person to contact for clarification of the issue, if needed.

    4. The completed Form 6229 is submitted to the group manager for review. After approval, the group manager will forward Form 6229. If Campus action is required (i.e., requesting the return), Form 6229 is forwarded to the Campus servicing the receiving area. If no Campus action is required, the initiating area will submit the request to the applicable Territory Manager of the receiving area. The initiating area will photocopy the retained Part 2 and put an "X" next to the "Follow-up" line when furnishing information to the receiving area.

Collateral Examinations: Receiving Area

  1. The receiving area must acknowledge receipt of the request by completing Part 3 of Form 6229 and returning it to the initiating area.

    1. The receiving examiner must include his/her name, address, telephone number and date received. If the case is reassigned, the new examiner must notify the initiating area of the change.

    2. Photocopies of Part 4 of Form 6229 are used for subsequent communication with the initiating area.

    3. The receiving examiner must provide a clear, concise response to each question raised.

  2. If the receiving area believes the results of the collateral examination would not justify the time and cost involved, a memorandum explaining that decision is attached to Form 6229 and forwarded to the initiating area. The Territory Manager will approve any declination memorandum with a copy sent to the respective Planning and Special Programs (PSP) sections. Territory Managers should resolve disagreements between the initiating and receiving areas concerning the need for a collateral examination. Area Directors will resolve any disagreement between the respective Territory Managers.

Examination of Returns with APO/FPO Addresses

  1. Returns of taxpayers who are stationed overseas having APO/FPO addresses are selected under the DIF system. Military personnel stationed overseas or on ships generally file these returns. Examinations of returns with APO/FPO addresses are conducted by SB/SE, Area 15. Any questions should be referred to the Area 15 Planning and Special Programs (PSP) Chief.

Extensions of the Replacement Period of Involuntarily Converted Property

  1. Applications for extension to replace involuntarily converted property are filed with the Area Director or Director of Field Operations (DFO) where the return is filed for the first taxable year when any gain from the involuntary conversion is realized. The Area Director or DFO forwards the application to the Area Technical Services (Exam) for determination.


    The request is more likely to be received by the Commissioner's Representative in miscellaneous mail forwarded by the Campus.

  2. If the converted property is owned by several taxpayers under the jurisdiction of different Area Directors' offices, the Area Technical Services (Exam) where the property is actually located will conduct the investigation to determine whether reasonable cause exists for not replacing the converted property within the required time period.

Involuntarily Converted Property Extension Procedures

  1. The Area Director forwards the extension request to the Technical Services (TS) staff, who reviews the request and determines whether the request to extend the replacement period is timely and meets the requirements of a proper request to include reasonable cause. TS will take final action to approve or deny the request as delegated by SBSE Delegation Order 4.24 (subject to revision). (See IRM 4.8.8)

  2. If the extension request is granted, Letter 1039 is used to advise the taxpayer that an extension has been granted. Generally, extensions longer that one year are not granted. The taxpayer must notify the Service when the property is replaced.

  3. Letter 1954 is used to follow-up on the extension granted in Letter 1039.

  4. If the extension is not granted, the taxpayer is notified the extension has not been granted and the reason(s) why.

  5. When the extension response relates to involuntary conversions that result from condemnations, a statement should be included informing the taxpayer that interest received on the award is taxable as ordinary income. This interest is paid to compensate the taxpayer for a delay in payment of the award and is not included in the gain or loss computations.

Identification of Bad Payer Data

  1. During the examination of Information Returns Selection System (IRSS) cases, examiners may determine that information provided by the payer is incorrect.

  2. Bad payer data is defined as any situation where the payer made an error on the information return of a type that could occur on other information returns.

  3. Where errors have occurred on ten or more of these documents filed by one payer or transmitter, bad payer data exists.

  4. Examples of bad payer data include but are not limited to:

    1. Duplicate filing of Forms W-2 or 1099;

    2. Corrected Forms W-2 or 1099 not identified as a corrected, thus appearing to duplicate the original filing;

    3. Misplaced decimals;

    4. Additional digits added to amounts;

    5. Nontaxable income reported as taxable; and

    6. Income reported on the wrong form.

  5. When examiners determine that bad payer data exists, they will briefly explain the identified reason on a copy of the IRSS transcript and route this copy to the Territory Manager or designate. The Territory Manager or designate will ensure the reasons are clear and will forward all copies to the Campus on a weekly basis. The copies will be directed to the attention of the IRP Magnetic Media Coordinator.

Awards Received by Informants

  1. Informant awards for confidential services are often received from the Bureau of Customs, Federal Bureau of Investigation, Central Intelligence Agency, Secret Service, local Police Departments, and other similar sources. It is imperative that the source of income not be revealed in the examiner's report and that the identify of the informant be protected.

  2. When asked to explain the source of unidentified income reported on the return or the source of unreported income discovered during the examination, the taxpayer may explain that the income was received for services of a confidential nature.

    1. If verification of the source of income is necessary, then verification should be secured through inquiry of the official in charge of making the payment.

    2. If the official is in the same locality as the examiner, then the official will be interviewed personally without any written communication or other report. If a personal interview is not possible, the examiner will prepare for the personal signature of the Area Director, a letter to the official marked "Personal -- To be opened by addressee only." requesting verification of the payment for confidential services.

  3. If the taxpayer states that the unidentified or unreported income was received for services of a confidential nature, the case will be processed in the usual manner without disclosing the source of the payment.

    1. In the case file, the description of the income will state " miscellaneous income --source verified."

    2. Correspondence used to verify the source of income will not remain in the case file but will be maintained in special file, confidential in nature, under the personal control of the Area Director.

Recognition of Witnesses During the Examination Process

  1. The taxpayer has the right to use the services of any person he/she may elect as a witness to explain the taxpayer's books, records, or returns to the examiner during the examination process. The fact that the person is not enrolled or ineligible to practice before the Internal Revenue Service does not disqualify him/her to act a witness.

  2. Witnesses should be afforded courteous treatment but should not be permitted to represent the taxpayer as an advocate when controversies arise out of the factual development of the case. To avoid misunderstandings as to the role of a witness, the examiners should explain the provisions of Rev. Proc. 68-29, 1968-1 C.B. 812, to the taxpayer and the witness.