- 4.10.7 Issue Resolution
- 18.104.22.168 Overview
- 22.214.171.124 Researching Tax Law
- 126.96.36.199.1 Internal Revenue Code
- 188.8.131.52.1.1 Authority of the Internal Revenue Code
- 184.108.40.206.1.2 Citing the Internal Revenue Code
- 220.127.116.11.1.3 Prior Tax Law
- 18.104.22.168.2 Committee Reports
- 22.214.171.124.3 Code of Federal Regulations
- 126.96.36.199.3.1 Income Tax Regulations
- 188.8.131.52.3.2 Types of Regulations
- 184.108.40.206.3.3 Classes of Regulations
- 220.127.116.11.3.4 Authority of the Regulations
- 18.104.22.168.3.5 Publication of the Regulations
- 22.214.171.124.3.6 Citing the Regulations
- 126.96.36.199.3.7 Outdated Regulations
- 188.8.131.52.3.8 Financial Record-Keeping Regulations
- 184.108.40.206.4 Internal Revenue Bulletin
- 220.127.116.11.5 Cumulative Bulletin
- 18.104.22.168.5.1 Citing the Cumulative Bulletin
- 22.214.171.124.6 Revenue Rulings and Procedures
- 126.96.36.199.6.1 Authority of Rulings and Procedures
- 188.8.131.52.6.2 Publication of Rulings and Procedures
- 184.108.40.206.6.3 Citing Rulings and Procedures
- 220.127.116.11.7 Bulletin Index-Digest System
- 18.104.22.168.8 IRS Publications
- 22.214.171.124.9 Court Decisions and Case Law
- 126.96.36.199.9.1 U.S. Board of Tax Appeals
- 188.8.131.52.9.2 Tax Court of the United States
- 184.108.40.206.9.2.1 Small Tax Case Procedures
- 220.127.116.11.9.2.2 Regular Opinions
- 18.104.22.168.9.2.3 Memorandum Decisions
- 22.214.171.124.9.2.4 Citing Tax Court Decisions
- 126.96.36.199.9.3 U.S. District Court and U.S. Court of Federal Claims
- 188.8.131.52.9.4 Court of Appeals
- 184.108.40.206.9.5 U.S. Court of Appeals for the Federal Court
- 220.127.116.11.9.6 Supreme Court
- 18.104.22.168.9.7 Citators: Researching Case History
- 22.214.171.124.9.7.1 Citator Examples
- 126.96.36.199.9.8 Importance of Court Decisions
- 188.8.131.52.10 Private Letter Rulings and Technical Advice Memorandums
- 184.108.40.206.11 General Counsel Memorandums
- 220.127.116.11.12 Technical Memorandums
- 18.104.22.168.13 Engineering Citator
- 22.214.171.124.14 Other Research Sources
- 126.96.36.199.15 Electronic Tax Research
- 188.8.131.52 Evaluating Evidence
- 184.108.40.206.1 Evidence Defined
- 220.127.116.11.2 Oral Testimony
- 18.104.22.168.3 First Hand Knowledge
- 22.214.171.124.4 Expert Testimony
- 126.96.36.199.5 Hearsay
- 188.8.131.52.6 Admission Against Interest
- 184.108.40.206.7 Opinions
- 220.127.116.11.8 Observations
- 18.104.22.168.9 Documentary Evidence
- 22.214.171.124.10 Circumstantial Evidence
- 126.96.36.199.11 Best Evidence
- 188.8.131.52.12 Secondary Evidence
- 184.108.40.206.13 Inferences
- 220.127.116.11 Arriving at Conclusions
- 18.104.22.168.1 Taxpayer Credibility
- 22.214.171.124.2 Reasonable Determinations
- 126.96.36.199.3 Tolerances
- 188.8.131.52.4 Significant Items
- 184.108.40.206.5 Compliance
- 220.127.116.11.6 Collectibility
- 18.104.22.168.7 Rollover vs. Tax Deferrals
- 22.214.171.124.8 Coordinated Issues
- 126.96.36.199.9 Whipsaw (a/k/a correlative adjustments)
- 188.8.131.52 Proposing Adjustments to the Taxpayer and/or Representative
- 184.108.40.206.1 Closing Phase of the Examination
- 220.127.116.11.2 Office Examinations Procedures
- 18.104.22.168.3 Field Examinations
- 22.214.171.124.3.1 Agreed Cases
- 126.96.36.199.4 Unagreed Cases
- 188.8.131.52.5 SB/SE Fast Track Settlement
- 184.108.40.206.5.1 Determining Eligibility
- 220.127.116.11.5.2 When to Offer FTS
- 18.104.22.168.5.3 Application Process
- 22.214.171.124.5.3.1 Denied SB/SE FTS Application Package by Group Manager
- 126.96.36.199.5.3.2 Appeals Receipt of the FTS Application Package
- 188.8.131.52.184.108.40.206 Denied SB/SE FTS Application Package by Appeals
- 220.127.116.11.5.3.3 Appeals Considerations Prior to the SB/SE FTS Session
- 18.104.22.168.5.4 SB/SE's Roles and Responsibilities during FTS
- 22.214.171.124.5.4.1 What the Examiner should bring to the FTS Session
- 126.96.36.199.5.4.2 New Information Presented During FTS Session
- 188.8.131.52.5.4.3 SB/SE's Rejection of a Settlement Proposal
- 184.108.40.206.5.4.4 Withdrawal from SB/SE FTS
- 220.127.116.11.5.5 FTS Closing Procedures
- 18.104.22.168.5.5.1 Form 14000, Fast Track Session Report
- 22.214.171.124.5.5.2 SB/SE FTS Closing Package
- 126.96.36.199.5.5.3 Customer Satisfaction Survey
- 188.8.131.52.5.5.4 FTS Data Collection Sheet
- 184.108.40.206.5.6 Ex Parte Communications
- 220.127.116.11.5.7 Other Administrative Responsibilities
- 18.104.22.168.5.8 FTS Agreed Civil Penalty Case Closures
- 22.214.171.124.6 Notice of Proposed Adjustments
- 126.96.36.199.7 TEFRA Cases
- 188.8.131.52.8 Payment Expectations
- 184.108.40.206 Burden of Proof Shifts to the Service
- 220.127.116.11.1 General Burden of Proof
- 18.104.22.168.1.1 Criteria to Be Met
- 22.214.171.124.1.2 Relationship with IRC section 6201(d)
- 126.96.36.199.1.3 Documentation of Case Files
- 188.8.131.52.2 Use of Statistical InformationBurden of Proof
- 184.108.40.206.3 Assessment of Penalties Burden of ProofOverview of New Procedures
- Exhibit 4.10.7-1 Court of Appeals Jurisdictions
Part 4. Examining Process
Chapter 10. Examination of Returns
Section 7. Issue Resolution
March 03, 2015
(1) This transmits a revision of IRM 4.10.7, Examination of Returns, Issue Resolution.
(1) This IRM has been updated to incorporate the provisions of Interim Guidance Memorandum SBSE-04-0414-0010, Interim Guidance for Small Business/Self-Employed Fast Track Settlement, Technical Procedures and Guidelines, dated April 03, 2014. Subsections 220.127.116.11.1 through 18.104.22.168.3 were updated and subsections 22.214.171.124.4 through 126.96.36.199.5.8 were added to incorporate the Fast Track Settlement procedures.
(2) Minor editorial changes including spelling, grammar and changes in emphasis method (from underlined to italicized or bold text) have been made throughout this IRM.
Joseph L. Wilson
Director, Field, Campus Exam and AUR Policy, SE:S:E:HQ:EP
Small Business/Self-Employed Division
Examiners are responsible for determining the correct tax liability as prescribed by the Internal Revenue Code. It is imperative that examiners can identify the applicable law, correctly interpret its meaning in light of congressional intent, and, in a fair and impartial manner, correctly apply the law based on the facts and circumstances of the case.
This section addresses five areas:
Researching tax law, IRM 188.8.131.52,
Evaluating evidence, IRM 184.108.40.206,
Arriving at conclusions, IRM 220.127.116.11,
Proposing adjustments to taxpayers and/or representatives, IRM 18.104.22.168,
Shift in Burden of Proof, IRM 22.214.171.124.
Conclusions reached by examiners must reflect correct application of the law, regulations, court cases, revenue rulings, etc. Examiners must correctly determine the meaning of statutory provisions and not adopt strained interpretations.
The Federal tax system is constantly changing. Examiners must keep well informed of the ever-growing body of tax authorities and advances in the management and storage of information.
Income tax law is too complex for examiners to immediately perceive its ramifications and provisions in all examinations. In the words of Supreme Court Justice Jackson, "No other branch of the law touches human activities at so many points. It can never be made simple."
This section focuses on researching Federal tax law, evaluating the significance of various authorities, and supporting conclusions reached with appropriate citations. The profiles of various tax authorities in this chapter are intended to help examiners become familiar with the most common, but by no means all, sources or available research techniques.
The Internal Revenue Code of 1986 is the primary source of Federal tax law. It imposes income, estate, gift, employment, miscellaneous excise taxes, and provisions controlling the administration of Federal taxation. The Code is found at Title 26 of the United States Code (U.S.C.). The United States Code consists of fifty titles.
For ease of use, the Code is divided into different units: subtitles, chapters, subchapters, parts, and sections. Listed below are the Code sections which fall within the eleven subtitles of the current Code.
Subtitle Contents Code Sections A Income Taxes 1–1563 B Estate and Gift Taxes 2001–2704 C Employment Taxes 3101–3510 D Miscellaneous Excise Taxes 4001–5000 E Alcohol, Tobacco, and Certain Other Excise Taxes 5001–5891 F Procedure and Administration 6001–7874 G The Joint Committee on Taxation 8001–8023 H Financing of Presidential Election Campaigns 9001–9042 I Trust Fund Code 9501–9602 J Coal Industry Health Benefits 9701–9722 K Group Health Plan Portability, Access, and Renewability Requirements 9801–9833
Sections are usually arranged in numerical order. This sometimes leads to the need to show a Code section number followed by a capital letter not in parentheses. An example is Code §280A. This designation is used because subsequent legislation created additional Code sections in Part IX, requiring the addition of new Code sections after section 280. Since section 281 already existed, new sections were added by creating sections 280A, 280B, 280C, etc.
The courts give great importance to the literal language of the Internal Revenue Code, but not every tax controversy can be resolved by the language in the Code. In cases where the literal language of the Code is ambiguous, the courts will consider the history of a particular code section, including committee reports and other legislative history, Treasury regulations and other IRS published guidance interpreting the code section, and the relationship of the particular code section to other code sections.
It is often necessary to cite Internal Revenue Code sections in reports and to taxpayers in support of a position on an issue. For convenience, the Internal Revenue Code is abbreviated IRC and the symbols § or §§ are often used in place of section and sections respectively.
When making reference to a Code section, usually no reference is made to the title, subtitle, chapter, subchapter, or part. Code sections are divided into subsections, paragraphs, subparagraphs, and clauses. For example, IRC §170(b)(1)(A)(i) is subdivided as follows:
IRC §170 - Code section, Arabic numbers;
Subsection (b) - lower case letter in parentheses;
Paragraph (1) - Arabic number in parentheses;
Subparagraph (A) - capital letter in parentheses; and
Clause (i) - lower case Roman numerals in parentheses.
The Code is continually changing. It is important that examiners determine the law applicable to the year under examination. To do so, determine whether the applicable law has been modified, and if so, the date on which the changes became effective. Many publishers provide this information in small print immediately following the current Code section.
Federal income tax legislation originates in the House of Representatives. Hearings are held by the House Ways and Means Committee. When a bill is introduced in the House, a Committee Report is published which often states the reason the bill is being proposed. This reasoning establishes the legislative intent behind the finalized law.
After the bill clears the House, it is considered by the Senate. The Senate Finance Committee holds hearings and prepares a report explaining any changes made to the House bill. A Conference Committee later resolves any differences between the House and Senate versions of the bill and issues its own report.
When the bill passes both the House and Senate, it is sent to the President to be signed. Once signed, the bill becomes law and a new or amended section of the Code is enacted. Committee Reports are useful tools in determining Congressional intent behind certain tax laws and helping examiners apply the law properly.
Committee Reports are published in full in the Congressional Record and in part in the Internal Revenue Bulletin and Cumulative Bulletin. Selected reports are found in many commercial tax services.
Committee Reports are identified by a number representing the session of Congress and a sequence number. For example, the Tax Reform Act of 1986 was enacted by Public Law 99–514. House, Senate, and Conference reports accompanying that legislation are cited as follows:
House Report 99–426, 1986–3 C.B. Vol. 2;
Senate Report 99–313, 1986–3 C.B. Vol. 3; and
Conference Report 99–841, 1986–3 C.B. Vol. 4.
The reports are published in the Cumulative Bulletin (IRM 126.96.36.199.4). In each citation, "99" refers to the 99th Congress. Some publishers refer to the reports collectively as "Committee Reports, P.L. 99–514."
The Code of Federal Regulations (CFR) is a codification of the general and permanent rules published in the Federal Register (F.R.) by the Executive departments and agencies of the Federal Government. It is divided into fifty titles which represent broad areas subject to Federal regulation. Each title is divided into chapters usually bearing the name of the issuing agency. Each chapter is subdivided into parts covering specific regulatory areas. Title 26 comprises the Internal Revenue Regulations and is cited 26 CFR.
The Federal Income Tax Regulations (Regs.) are the official Treasury Department interpretation of the Internal Revenue Code and follow the numbering sequence of Internal Revenue Code sections.
Legislative and interpretative regulations are issued by the Secretary of the Treasury. If the code states "The Secretary shall provide such regulations . . ." , then the regulations issued are legislative. Interpretative regulations are issued under the general authority of IRC section 7805(a), which allows regulations to be written when the Secretary determines they are needed to clarify a Code section.
The courts consider the merit of both interpretative and legislative regulations. However, more weight is given to legislative regulations than to interpretative regulations.
Regulations are written by the Office of Chief Counsel, Internal Revenue Service, and are approved by the Department of the Treasury. There are three classes of regulations: proposed, temporary, and final.
Proposed Regulations — Proposed regulations provide guidance concerning Treasury’s interpretation of a Code section. The public is given an opportunity to comment on a proposed regulation and a public hearing may be held if a sufficient number of requests to speak at a hearing are received. Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation.
Temporary Regulations — Temporary regulations are often issued soon after a major change in the law to provide guidance for the public and Internal Revenue Service employees with respect to procedural and computational matters. Temporary regulations are authoritative and have the same weight as final regulations.
Final Regulations — Final regulations supersede both temporary and proposed regulations. A final regulation is effective, unless stated otherwise, the day that it is published as a Treasury Decision in the Federal Register.
The Service is bound by the regulations. The courts are not.
If both temporary and proposed regulations have been issued on the same Code section and the text of both are similar, examiners’ positions should be based on the temporary regulations because it can be cited as an authority for proposing an adjustment.
When no temporary or final regulations have been issued, examiners may use a proposed regulation to support a position. Indicate that the proposed regulation is the best interpretation of the Code section available.
Regulations are printed in the following publications:
Code of Federal Regulations (CFR),
Under the heading "Treasury Decisions " (T.D.) in the Internal Revenue Bulletins (I.R.B.),
Under the heading Treasury Decisions (TD) in the Cumulative Bulletin (C.B.), and
Tax services of commercial publishers.
The citation for a regulation contains three basic organizational units:
The part number,
The Code section number, and
The regulation section number.
Treasury Regulation § 1.61–9(c) is illustrated below:
The first division is the CFR part number and indicates the subject of the regulation. The part number appears before the decimal point in a citation. In the citation Treas. Reg. § 1.61–9(c), the number 1 refers to Part 1 of the CFR, which is income tax. If the regulation were on employment taxes, the number 31 would precede the decimal point. Frequently used part numbers are as follows:
(1) Part 1 - Income Tax
(2) Part 20 - Estate Tax
(3) Part 25 - Gift Tax
(4) Part 31 - Employment Tax
(5) Part 301 - Administrative and Procedural
(6) Part 601 - Statement of Procedural Rules
The numbers immediately after the decimal point refer to the Code section to which the regulations apply. In the citation Treas. Reg. § 1.61–9(c), the number 61 refers to IRC § 61. The regulations are sequenced by Code section numbers. For example, Treas. Reg. § 31.6051 comes before § 31.6052 but after § 301.6047.
The section number of the regulation is separated from the Code section by a hyphen. Again, using the citation Treas. Reg. § 1.61–9(c), the number 9 is the regulation section number and (c) is the subsection.
Generally, there is no direct correlation between the sequence designation of the Internal Revenue Code and the organization of a Treasury Regulation. IRC section 1245(c) discusses "Adjustment to Basis," while the interpretive discussion of the same topic is found in Treas. Reg. section 1.1245-5.
Regulations may only apply to a particular time period. This fact is sometimes reflected by the publisher in the paragraph heading or symbols when accessed via electronic tax law research. Look for disclaimers and cautions regarding time frames.
Regulations do not always reflect recent changes in the law and may not be applicable to years following a change in the law. An example would be when IRC 179 changed from additional first year depreciation to section 179 expensing. Occasionally, when a major change of a particular code section has been enacted and the Commissioner issues new regulations, two sets of regulations will appear covering the same code section. Generally the new regulation is distinguished from the old regulation by adding a letter after the code section part of the citation. For instance 1.170A-1.
Financial Recordkeeping Regulations are issued by the Treasury Department under authority of the Federal Deposit Insurance Act, 12 U.S.C. 1829b, §§ 1951–1959, and the Currency and Foreign Transactions Reporting Act, 31 U.S.C. §§ 103.11–103.53. The regulations specify the financial reports and records to be kept and/or filed by those engaged in domestic and foreign currency transactions.
The Internal Revenue Bulletin (I.R.B.) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official IRS rulings and procedures and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published on a weekly basis by the Government Printing Office.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated.
In addition to Revenue Rulings and Revenue Procedures, a number of miscellaneous documents having application to tax law interpretation and Documents administration are published in the Bulletin.
Announcements — Announcements are public pronouncements on matters of general interest, such as effective dates of temporary regulations, clarification of rulings and form instructions. They are issued when guidance of a substantive or procedural nature is needed quickly. Announcements can be relied on to the same extent as revenue rulings and revenue procedures. Announcements are identified by a two digit number representing the year and a sequence number.
Notices — Notices are public announcements issued by the Internal Revenue Service. Notices appear in the Internal Revenue Bulletin and are included in the bound Cumulative Bulletin. Notices are identified by a two digit number representing the year and a sequence number.
Delegation Orders — Commissioner Delegation Orders formally delegate authority to perform certain tasks or make certain decisions to specified Service employees. Delegation orders are identified by a number and are located in IRM 1.2.2. through IRM 1.2.53. Any delegation order approved between IRM updates can be found on the Office of Servicewide Policy, Directives and Electronic Research (SPDER) web site under Internal Management Documents – Unpublished Delegation Orders. Some delegation orders are selected for publication and appear in the Internal Revenue Bulletin and are included in the Cumulative Bulletin. Instructions for preparing, clearing and issuing delegation orders can be found in IRM 1.11.4, Internal Management Document System, Delegation Orders.
Items appearing in the Internal Revenue Bulletin that have not appeared in the Cumulative Bulletin should be cited to the weekly Bulletin as follows, Rev. Rul. 96–55, 1996–49 I.R.B. 4. Internal Revenue Bulletin No. 1996–49 was issued December 2, 1996. Revenue Ruling 96–55 is found at page 4.
The Cumulative Bulletin is a consolidation of items published in the weekly Internal Revenue Bulletin. The Cumulative Bulletin is issued on a semiannual basis. The Cumulative Bulletin is number 1 to 5, inclusive (April 1919 to December 31, 1921); and I–1 and I–2 to XV–1 and XV–2, inclusive (January 1, 1922, to December 31, 1936) . Each Cumulative Bulletin number thereafter bears the particular year covered, for example, 1963–1 (January 1 to June 30, 1963).
The Cumulative Bulletin is divided into four parts:
Part I, 1986 Code: This part is divided into two subparts based on provisions of the Internal Revenue Code of 1986. Arrangement is sequential according to Code and regulations sections. The Code section is shown at the top of each page.
Part II, Treaties and Tax Legislation: This part is divided into two subparts as follows: (1) Subpart A, Tax Conventions, and (2) Subpart B, Legislation and Related Committee Reports.
Part III, Administrative, Procedural, and Miscellaneous: To the extent practical, pertinent cross references to these subjects are contained in the other parts and subparts.
Part IV, Notice of Proposed Rule Making: The preambles and text of Proposed Regulations that were published in the Federal Register during this six month period are printed in this section. Included in this section is a list of persons disbarred or suspended from practice before the Internal Revenue Service.
The title of Cumulative Bulletins issued before 1937 does not reflect the year of issuance. A citation to the Bulletin must include the year in parentheses at the end of the citation, as follows: S.S.T. 31, XV–2 C.B. 400 (1936).
After 1936, a citation to the Bulletin is as follows: Rev. Proc. 71–4, 1971–1 C.B. 662. Revenue Procedure 71–4 is found at page 662, volume one of the 1971 Cumulative Bulletins (January – June, 1971).
To call attention to a certain page of a document, such as the Bulletin, show first the page on which the document begins followed by the page to which attention is directed. Thus, the citation Rev. Rul. 63–107, 1963–1 C.B. 71, 74, directs the reader’s attention to page 74 of Rev. Rul. 63–107 found in volume 63–1 of the Cumulative Bulletin, starting on page 71.
Revenue Rulings (Rev. Rul.) represent the conclusions of the Service on the application of the law to specific facts stated in the ruling. In rulings based on positions taken in private letter rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.
A revenue procedure (Rev. Proc.) is issued to assist taxpayers in complying with procedural issues that deal with tax return preparation and compliance.
The purpose of revenue rulings and revenue procedures is to promote uniform application of the tax laws. Internal Revenue Service employees must follow revenue rulings and revenue procedures. Taxpayers may rely on them or appeal their position to the Tax Court or other Federal court.
Revenue Rulings and Revenue Procedures that have an effect on previous rulings use the following defined terms to describe the effect:
Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the original fact situation.
Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, confusion. It is not used where a position in a prior ruling is being changed.
Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them.
Modified is used where the substance of a previously published position is being changed.
Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. The term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in law or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted.
Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling.
Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings) . Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desirable to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case the previously published ruling is first modified and then, as modified, is superseded.
Supplemented is used in situations in which a list, such as a list of the name of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series.
Suspended is used in rare situations to show that the previously published ruling will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study.
Rulings do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. In applying published rulings, the effects of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered. Caution is urged against reaching the same conclusion in other cases, unless the facts and circumstances are substantially the same.
Revenue Rulings and Procedures are published by the Internal Revenue Service in the Internal Revenue Bulletin.
Locating a ruling or procedure requires the following information from the citation:
The year the ruling or procedure was issued,
The ruling or procedure number,
The volume number of the I.R.B. or C.B.,
The page number of the Ruling or Procedure.
Rev. Rul. 76–12, 1976–2 C.B. 88, is illustrated below:
The Bulletin Index-Digest System provides a way to quickly research Revenue Rulings, Revenue Procedures, Public Laws, Treasury Decisions, and other matters of a permanent nature published since 1952 in the Internal Revenue Bulletin or Cumulative Bulletin. The Index-Digest is published by the Government Printing Office. It is a comprehensive, up-to-date research tool and consists of four Services:
Service No. 1, Income tax (Publication 641);
Service No. 2, Estate and Gift Tax (Publication 642);
Service No. 3, Employment Tax (Publication 643);
Service No. 4, Excise Taxes (Publication 644);
Each Service consists of a basic volume and cumulative supplements that provide (1) finding lists of items published in the Bulletin , (2) digests of Revenue Rulings, Revenue Procedures, and other published items, and (3) indexes of Public Laws, Treasury Decisions, and Tax Conventions.
IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position.
This section focuses on the Federal courts (and their predecessors) that interpret Federal tax law, and the role of case law in tax research and decision making. This section includes the following:
188.8.131.52.9.1 — U.S. Board of Tax Appeals 184.108.40.206.9.2 — Tax Court of the United States 220.127.116.11.9.3 — U.S. District Court and U.S. Court of Federal Claims 18.104.22.168.9.4 — Courts of Appeals 22.214.171.124.9.5 — U.S. Court of Appeals for the Federal Circuit 126.96.36.199.9.6 — Supreme Court 188.8.131.52.9.7 — Citators: Researching Case History 184.108.40.206.9.8 — Importance of Court Decisions
The U.S. Board of Tax Appeals is the predecessor of the United States Tax Court. Prior to 1942, the Board of the Tax Appeals was the prepayment forum for taxpayers who wanted judicial review of the Internal Revenue Service’s determination of deficiencies in income, excess profits, and estate and gift taxes.
Although these decisions are old, many retain precedential value because they address issues of continuing significance or state principles that are still valid. However, a B.T.A. decision may be based upon an authority that is obsolete and all references to the Code are to a pre-1954 Code. Therefore, caution must be exercised in citing B.T.A. decisions.
Board of Tax Appeals Decisions are cited as follows: Simons Brick Co. v. Commissioner is cited 14 B.T.A. 878 where "14" is the volume number, "B.T.A." is the publication title, and "878" is the page number. These decisions are available from commercial publishers.
When taxpayers disagree with a determination and the case is not settled through the Appeals process, taxpayers may petition the United States Tax Court for a judicial determination of tax liability before paying the tax. Tax Court offers taxpayers a forum for disputing deficiencies asserted by the Service under income, estate and gift tax, and certain (not all) employment tax and excise tax provisions.
Taxpayers can elect to have their Tax Court cases involving not more than $50,000 for any one year be handled under the court’s " small tax case procedures" . These procedures are authorized to allow the court to handle cases involving small sums of money in a more expeditious and informal manner. The decision of the Tax Court in a case handled under the "small tax case procedures" is final and may not be appealed by either party. These decisions have no precedential value.
Tax Court regular opinions are decisions of the Court that involve more than mere factual determinations or applications of well established legal principles. They generally involve new decisions on points of law that set precedents. Regular opinions are published in Reports of the United States Tax Court by the Government Printing Office. Commercial publishers also print these decisions.
Memorandum decisions primarily involve factual determinations and the application of well-established legal rules. Memorandum decisions do not warrant publication in bound volumes in the opinion of the Court. They are published in pamphlets by the Government and in bound volumes by commercial publishers.
In citing a regular decision of the United States Tax Court, examiners should name the case, refer to the number of the volume in which it is published, and the page in the volume on which the ruling begins. For example: Richard A. Sutter, 21 T.C. 170.
Examiners should be careful not to cite a Tax Court case in which the decision was against the Government unless that decision has been acquiesced by the Commissioner (see IRM 220.127.116.11.9.8.1(4)). If the decision was against the Commissioner and acquiescence followed, the decision must be noted as "Acq." . A decision against the Government which has been nonacquiesced in should be noted as "Nonacq" .
Memorandum decisions are usually cited with reference to one or both of two commercial publications. For example: R.L. Taylor v. Commissioner may be cited as follows:
CCH, Incorporated: Taylor, R.L. 40 T.C.M. 1206 1980–376 Dec. 37,228(M)
Research Institute of America: Taylor, R.L. 1980 T.C. Memo 80376
Some of the information is the same in each citation, such as the case name and decision number (1980–376 and 80376, respectively). However, reference to where the decision is found is different and the CCH citation includes a CCH decision number, Dec. 37,228(M).
The term "v. Commissioner" is not used in citing United States Tax Court cases.
Generally, the United States District Court and the United States Court of Federal Claims hear tax cases after the taxpayer has paid the tax and filed a claim for refund or credit. If the claim is denied by the Service, the taxpayer may file a suit for refund or credit either with the District Court or the Court of Federal Claims. District Court decisions may be appealed to the Courts of Appeals for the appropriate circuit and decisions of the court of Federal Claims may be appealed to the Court of Appeals for the Federal Circuit. The Supreme Court of the United States may, at its discretion, review decisions of a Court of Appeals.
United States District Courts are the primary Federal courts of original jurisdiction and are located across the United States and its possessions. This is the only court where taxpayers can request a jury trial.
Decisions of District Courts are published by commercial publishing houses. Examples are:
CCH Incorporated: United States Tax Cases (cited USTC)
Research Institute of America: American Federal Tax Report (cited AFTR)
West publishing Company: Federal Reports (cited F. 3R)
(NOTE: West Publishing Company publishes all decisions; CCH and Research Institute publish only Federal tax decisions.)
Citing District Court decisions is demonstrated below for the case of Ruby Smith Stahl v. United States.
CCH Incorporated: 69–1 USTC 9179
Research Institute: 23 AFTR 2d 69–563
West Publishing: 294 F. Supp 243 (D.D.C. 1969)
If a case has been decided but not published, cite as follows: Gifford Corp. v. United States, Civil No. 73–1250 (D. Mass., Jan. 10, 1973).
If a case has not been decided, cite as follows: Cowden Mfg. Co. v. United States, Docket No. 2227 (E.D. Ky. , filed April 17, 1972).
The decisions of the United States Court of Federal Claims, previously known as the United States Claims Court, are published by the following commercial publishers:
CCH Incorporated: United States Tax Cases (cited USTC)
Research Institute of America: American Federal Tax Report (cited AFTR)
West Publishing Company: Federal Reports (cited F.2d, F.3d, F.4th, etc.) and beginning October 1982, Court of Federal Claims Reporter (cited Fed. Cl. or Cl. Ct.).
Citing United States Court of Claims is demonstrated below for the case of Uptown Club of Manhattan, Inc. v. United States.
CCH Incorporated: 49–1 USTC 9261
Research Institute: 37 AFTR 1316
West Publishing: 83 F. Supp. 823 (Ct. Cl. 1949)
Citing a Claims Court decision is demonstrated below for the case of Recchie v. United States.
CCH Incorporated: 83–1 USTC 9312
Research Institute: 51 AFTR 2d 83–1010
West Publishing: 1 Cl. Ct. 726
Either the taxpayer or the government may appeal decisions of the Tax Court (except for cases handle under the "small tax case procedures " ), district courts, and the Court of Federal Claims to the United States Circuit Courts of Appeals. There are 13 courts of appeals.
District courts must follow the decisions of the court of appeals for the circuit in which they are located. For example, the District Court for the Eastern District of Missouri must follow decisions of the Court of Appeals for the Eight Circuit. If the eighth circuit has not rendered a decision on a particular issue, the district court may reach its own conclusion on the issue or follow the decision of another circuit or district court that has reviewed the issue. Because the courts in one circuit are not bound by the decision of the appellate court in another circuit, examiners should cite to cases supporting their position from the circuit where the taxpayer resides. If the appellate court for that circuit has not taken a position on the issue, the examiner may cite to the decisions of other appellate courts or district courts to support her position.
Since one circuit court is not bound by the decision of another circuit, it is important to find a case from the circuit that will hear the case when citing a case supporting the position taken on an issue. If a decision on a particular issue has not been rendered in the examiner’s circuit, cite a supporting decision rendered in another circuit.
Decisions of the Courts of Appeals are published by commercial publishers in the following volumes:
CCH Incorporated: United States Tax Cases (cited USTC)
Research Institute of America: American Federal Tax Report (cited AFTR)
West Publishing Company: Federal Reports, Second Series (cited F. 2d)
Citing United States Courts of Appeals decisions:
Example: In the case of Graham v. Commissioner, the citation is 6 F.2d 878 (4th Cir. 1964).
If a case has not been reported in Federal Reports, cite an unofficial reporter, as follows: Marwais Steel Co. v. Commissioner, 17 AFTR 2d 11 (9th Cir. 1965), or Marwais Steel Co. v. Commissioner, 66–1 USTC 85, 126 (9TH Cir. 1965).
Before October 1, 1982, decisions of the U.S. Court of Claims were appealed directly to the Supreme Court. A new appellate court, the United States Court of Appeals for the Federal Circuit was established in October 1982 to hear appeals of decisions of the United States Court of Federal Claims.
IRM Exhibit 4.10.7–1 shows the jurisdiction of the circuits of the Court of Appeals.
Decisions of the U.S. Courts of Appeal, including the Court of Appeals for the Federal Circuit, may be appealed to the United States Supreme Court. The Supreme Court of the United States is the highest court of the land. In general, Supreme Court review is discretionary, the Supreme Court accepts cases which it views as having national importance. Only a limited number of tax cases are heard.
Supreme Court review is by a petition for a Writ of Certiorari . If the Supreme Court accepts the petition, it will grant the writ, citedcert. granted. If the petition is denied, the case is cited cert. denied.
Supreme Court decisions are published by the Internal Revenue Service in the Internal Revenue Bulletin and Cumulative Bulletin. Commercial publishers as well as the Government Printing Office print the Court’s decisions:
CCH Incorporated: United States Tax Cases (cited USTC)
Research Institute of America: American Federal Tax Report (cited AFTR)
West Publishing Company: Supreme Court Reporter (cited S. Ct.)
United States Law Week (cited U.S.L.W).
Government Printing Office: United States Reports (cited U.S.)
Citing Supreme Court cases is demonstrated below for the case of Commissioner v. Neil Sullivan:
CCH Incorporated: 58–1 USTC 9368
Research Institute of America: 1 AFTR 2d 1158
West Publishing Company: 78 5. Ct. 512
United States Reports: 356 U.S. 27 (1958)
Cumulative Bulletin: 1958–1 C.B. 506
Knowledge of the judicial history of a tax case is important and research of case law is not complete until the history of a case is reviewed in a citator. For example, examiners should consider whether a case is current, whether there are other cases on the same point of law that should be considered, or whether a ruling is still valid. A citator lists court decisions alphabetically by case name and shows where the full text of the decisions may be found. The citator traces the case history from its original entry into the court system through the Supreme Court, if appealed.
Decisions reached in a lower court are sometimes reversed in the appellate or Supreme Court. When this happens, the lower case decision has no legal sanction and may not be cited as an authority. A citator will show whether a higher court reversed, affirmed, modified or otherwise disposed of a lower court decision.
Revenue Rulings and Procedures may be revoked, modified, amplified, etc. A citator findings list will indicate whether or not this is the case.
A citator will also direct examiners to subsequent cases or rulings that deal with the same legal principle in the setting of other Code sections or fact patterns. It lists everything that has been said about a case, ruling, or procedure.
Citators are published by commercial publishers of tax services such as CCH Incorporated and Research Institute of America. While formats differ, commercial citators provide basically the same information.
The following examples are taken from the Main Citator Table of CCH Incorporated’s Standard Federal Tax Reporter on compact disc.
Example 1: Case Citator
Batman, Ray L. ANNOTATED AT . . . 96 FED 2250.66; 8586.0358; 8706.075; 8706.11; 11, 025.3801; 13, 709.2261; 25,424 .95
SCt—Cert. denied, 342 US 877; 72 SCt 167
CA–5—(aff’g TC), 51–1 USTC P9305; 189 F2d 107
Miller, CA–10, 61–1 USTC 9156, 285 F2d 843
Finley, CA–10, 58–1 USTC 9517, 255 F2d 128
Batman, CA–5, 57–1 USTC 9247, 239 F2d 283
Christopher, CA–5, 55–1 USTC 9504, 223 F2d 124
West, CA–5, 54–2 USTC 9480, 214 F2d 300
Wofford, CA–5, 53–2 USTC 9637, 207 F2d 749
Mauritz, CA–5, 53–2 USTC 9495, 206 F2d 135
Tomlinson, CA–5, 52–2 USTC 9543, 199 F2d 674
Seabrook, CA–5, 52–1 USTC 9294, 196 F2d 322
Culbertson, Sr., CA–5, 52–1 USTC 9233, 194 F2d 581
Alexander, CA–5, 52–1 USTC 9232, 194 F2d 921
Tilden, Inc., CA–5, 51–2 USTC 9501, 192 F2d 704
Britt Est., CA–5, 51–2 USTC 9414, 190 F2d 946
Scott, DC—Ark, 53–1 USTC 9166, 110 FSupp 165
Lewis, TC, Dec. 20,733, 23 TC 538
West, TC, Dec. 19,435, 19 TC 808
Tomlinson, TC, Dec. 18,513(M), 10 TCM 828
TC—Dec. 17,553(M); 9 TCM 210
Explanations of the above citations are as follows:
Case name (Batman, Ray L.) and paragraph references to CCH Federal Standard Tax Reporter.
Batman was appealed to the Supreme Court; however, certiorari was denied.
Fifth Circuit Court of Appeals heard Batman and affirmed the Tax Court Decision.
These cases deal with the same legal principle or fact pattern and cite Batman.
Tax Court heard Batman and case was appealed to Fifth Circuit Court of Appeals.
Example 2: Rulings Finding List
Rev. Proc. 75–25, 1975–1 CB 720 ANNOTATED AT …96 FED 8471.90; 29,663.90 1975 CCH 6595
Amplified by: Rev. Proc. 78–25
Cited in: Jones, Dec. 49,862(M), 67 TCM 2997, TC Memo. 1994–230 Notice 91–4 T.D. 8408 Haynsworth, TC, Dec. 34,581, 68 TC 703 Rev. Rul. 76–247
Obsoleted by: Rev. Proc. 92–29
Superseding: Mim. 4027
Example 2 is self-explanatory.
Decisions made at various levels of the court system are considered to be interpretations of tax laws and may be used by either examiners or taxpayers to support a position.
Certain court cases lend more weight to a position than others. A case decided by the U.S. Supreme Court becomes the law of the land and takes precedence over decisions of lower courts. The Internal Revenue Service must follow Supreme Court decisions. For examiners, Supreme Court decisions have the same weight as the Code.
Decisions made by lower courts, such as Tax Court, District Courts, or Claims Court, are binding on the Service only for the particular taxpayer and the years litigated. Adverse decisions of lower courts do not require the Service to alter its position for other taxpayers.
It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings of lower courts in certain cases. An Action on Decision (A.O.D.) is the document making such an announcement. An Action on Decision is issued at the discretion of the Service only on unappealed issues, decided adverse to the government. Generally, an Action on Decision is issued where guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.
An Action on Decision may be relied upon within the Service only as the conclusion, applying the law to the facts in the particular case at the time the Action on Decision was issued. Caution should be exercised in extending the recommendation of the Action on Decision to similar cases where the facts are different. Moreover, the recommendation in the Action on Decision may be superseded by new legislation, regulations, rulings, cases, or Actions on Decisions.
Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions. The Service expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. Accordingly, the Service may acquiesce or nonacquiesce in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal. Regardless of the court deciding the case, the recommendation of any Action on Decision will be published in the Internal Revenue Bulletin.
The recommendation in every Action on Decision is summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both "acquiescence " and "acquiescence in result only" mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. The following differences are noted:
"Acquiescence" indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions.
"Acquiescence in result only" indicates disagreement or concern with some or all of those reasons.
Nonacquiescence signifies that, although no further review was sought, the Service does not agree with the holding of the court and generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a nonacquiescence indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.
Action on Decisions are published in the weekly Internal Revenue Bulletin and consolidated semiannually. The consolidation appears in the first Bulletin for July and in the Cumulative Bulletin for the first half of the year. The annual consolidation appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.
If the Commissioner has published an acquiescence, acquiescence in result only, or nonacquiescence in a Tax Court or Board of Tax Appeals decision, it must be included in the citation, as in the following examples:
Merle P. Brooks, 36 T.C. 1128 (1961), acq., 1962–2 C.B. 4.
Rodney Horton, 13 T.C. 143 (1949), acq. in result, 1959–2 C.B. 5.
Forest Lawn Memorial Park Ass’n. , 45 B.T.A. 1091 (1941), nonacq. 1960–2 C.B.
A Private Letter Ruling (PLR) represents the conclusion of the Service for an individual taxpayer. The application of a private letter ruling is confined to the specific case for which it was issued, unless the issue involved was specifically covered by statute, regulations, ruling, opinion, or decision published in the Internal Revenue Bulletin.
Technical Advice Memorandums (TAM) are requested by IRS area offices after a return has been filed, often in conjunction with an ongoing examination. TAMs are binding on the Service in relation to the taxpayer who is the subject of the ruling.
A private letter ruling to a taxpayer or a technical advice memorandum to an area director, which relates to a particular case, should not be applied or relied upon as a precedent in the disposition of other cases. However, they provide insight with regard to the Service’s position on the law and serve as a guide.
Existing private letter rulings and memorandums (including Confidential Unpublished Rulings (C.U.R.), Advisory Memorandums (A.M.), and General Counsel Memorandums (G.C.M.)) may not be used as precedents in the disposition of other cases but may be used as a guide with other research material in formulating an area office position on an issue.
Whenever an area office finds that a C.U.R., A.M., or G.C.M. represents the sole precedent or guide for determining the disposition of an issue and cannot to its own satisfaction find justification in the Code, regulations, or published rulings to support the indicated position, technical advice should be requested from the Headquarters Office.
Technical advice should be requested where taxpayers or their representatives take the position that the basis for the proposed action is not supported by statute, regulations, or published positions of the Service. If it is believed that the position of the Service should be published, the request for technical advice will contain a statement to that effect. Instructions for requesting technical advice from the Headquarters Office are contained in the second revenue procedure issued each year. Questions regarding the procedures should be addressed to the functional contacts listed in the revenue procedure.
Letter rulings and technical advice memorandums are available at www.irs.govI and from commercial publishers.
Letter rulings and technical advice memorandums are cited PLR or TAM, respectively, followed by a seven digit number. For example, PLR 8210019 or TAM 9643001. The first two digits indicate the year the ruling was published, for example, 1982 and 1996, respectively.
General Counsel Memorandums (GCM) are legal memorandums from the Office of Chief Counsel prepared in connection with the review of certain proposed rulings (Rev. Ruls., PLRs, TCMs) . They contain legal analyses of substantive issues and can be helpful in understanding the reasoning behind a particular ruling and the Service’s response to similar issues in the future.
Technical Memorandums (TM) function as transmittal documents for Treasury Decisions or Notices of Proposed Rule Making (NPRMs) . They generally summarize or explain proposed or adopted regulations, provide background information, state the issues involved, and identify any controversial legal or policy questions. Technical Memorandums are helpful in tracing the history and rationale behind a regulation or regulation proposal.
The Engineering Citator, Document 5262, contains annotations (short summaries of cases and rulings) and citations of precedents and published tax law developments pertinent to administering Internal Revenue Code provisions involving engineering matters.
Copies of the Citator and supplements are distributed to Service personnel most concerned with engineering issues.
A wide range of tax literature is available to Service personnel. Monthly publications such as The Journal of Taxation, Taxation for Accountants, and Taxation for Lawyers, published by Warren, Gorham & Lamont.
Numerous books presenting detailed analyses of tax laws and issues are available and provide excellent sources of information. One of the better known is Federal Income Taxation of Corporations and Shareholders by Bittker and Eustice, published by Warren, Gorham & Lamont, which has been cited by the Supreme Court.
A number of tax services are available from commercial publishers that provide explanations and annotations on a variety of tax issues. For example, CCH Incorporated’s Standard Federal Tax Reporter, Bureau of National Affairs’ Tax Management Portfolios , and Research Institute of America’s American Federal Tax Reports.
There are numerous sources of information available through on-line research. IRS has electronic access to thousands of data bases. See IRM 18.104.22.168.15.1 for more detail.
Electronic tax research using computers, compact discs, and on-line tax services is also available. Information can be accessed quickly and all references to a given topic, obtained by searching, by specific words or word groups. Most of the documents discussed above are available from commercial vendors on compact disc or online.
Employees needing access to electronic research tools should consult with their manager and visit the SPDER Reference Net website at http://rnet.web.irs.gov/. This site provides information on available services, training, and password access information.
The Examination Specialization and Technical Guidance (ESTG) Program Office focuses on compliance on an industry segment basis, issue basis, or return type basis. ESTG analysts/technical advisors facilitate the development of examiners’ expertise by providing guidance on issues specific to certain industries or return types and provide technical support to field examiners. They are responsible for preparing issue guidance and Audit Technique Guides(ATG) (also know as MSSP Guides) that provide auditing techniques, assist with issue identification and development, and tax law interpretation. Audit Technique Guides are available to the public and can be accessed at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Audit-Techniques-Guides-ATGs.
The Technical Advisor Program, under the operation of the Large Business & International Business Unit (LB&I), has been established to:
Ensure uniform and consistent treatment of issues nationwide.
Provide for better identification, development and resolution of issues.
Provide a vehicle for coordination of technical issues for LB&I and other Operating Divisions.
Technical Advisors, each serving as a nationwide expert in a particular industry or issue area, ensure consistent treatment of all taxpayers within their specific industry or issue area. Visit the LBI Intranet web site for a current listing of all Technical Advisors and the industry or issue areas they represent, and also to access information available for their industry or issue areas.
For more information about the Technical Advisor Program, see IRM 4.10.1.
Examiners gather facts to correctly determine a taxpayer’s tax liability. This determination must be made on the basis of all available facts, including facts supporting the taxpayer’s position. For this reason, examiners should determine all the facts supporting both sides of an issue.
Examiners should pursue an examination to a point where a reasonable determination of the correct tax liability can be made. In the daily application of this responsibility, examiners must deal with problems of evidence and its evaluation. The following discussion is presented as a series of definitions and explanations to assist examiners in determining the nature and sustaining value of various types of evidence.
Evidence is something which tends to prove a fact or point in question. Evidence is distinguished from proof, in that proof is the result or effect of evidence.
The Internal Revenue Code requires all taxpayers to keep adequate records. There are times, due to unusual circumstances, when records do not exist. In such cases, oral testimony may be the only evidence available. Therefore, oral statements made by taxpayers to examiners represent direct evidence which must be thoroughly considered. Although self-serving, uncontradicted statements which are not improbable or unreasonable should not be disregarded. The degree of reliability placed on a taxpayer’s oral statements must be based on the credibility of the taxpayer and surrounding circumstantial evidence (IRM 22.214.171.124.10 below). The following general guidelines should also be considered:
Oral evidence should not be used in lieu of available documentary evidence.
If the issue involves specific recordkeeping required by law and regulations (e.g., IRC § 274), then oral evidence (testimony) alone cannot be substituted for necessary written documentation.
Oral testimony need not be accepted without further inquiry. If in doubt, attempts should be made to verify the facts from other sources of evidence.
In some instances a summary of a conversation or statement made by a taxpayer or witness should be prepared as documentation of the oral testimony and the taxpayer (or third party) should be requested to sign the document. It should always be signed by the examiner or examiners party to the interview. If the taxpayer or third party does not sign the documentation, then it is considered a report of the interview. This summary document should always contain:
Date, time and place of contact,
Name of the parties present, and
Description of what transpired.
Sometimes a more formal written statement is needed when documentation is not available and oral testimony will significantly affect the outcome of the case. In these cases examiners should assume that the case may eventually be resolved through litigation and should use formal written statements such as affidavits to record taxpayer or third party statements. An affidavit is an attested statement and has great validity when properly prepared and voluntarily given. Affidavits should be completed using Form 2311. Affidavits may be used:
When other documentary evidence is unavailable,
When the examiner wants the taxpayer’s statements to become part of the case file,
To help accumulate complete and accurate information.
To record the testimony of a witness, and
To prevent a taxpayer from changing testimony.
If oral testimony is accepted or where oral testimony is not allowed, the workpapers should reflect a full development of the facts, oral statements, corroborating evidence and conclusions, including an explanation of the factors supporting the conclusion. "Per oral testimony" or "as reasonable" are insufficient unless the amounts are both de minimis and reasonable.
One of the basic rules of evidence is that witnesses (either taxpayers or third parties) can testify only about facts of which they have first hand knowledge. In other words, witnesses must be able to say the facts to which they testify are true.
Some issues are so difficult that the ordinary person needs assistance from someone more familiar with the subject to understand and resolve the matter at hand. An expert opinion is made by someone with the education and experience to qualify as an expert. Thus, expert testimony is needed.
Hearsay is what a witness says another person was heard to say. It is a secondary source of information and generally the reliability and trustworthiness of the evidence rests upon the veracity and reliability of a person giving testimony.
A common example of hearsay evidence is testimony of taxpayers’ representatives. It should therefore be recorded in the workpapers by examiners. Hearsay often leads to primary sources of information.
A statement that is harmful to the person making the statement is considered an "admission against interest" . When an admission is made voluntarily and with deliberation, it represents substantial evidence that the fact admitted is probably true.
An opinion is a belief not based on absolute certainty, or a judgment or evaluation of what seems to be true. Opinions are statements of personal feelings.
An opinion is not conclusive evidence of a fact. But opinions may be the only evidence available. Before accepting an opinion as evidence, the examiner should solicit other documentary evidence.
Opinions emphasize connotative meaning, that is, how someone feels about something; how they value it.
Opinions cannot be proven or verified. The only criterion for testing an opinion is whether it is acceptable or not, believed or not believed.
There are three primary types of opinions:
Unqualified Opinion: An unqualified opinion is made by someone who is only guessing. The individual has neither the education or work experience to make an intelligent estimate.
Biased Opinion: A biased opinion is made by someone whose relationship with the taxpayer influences the opinion. Suspect bias when a valuation or opinion is rendered by a family member or someone receiving a substantial benefit from the taxpayer.
Expert Opinion: An expert opinion is made by someone with the education and experience to qualify as an expert, but biases, for example, family or employment relationships, should be considered. Any doubt about the validity of an expert’s opinion should be resolved by seeking a second expert’s opinion.
Observations are statements, judgements, or inferences of fact based on something observed. It is the act of recognizing and noting a fact or occurrence.
Documents are another form of evidence. Documentary evidence is generally regarded as having great probative (providing proof or evidence) value. Writings made contemporaneously with the happening of an event generally reflect the actual facts and show what was in the minds of the parties to the event.
While documentary evidence has great value, it should not be relied on to the exclusion of other facts. Facts can also be established by oral testimony and there will be occasions when courts will give greater weight to oral testimony than to conflicting documentary evidence.
Circumstantial evidence is evidence from which more than one logical conclusion can be reached. To be useful, both the credibility of the evidence and the reasonableness of the conclusion should be evaluated.
The best evidence rule requires that, when possible, original evidence be used. Therefore, examiners should always ask to the see original documents when there is reason to believe such documents are available.
Secondary evidence is used when original evidence is unavailable. Examples of acceptable secondary evidence are copies of original documents made by an examiner. In the absence of original documents, copies made by the examiner become the best evidence available.
The fact in dispute can, in some cases, be proved by showing other facts from which the fact can be inferred. In other words, as a matter of logic, an inference can be made from facts to decide a disputed fact.
An inference is a logical conclusion based on facts. Things beyond the range of what can be observed are inferences.
After all the facts have been gathered through taxpayer interviews; examination of the books, records and supporting documents; interviews with third parties; and, having researched questionable items, the examiner has all the information to be considered in resolving the issues. At this point the examiner will use his/her professional judgement in considering all the information to arrive at a conclusion.
Examiners are expected to arrive at a definite conclusion by a balanced and impartial evaluation of all of the evidence. Examiners are given the authority to recommend the proper disposition of all identified issues, as well as any issues raised by the taxpayer.
Once the examiner has reached a conclusion for an issue, the examiner should communicate their decision to the taxpayer and/or representative. Copies of the examiner’s workpapers may be provided to the taxpayer and/or their representative. The examiner should attempt to resolve issues as the audit progresses.
Examiners will employ independent and objective judgment in reaching conclusions on issues being examined and in all aspects of their duties and will decide all matters on their merits, free from bias and conflicts of interest. Fairness will be demonstrated by:
Making decisions impartially and objectively based on consistent application of procedural and the applicable tax law,
Treating individuals equitably,
Being open-minded and willing to seek out and consider all relevant information, including opposing perspectives,
Voluntarily correcting mistakes and improprieties made by themselves or someone else in the Service and refusing to take unfair advantage of mistakes or ignorance of citizens, and
Employing open, equitable, and impartial processes for gathering and evaluating information necessary to decisions.
Examiners will use their professional judgment in evaluating all evidence to reach a conclusion. Examiners seldom have all of the information they would like to have to definitively resolve an issue. Examiners, therefore, must decide when they have enough, or substantially enough, information to make a proper determination for all issues under consideration. The sooner this point is reached, the more timely the case can be completed and the less burden will be placed on the taxpayer.
IRC section 274(d) specifies recordkeeping rules that are required in certain situations. Treasury Regulations 1.274–5(c)(2)(v) states that it is permissible to allow a deduction without complete documentation if the taxpayer can show he or she has "substantially complied" with the adequate recordkeeping requirements. The examiner will use his/her skill and judgement in developing the surrounding evidence when less than the required documentation is available, so that the taxpayer is treated fairly, but does not profit from failure to keep records.
To determine if the taxpayer has "substantially complied, " the following factors should be considered:
Number and type of expenditures involved,
Elements of documentation missing,
Reason(s) why deduction was not properly substantiated,
Availability of other information to substantiate the expenditure,
Materiality of unsubstantiated items, and
Relative tax significance of the items.
A determination of taxpayer credibility is most often required in connection with evaluating oral evidence presented by taxpayers (see IRM 126.96.36.199.2, Oral Testimony).
It is the responsibility of examiners to establish the taxpayer’s or third party’s credibility as part of the evaluation of oral evidence. Corroborative or contradictory details will have an important bearing on determining the reasonableness and probability of the statements.
If the statements of taxpayers, in the judgment of examiners, suggest some degree of unreliability, the decision to accept some, all or none of the oral statements as credible evidence should take this into account. However, unless taxpayers’ statements are found to be wholly unreliable, they must be given some weight in the conclusion reached.
When deductions (such as exemptions for dependents) are based on a substantial number of small expenditures all of which cannot be substantiated by documentary evidence, examiner judgement will be used to reach a reasonable determination. This is provided there is basis for allowance under the law and regulations.
These instructions are not intended to relieve taxpayers of the burden of proof, nor to sanction their failure to comply with the recordkeeping requirements of the law and regulations. Rather, they are intended to give examiners flexibility in the evaluation of incomplete evidence that is often encountered in everyday administration of the tax laws.
Examiners will exercise sound judgment to make reasonable determinations. The examiner must be sure that there is a basis for each allowance. This involves consideration of the following elements, which will vary according to the nature of the items involved and the circumstances of the case:
Considering the extent to which detailed documentation is required,
Examining all existing records essential to adequate substantiation, and
Determining the weight to be accorded oral statements and explanations.
Close approximations of items, not fully supported by documentary proof, can frequently be established through reliable secondary sources and collateral evidence. For example, in questionable exemption cases, the fact that taxpayers cannot furnish documentary evidence in support of some of the amounts contributed need not be fatal to allowance of the exemption. Taxpayers may be able to demonstrate the total cost of support with reasonable certainty and satisfy examiners, for example, by third-party affidavits, that only nominal amounts were contributed by others.
Due consideration should be given to:
Reasonableness of the taxpayers’ stated expenditures in relation to the taxpayers’ reported income,
Reliability and accuracy of the taxpayers’ records (determined by examining items on the return more readily lending themselves to detailed recordkeeping) , and
General credibility of the taxpayers’ statements in the light of the entire record in the case.
The practice of disallowing amounts claimed because there is no documentary evidence available, which will establish the precise amounts beyond any reasonable doubt (even though it is clear that the taxpayer did incur some expense) ignores commonly recognized business practice, as well as the fact that proof may be established by credible oral testimony. However, an arbitrarily computed portion of deductions in this situation will not be allowed merely for the purpose of expediting the closing of the case.
For instance, if a taxpayer cannot precisely document amounts spent for expenses while away from home on business, examiners may establish that reasonable amounts were spent for such items if taxpayers can clearly establish the following:
Time: Dates of departure and return for each trip away from home, and number of days away from home,
Place: Destinations or locality of travel, for example, name of city or town,
Business Purpose: business reason for travel or nature of business benefit derived or expected to be derived, and
Proof that Expenditures were incurred: a reasonable showing, based upon secondary evidence, including oral testimony, that out-of-pocket expenses were paid.
The extent of the allowance in (7) above should be governed by the principles stated in (4), (5) and (6) above. Allowances should be consistent with an appraisal of the facts and conservative to ensure that taxpayers do not profit from failure to keep required records of all elements of travel expenses.
The Internal Revenue Manuals(IRM) contain tolerances to be observed for deficiencies and various types of penalties. Consult the applicable IRM as needed.
The definition of "significant" or " material" depends on an examiner’s evaluation of a return as a whole and the items that comprise the return. There are several factors, however, that examiners must consider when determining whether an item is significant. These factors include:
Comparative size of the item,
Absolute size of the item,
Inherent character of the item,
Evidence of intent to mislead,
Beneficial effect of the manner in which an item is reported, and
Relationship to/with other item(s) on a return.
Generally, automatic adjustments (obvious errors or omissions on the return) in excess of tolerances are to be considered significant items.
The impact on compliance within a segment of the population, sector of the economy, or similarly situated taxpayers will be considered when making a decision whether or not to raise an issue.
Once an examination has begun and a decision is made to limit the scope of an examination on account of collectibility, examiners will complete the examination at the earliest possible opportunity.
In making the determination, the following should be considered:
Are the taxpayers considering bankruptcy proceedings?
Are there net operating losses that could be utilized in the current year to absorb any potential tax liability resulting from an examination?
Are the taxpayer’s bank accounts overdrawn?
Do the taxpayer’s liabilities exceed the taxpayer’s assets?
Are there collectibility indicators on the Charge-Out document?
Factors such as future earning power, age, assets, liabilities, education, profession or trade, and health.
The steps taken to determine whether to limit the scope of the examination are to be documented in the case file.
When an issue is examined and based on the findings, the examiner decides further issue development is not warranted, the examiner should use the Issue Lead Sheet to document what work has been performed, findings, and conclusions to support the examiner’s determination to get out of the issue
For field examinations, if the examiner decides based on information developed during the examination that the examination of remaining issues as originally planned is no longer warranted, the examiner should use the Risk Analysis Workpaper to document the decision. The Risk Analysis Workpaper should be filed as a separate line item in Section 600.
For office examinations, if the examiner decides based on information developed during the examination that the examination of remaining issues as originally planned is no longer warranted, a risk analysis workpaper is not required, only a comment on the leadsheet or Form 4700 is needed.
The scope of the examination may be limited on an employment tax examination. However, examiners should avoid taking any action that would give the taxpayer a safe haven. As an alternative, examiners should limit the number of returns examined. This approach minimizes the potential tax liability, while avoiding the likelihood of giving the taxpayer a safe haven.
When permission has been given to limit the scope of the examination due to collectibility, the following adjustments should be included in the audit report:
Adjustments in the taxpayers’ favor,
Other issues "developed," up to the point of limiting the scope of the examination.
Judgment should be exercised when identifying which issues are to be considered "developed." The following areas should be considered in making the decision:
The additional time required to complete the issue. Avoid raising an issue unless the audit work is substantially complete.
The potential for future non-compliance,
The extent of statutory authority. Avoid issues in which the statutory authorities are inconclusive unless there are overwhelming compliance considerations.
Once a determination to limit the scope has been made and approved, the determined tax liability will always be assessed.
In examinations conducted by examiners using field techniques, timing issues should be dealt with at the planning level. Generally, planning an examination to include short-term timing issues is not an effective use of resources. However, unplanned timing issues which are uncovered or arise as a correlative adjustment during an examination of non-timing issues should be made if cost effective to do so.
The pre-contact and/or examination plan should preclude the inclusion of timing issues, except those with long term, flagrant short term, indefinite, or permanent deferral features.
Coordinated Issues may be proposed by LB&I Technical Advisors to ensure that key issues within particular industry or issue areas are raised, developed and resolved on a consistent basis. The purpose of Coordinated Issues is to provide examiners with guidance on significant national issues that are not being resolved consistently. Coordinated issues establish uniform positions within industry or issue areas. Examiners cannot deviate from such positions without the concurrence of the responsible LB&I Industry/Issue Team. See IRM 188.8.131.52.1.8, Industry/Issue Teams for more information on Industry/Issue teams.
Visit the LB&I Intranet web site for a listing of coordinated issues.
For more information on Coordinated Issues, see IRM 184.108.40.206.1.7, Coordinated Issues.
The term whipsaw refers to situations where the government is subjected to conflicting claims by taxpayers. A potential whipsaw situation exists whenever there is a transaction between two parties and correct reporting of the transaction may benefit one and adversely impact the other for tax purposes.
A potential whipsaw situation could be present in almost any transaction; however, experience has shown the following issues to generate the majority of whipsaw cases:
Goodwill vs. covenant not to compete,
Alimony vs. child support,
Allocation of purchase price,
Buyer vs. seller,
Sale vs. rental/royalty,
Employee vs. independent contractor,
Payments to widows (gift vs. taxable income),
Dependency exemptions for children of divorced parents,
Husband and wife filing separate returns,
Grantor, trust, and beneficiaries,
Parent and child,
Decedent and decedent's estate,
Taxpayers in which the Commissioner has invoked the provisions of IRC section 482, and
Parent and subsidiary corporations .
When whipsaw issues require ( i.e. material tax consequence), an examination of both parties, examiners will secure the name, address, and the tax identification number (TIN) of the related party. A transcript will be requested to determine the related party's examination status.
If a related party is under examination, then the examiner assigned to the case will be notified.
If the related party is not under examination, then the examiner will determine if they can examine the return or if a referral is needed. If a collateral examination is warranted, then Form 6229, Collateral Examination, will be prepared.
The primary objective of requiring support examinations of these returns is to assure consistent treatment of related taxpayers or taxpayers involved in the same transaction.
Communication with the taxpayer or representative on an on-going and continuous basis is a critical part of the examination process. Generally, the taxpayer should feel more involved in the audit process and will be better informed of the status of the examination. The examiner should discuss the progress of the audit and issues proposed with the taxpayer and/or representative at frequent intervals as the examination continues.
In office examinations, the examiner can discuss issues as they are concluded during a scheduled appointment or at the conclusion of the appointment. Whenever possible, the examiner should prepare an audit report at the conclusion of the appointment and discuss audit issues with the taxpayer and/or representative in a face to face meeting versus just mailing the report later.
In field examination, the examiner should discuss issues as they are concluded. This allows the resolution process to begin as the examination continues. Each issue is discussed as it is completed and resolved so that at the conclusion of field work the status of each issue is known. The examiner can then take the appropriate steps to close the case.
This section focuses on techniques for conducting closing conferences, presenting examination findings, explaining proposed adjustments, and soliciting agreements. Each situation is unique and techniques vary widely, but there are basic procedures which should always be followed. See IRM 4.10.8 for report writing requirements.
Generally, substantive issues should be proposed and discussed with taxpayer and/or his representative in a face to face meeting. In some circumstances, a telephone conference or call may suffice, but this would be the exception.
Generally, a report will not be mailed to the taxpayer prior to discussing findings and proposed issues with the taxpayer and/or his representative. Exceptions to this rule would be for the following:
no-show/ no-response appointments,
uncooperative taxpayers, or
when additional records are provided for the examiner to consider.
A revised report may be mailed to the taxpayer rather than presented in a face to face meeting.
To facilitate discussion at closing conferences, the examiner may provide the taxpayer with a listing and brief description of items to be discussed.
The examiner should choose the order in which issues will be presented at the closing conference. The order can be modified during the conference. While there is no "right" order or order which is best for all occasions, it is generally easier to resolve factual issues or issues involving an established application of law. These issues should be discussed first. Less certain issues should be discussed last.
Closing conferences vary in the degree of formality, but generally the following areas are covered:
The examiner discusses his findings with the taxpayer and/or representative.
The examiner provides the taxpayer and/or representative with the authority for his findings (law, argument and conclusion).
The examiner receives information from the taxpayer and/or representative and addresses any taxpayers concerns. It is very important that the examiner listen to the taxpayer and gets a clear understanding from all persons present that there are no pertinent facts other than those of which the examiner is aware. This can be done in a positive manner by stating, "This is my understanding . . .," and then detailing the facts as the examiner understands them. "Are we all in agreement on this? Are there any other material facts or circumstances of any consequence? "
The examiner solicits an agreement from the taxpayer.
When a joint return is being examined and only one spouse is present at the interview, a copy of the examination report must be mailed to the other spouse. If the taxpayers are represented by a power of attorney and he signs the audit report, copies of the audit report will be sent separately to each spouse.
On agreed cases, the examiner solicits payment of tax, interest and penalties.
(1) If taxpayer indicates an inability to pay the tax due at closing, alternative payment methods should be discussed. An installment agreement should be offered if the taxpayer meet the requirements. Form 9465, Installment Agreement Request, can be used to solicit a payment agreement.
(2) If the taxpayer and/or representative agree with the findings, but do not wish to pay the deficiency immediately, explain that a statement for the deficiency plus interest will be mailed. Their cancelled check will be their receipt. Secure appropriate waivers and close the case.
On unagreed cases, the examiner will:
(1) Offer the taxpayer a managerial conference.
(2) Determine if the case is wholly or partially agreed.
(3) Solicit the taxpayer(s)’ position on unagreed issues.
(4) Advise the taxpayer about Fast Track Settlement (FTS), if eligible. See IRM 220.127.116.11.5, SB/SE Fast Track Settlement.
(5) Advise the taxpayer of the appellate process and his Appeal Rights.
This section provides additional information for the processing of office examination cases. See IRM 18.104.22.168.1 for general information.
If the taxpayer says he has additional information to consider at the end of the initial meeting, this should not delay the issuance of a report. The taxpayer should be informed that the report will be revised or voided if adequate additional information is provided. The general rule is to issue a report at the conclusion of the initial appointment. The additional information the taxpayer wants considered can be mailed or faxed in for consideration. The examiner and taxpayer should agree on a mutually acceptable date (generally 15 days) for submission of additional information to be considered.
If the examiner does not issue a report at the conclusion of the initial appointment, the examiner and the taxpayer should agree on a mutually acceptable date (generally 15 days) for submission of additional information needed. The examiner will advise the taxpayer that if the additional information is not received, or is inadequate, an examination report will be issued based on the information currently available.
A focused IDR, using Form 4564, Information Document Request, should be issued to request additional information.
When the communication process between the examiner and the taxpayer is working well, the examiner will know at the end of field work which issues are agreed and which are unagreed.
If the desired level of communication and cooperation is not achieved, once the examination is completed, examiners will explain the basis of the proposed adjustments to taxpayer and/or his representative. The examiner should solicit agreement to the issues and attempt to secure agreement to the proposed tax liability. Examiners should be prepared to cite the law, regulations, rulings, and court decisions on which their conclusions are based and provide the taxpayer with copies of workpapers explaining the proposed adjustments.
Over assessment and no-change cases are generally not controversial and, in most instances, there is no need to hold a formal closing conference.
For agreed cases a closing conference is generally not required as the issues were probably discussed and resolved throughout the audit. However, in some instances, a formal closing conference will be needed. The examiner should discuss the revenue agent’s report with the taxpayer and/or representative to ensure that all questions are answered and that payment arrangements are made.
For unagreed cases a closing conference will generally be held.
When agreement is reached on the last of the disputed issues, examiners should review all questioned items and confirm that taxpayers and/or representatives are in complete agreement.
Calculate the deficiency or overassessment. Unless the tax computation is very complicated, it may be completed immediately and a report prepared. If everyone is in agreement, there is no reason for delay in execution of the waiver.
Examiners will solicit payment of the tax due including accrued interest and applicable penalties.
If taxpayers indicate an inability to pay the tax due at closing or within 120 days of the first notice, alternative payment methods should be discussed. An installment agreement should be offered if the taxpayers meet requirements.
If the taxpayer and/or representative do not wish to pay the deficiency immediately, explain that a statement for the deficiency plus interest will be mailed. Their cancelled check will be their receipt. Secure appropriate waivers and close the case.
If agreement can be reached on one or more, but not all issues or years, taxpayers should be encouraged to enter into a partial agreement by executing a waiver such as Form 870, covering the agreed issues or years.
Managerial involvement is required in all unagreed cases. The group manager should review the case file to ensure the taxpayer has submitted requested information and all issues are fully developed and documented. See IRM 22.214.171.124.11.5, Unagreed Closing Procedures.
Office Examination group managers are required to make contact in person or by telephone with taxpayers and/or representatives to offer a group manager's conference on cases where the taxpayer has requested their case be sent to Appeals.
Field Examination group managers are required to make contact in person or by telephone with taxpayers and/or representatives on all unagreed cases.
During conferences the group manager should discuss disputed issues with the taxpayer in an attempt to resolve the issues, obtain agreement, and limit taxpayer burden.
If the issues cannot be resolved with the involvement of the group manager, the taxpayer should be informed of the following resolution options:
FTS for eligible cases (see IRM 126.96.36.199.5, SB/SE Fast Track Settlement)
formal appeal with the Office of Appeals
pay the deficiency and file a claim for refund
receive a notice of deficiency and file a petition in the United States Tax Court
FTS provides taxpayers with an optional strategy to reach resolution when the SB/SE examiner and manager, and the taxpayer have exhausted established issue resolution strategies. For eligible cases, FTS allows taxpayers with unagreed examination issues to work with SB/SE Examination and the Office of Appeals to resolve the issues while the case remains in SB/SE's jurisdiction. FTS may be initiated any time after an issue has been fully developed.
The FTS process is estimated to be completed within 60 calendar days of Appeals' acceptance of the FTS application.
There are many benefits of the SB/SE FTS program, including:
Resolving issues at the lowest level possible by using the mediation skills and settlement authority of Appeals.
Reducing taxpayer burden.
Reducing overall case cycle time.
Reducing examiner burden in successful cases by eliminating the need for extensive write up, rebuttal memorandum, etc.
Reducing resource needs for the Service.
Subject to the limitations below, FTS is generally available for non-docketed SB/SE Examination cases with no regard to a dollar amount if:
Disputed issues are fully developed and facts, procedures, audit techniques, management involvement, applicable law, conclusions and adjustments are documented,
All examination issue resolution strategies have been exhausted, including the group manager conference, and
The taxpayer has stated a position in writing (or filed a small case request for cases in which the total amount for any tax period is less than $25,000, as described in Pub 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree).
Certain cases are excluded from the FTS program. The group manager and/or examiner will determine if the case meets the FTS eligibility requirements according to the "Case Eligibility and Exclusions" section of Announcement 2011-5, Extension of Fast Track Settlement for SB/SE Taxpayers Pilot Program. FTS should not be offered if the taxpayer:
Failed to cooperate, respond or submit requested information during the audit process, or
Failed to provide a stated position in writing in response to the proposed issues.
Any questions about FTS eligibility should be discussed with the group manager.
The Appeals team manager is available to assist the parties in making the eligibility determination, if necessary.
The Appeals team manager and group manager may agree to consider issues or cases that otherwise are not eligible for FTS, depending on individual circumstances. If an issue is determined not eligible for FTS, all other issues in the case are not eligible for FTS.
The group manager will review the case file to ensure the issue(s) is fully developed. An issue is considered to be fully developed when:
The examiner has considered all requested information and the issue can be written up as unagreed with supporting explanations (IRM 188.8.131.52, Unagreed Case Procedures (SB/SE Field and Office Examiners only), and
The case contains properly documented lead sheets and workpapers supporting the examiner’s position. The facts, applicable law, audit techniques used, management involvement and conclusions should be documented as described in IRM 184.108.40.206.7, Workpapers:Documenting Issues, or if applicable, IRM 220.127.116.11.6, Examination Delinquent Information Return Procedures.
The examiner will explain FTS to the taxpayer at the initial interview when he/she is informing the taxpayer of the examination and appeals process.
If a case is eligible for FTS, Pub 5022, Fast Track Settlement –A Process for Prompt Resolution of Small Business Self Employed Tax Issues, should be provided as follows:
Field Examination–when there are unagreed issues,
Office Examination–when the 30-day letter is issued.
If the case is eligible for FTS and there are unagreed issues remaining after the group manager has contacted the taxpayer in an attempt to resolve all issues (IRM 18.104.22.168.11.5, Unagreed Closing Procedures), the examiner or group manager will explain the benefits of the FTS program to the taxpayer. FTS should not be offered if the group manager has not spoken to the taxpayer/representative.
For eligible cases, FTS should be offered:
Field Examination - prior to issuance of a 30-day letter,
Office Examination - after the taxpayer has requested their case be sent to Appeals,
Civil Penalty Cases (both Field and Office Examination) where the taxpayer has not indicated agreement - prior to the case closing from the group.
If the case is eligible for FTS and the 30-day letter has been issued but the case has not closed from the group, applications for FTS should still be referred to Appeals for consideration.
The taxpayer, the examiner or the group manager may initiate the FTS process for eligible cases at any time after an issue is fully developed. Both parties must agree to the process.
The SB/SE FTS application package must contain the following:
Form 14017, Application for Fast Track Settlement, signed by the taxpayer(s), authorized representative, and group manager (the territory manager signature is not required in the Approving Operating Division Official section of the form) for the key case and any prior and/or subsequent tax periods.
Separate Forms 14017 with required signatures for related tax returns and unagreed civil penalty cases (note “CVL PEN” in the “Type of Tax” block on Form 14017).
Summary of the unagreed issues and copies of pertinent examination lead sheets and workpapers.
The taxpayer’s written response to the proposed issues.
The examiner will work with the taxpayer to prepare Form 14017 and provide the taxpayer with copies of pertinent workpapers in order for the taxpayer to prepare a written response to the disputed proposed issues.
The examiner will continue to work the case towards closure while waiting for the taxpayer’s submission of the SB/SE FTS application.
Upon receipt of the taxpayer’s signed SB/SE FTS application and written position, the examiner will ensure the SB/SE FTS application package is complete with pertinent workpapers attached. The examiner will, by the close of the next business day, forward the SB/SE FTS application package to the group manager for review, approval (signature) or denial, and processing.
Within three business days of the examiner’s receipt of the completed SB/SE FTS application package, the group manager will:
Review the SB/SE FTS application package,
If approved, sign the Form 14017, and make two copies of the signed SB/SE FTS application package; mail one to the taxpayer and retain a copy in the examination case file, and
Forward the original SB/SE FTS application package to the nearest servicing Appeals office. The MySB/SE Fast Track Settlement website provides contact information and FAX numbers for where to send the completed application package. The group manager will coordinate with Appeals to determine the appropriate method (fax or secure email) to send the SB/SE FTS application package to Appeals.
The full administrative case file will not be forwarded to Appeals. All documents submitted with the SB/SE FTS application package will be made available by Appeals to all parties present at the first FTS session, if needed.
The group manager should deny an application for FTS if the case is not eligible. See IRM 22.214.171.124.5.1, Determining Eligibility. However, if the taxpayer was uncooperative, or did not respond to document requests or did not submit an adequate written response to the Service’s proposed issues, FTS must be denied.
Any FTS application denied by the group manager, for reasons other than those defined in Announcement 2011-5, requires review and concurrence by the SB/SE territory manager.
The group manager will provide the territory manager a copy of the SB/SE FTS application package and the group manager's written explanation for the denial within three business days of the examiner’s receipt of the signed SB/SE FTS application package from the taxpayer.
The territory manager will respond to the group manager via email with their concurrence or non-concurrence. A decision by the territory manager not to accept a case into FTS is final.
The group manager will discuss the decision to deny the application with the taxpayer. The group manager must annotate the activity record to reflect the decision to deny the application and discussion with the taxpayer. The denied SB/SE FTS application package will remain in the case file.
The Appeals team manger will call the group manager to confirm the group manager’s eligibility determination within three business days of receipt of the SB/SE FTS application package.
If the SB/SE FTS application package is accepted, the Appeals team manager will assign the case to an Appeals Officer trained in mediation within three business days of receipt.
If Appeals determines the eligibility requirements are not met, or the case is specifically excluded from FTS, the Appeals team manager will contact the group manager within three business days of receipt, to explain the ineligibility determination, and return the SB/SE FTS application package to the group manager. The group manager will contact the taxpayer to inform the taxpayer of the reasons why the case is not eligible. The case file will be documented accordingly.
If Appeals denies the application for a reason other than a failure to meet an eligibility requirement or the defined excluded cases, Appeals will notify the group manager in writing within three business days to explain the reason for denial. Appeals will return the SB/SE FTS application package to the group manager. Appeals will notify the taxpayer of the reason for the denial in writing. Examples of cases that might not qualify for SB/SE FTS include:
Numerous issues requiring more than 60 days to resolve, and
Examination or taxpayer is unable to meet during the 60 day time frame.
Within five business days of case assignment, the Appeals official will contact the taxpayer and Examination to start the FTS planning process.
The Appeals official will work with Examination and the taxpayer/representative to identify and confirm the participants to the FTS session and ensure that all decision-making parties are present during the session. The SB/SE group manager will determine the SB/SE participants. SB/SE participants may include the group manager, the examiner, and others who have knowledge and expertise that may contribute to issue resolution. To facilitate resolution, the Appeals official should encourage the taxpayer's participation even if the taxpayer is represented.
The Appeals official has the right to ask either party for additional information to have full understanding of the issues and will share any information received with all parties prior to the session.
The Appeals official will schedule the FTS session at the servicing Appeals office or at another neutral site agreeable to the parties. The Appeals official will consider holding the session at a location that has the least cost or impact to the Service. In some instances, this could mean the Appeals official will travel to the examiner's post of duty (POD). The Appeals official should involve their manager and Examination in setting the location of the session. The parties should be flexible in setting the meeting location and should allow participation by phone if all parties agree and it meets the needs of the parties.
The case activity record must reflect all examination action taken by the examiner and group manager during the FTS process. If the examiner or group manager fails to meet any of the FTS time requirements, the reason(s) must be documented accordingly.
Examiners must update their case to status 15 and aging reason code (ARC) 23 when Appeals accepts the case into the FTS program. Upon completing the FTS session, the examiner should update the case back to status 12. The ARC 23 should remain on the case.
If the FTS session takes place at the Examination office, the examiner and group manager are responsible for reserving a conference room(s).
Examination brings tax law expertise and specific knowledge of the case issue(s) to the FTS session. The examiner and group manager are advocates for the government’s position during the FTS session. Examination may invite Counsel to attend the session to assist Examination, if needed.
The examiner and group manager will clarify and supplement the government’s position and provide information necessary to address arguments and information raised by the taxpayer.
All parties will be active participants during the FTS session.
The Appeals official has the ability to offer a settlement in both factual and legal issues in the event that the parties cannot reach settlement through mediation. Neither party is obligated to accept the settlement proposal offered by the Appeals official.
If the settlement proposal is accepted by Examination and the taxpayer, the case will be closed agreed by the examiner based on the Appeals settlement.
The examiner is expected to prepare a report (e.g., Form 4549), and the appropriate agreement forms at the conclusion of the session in order to secure agreement.
If the settlement proposal is rejected by either party, the examiner will close the case using regular unagreed procedures. (See IRM 126.96.36.199.5.4.3, SB/SE’s Rejection of a Settlement Proposal).
Case file containing workpapers
Copy of the SB/SE FTS application package
Laptop computer with RGS to prepare an examination report
Portable printer, if available
It is expected that the examiner and taxpayer are aware of all issues and claims, and have presented all documentation before the FTS application package is submitted to Appeals.
If the taxpayer and/or Examination presents new information related to the issue(s) during the FTS session, and the parties agree that the process will not be delayed beyond the goal of 60 days, the FTS process can and should continue.
If the parties determine that the process will be delayed beyond the goal of 60 days, the Appeals official will consider terminating the session until both parties have had adequate time to review and evaluate the new information. If Appeals does terminate the FTS session, the case is removed from the FTS program, and the taxpayer would have to re-apply. The examiner would update ERCS to status 12 but retain ARC 23 on ERCS. Once the new information is evaluated, the examiner should close the case agreed, if possible, or follow unagreed procedures, including offering FTS.
If the group manager rejects the Appeals official’s settlement proposal, which has been accepted by the taxpayer, by the close of the next business day, the group manager will notify the territory manager of the reasons for rejection of the settlement proposal in writing (e.g. memorandum, email). The territory manager must concur with the rejection in writing.
If the territory manager concurs with the group manager’s rejection of the Appeals official’s settlement proposal, and an acceptable alternative settlement cannot be reached, the FTS session will be terminated and the case file will be documented accordingly. The examiner will close the case using normal unagreed case closing procedures. (See IRM 188.8.131.52, Unagreed Case Procedures (SB/SE Field and Office Examiners only)).
If the territory manager does not concur with the group manager’s rejection of the Appeals official’s settlement proposal and agrees with the Appeals official’s settlement proposal, the examiner will prepare the report (e.g. Form 4549) based on that proposal, secure the taxpayer(s) signature and close the case using agreed closing procedures. (See IRM 184.108.40.206, Regular Agreed Cases (SB/SE Field and Office Examiners only)).
Both Examination and the taxpayer retain the right to withdraw from FTS throughout the entire process.
If after assignment in Appeals it is determined that the case is not ready for FTS or there is a change in the status of the case, Appeals and Examination will discuss a withdrawal of the case from FTS.
In the event of either party withdrawing, the Appeals official will notify the taxpayer and Examination, and return the SB/SE FTS application package to Examination.
Examination is expected to prepare a report (e.g. agreed or excepted agreed) and compute the applicable deficiency/over assessment at the conclusion of the FTS session for all cases closing fully agreed.
If the Appeals official settles the issues based on hazards of litigation, he or she will secure the appropriate waivers or closing agreements and provide them to Examination. Examination will follow procedures as stated in IRM 220.127.116.11, Excepted Agreed Cases, to prepare the report to be associated with the waivers or closing documents provided by Appeals.
If the case is closing fully agreed, without using hazards of litigation, Examination will follow agreed closing procedures as stated in IRM 18.104.22.168, Regular Agreed Cases (SB/SE Field and Office Examiners only).
If the taxpayer indicates agreement to some issues but not all of the issues at the conclusion of the FTS session, the examiner should secure a partial agreement.
The taxpayer will retain all appeal rights for issues that remain unagreed at the conclusion of the FTS session and Examination will close the case as either partially agreed or unagreed.
The Appeals official is required to complete Form 14000, Fast Track Session Report, which assists in planning the SB/SE FTS session and reports the progress of the issues in dispute. The report includes the issues, adjustment dollars in dispute, and the disposition of each issue.
The Appeals official will obtain signatures from the taxpayer, representative, if applicable, the examiner and group manager on the session report, and give all session participants a signed copy. The Appeals official will explain that the settlement is not final until the necessary closing documents or waivers are signed by all parties.
Form 14000 is not a waiver of restrictions on assessment; does not terminate consents to extend the statute of limitations; and does not start the running of any statute of limitations. The signature of an IRS official on the Session Report does not preclude the reopening of the case under IRM 22.214.171.124.1, Policy Statement 4-3.
When an SB/SE FTS case is closed (fully or partially resolved, not resolved, terminated or withdrawn) the Appeals official will prepare an “SB/SE FTS Closing Package” as stated in IRM 126.96.36.199.2, SB/SE FTS Closing Package, which will be routed to SB/SE. The package may include the following documents:
Form 5402, Appeals Transmittal and Case Memo (signed by the FTS appeals official),
Form 14000, Fast Track Session Report (signed by all parties)
Appeals Case Memorandum (ACM) (required only on hazards settlements),
Special Appeals agreement forms (e.g., 870-AD), or Form 906, Closing Agreement on Final Determination Covering Specific Matters, or Form 866, Agreement as to Final Determination of Tax Liability (required only on hazards settlements),
Correspondence received from and sent to the taxpayer/representative.
The examiner should retain the SB/SE FTS application package and/or closing package in the examination case file together with the related FTS documentation and all FTS correspondence.
Appeals will provide a survey to all taxpayers/representatives after each FTS session.
The prohibition on ex parte communications between Appeals employees and other Internal Revenue Service employees does not apply to the communications arising in SB/SE FTS because Appeals employees are not acting in their traditional Appeals’ settlement role. (See Rev. Proc. 2012–18, Ex Parte Communications Between Appeals and Other Internal Revenue Service Employees).
The FTS process is confidential with respect to all parties, pursuant to IRC 6103, Confidentiality and disclosure of returns and return information. All information concerning any dispute resolution communication is confidential and may not be disclosed by any party except as provided under 5 U.S.C. Section 574. See IRM 188.8.131.52, SB/SE FTS Confidentiality.
Case controls, jurisdiction and statute of limitations responsibilities remain with the Examination group.
The examiner must manually issue Letter 5320, Fast Track Settlement – Civil Penalty, to the taxpayer, in accordance with IRC 6751, Procedural requirements, and IRC 6303, Notice and demand for tax.
The examiner must complete Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, for each civil penalty with the FTS agreed civil penalty amount(s). To suppress incorrect computer-generated notices, write in the “Remarks” section of each page of Form 8278, the following:, “INPUT HOLD CODE 3 TO SUPPRESS NOTICE. PENALTY CASE HAS BEEN THROUGH FAST TRACK SETTLEMENT PROCESS.”
Write “Input hold code 3 to suppress civil penalty notice”, in the Special Features section, “Other Instructions”, of Form 3198, Special Handling Notice for Examination Case Processing.
In the examination of large, complex tax returns, numerous issues will likely be proposed. Adjustments need to be fully developed before they are presented to taxpayers for review. If adjustments are not adequately developed, the review process may take longer. Records should be maintained of proposed adjustments and every effort taken to secure taxpayers’ responses in a timely manner.
Form 5701 may be used to present proposed adjustments to taxpayers. Form 5701 is a three part form designed to provide written record of proposed adjustments. It is distributed as follows:
Part I is kept by the taxpayers.
Part II is returned by the taxpayers with their response to the issue.
Part III is maintained by the examiners.
Use of Form 5701 is not mandatory. Any method which provides a record of what was presented to taxpayers may be used.
The issuance of Form 5701 is recorded on the Issue Control Sheet, Form 5700. Form 5700 is a log which provides a record of outstanding Forms 5701, along with their current status.
Preparation of Form 5701 must be tailored to the peculiarities of the issue, the taxpayer, and the expected agreed or unagreed status of the proposed adjustment. Form 5701 may serve as a cover sheet for a Form 886A, Explanation of Items. This facilitates incorporation of an explanation of the issue into the Revenue Agent’s Report.
The suggested format for preparation of an issue proposal is as follows:
Taxpayer’s Position, and
The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) changed examination and administrative procedures for partnership examinations. The Sub-Chapter 5 Revision Act of 1982 made similar revisions to S corporations. Under the 1982 Acts, examinations, appeals, and judicial proceedings are, in general, conducted at the entity level. Closing conferences and issue proposals relating to TEFRA entities must by law follow rigid guidelines. Refer to the Tax Shelter/TEFRA Handbook for a complete discussion of TEFRA examinations and procedures.
Payment for agreed deficiency cases should be solicited and secured at the closing conference whenever possible. Taxpayers should be informed of the following benefits of making a current payment:
It decreases future interest that is compounded daily,
The interest and the failure to pay penalty will begin to accrue if the tax is not paid within 10 days from the date of the first notice,
Any personal interest will not be tax deductible.
If taxpayers state they cannot pay, ability to pay should be determined. The interview should include the following dialogue:
The total amount you owe, which includes tax, interest, and penalties, is $. Are you going to pay by check, money order, or cash? (If a taxpayer desires to make payment by cash, assistance will be requested, through the group manager, for Collection assistance in the acceptance of the payment.)
Given that full payment cannot be made today, what is the maximum amount that you can pay today?
Can you make full payment upon receipt of the first notice?
Do you have any assets which you can easily liquidate?
Can relatives or friends lend you the funds?
If taxpayers indicate that they will not be able to full pay at the conclusion of the examination or upon receipt of first notice, examiners have the additional responsibility to discuss installment agreement provisions.
If taxpayers state a willingness to pay, but do not meet the installment agreement criteria, examiners, through their group manager, will involve Collection.
Case files must be documented to reflect the taxpayers’ responses and actions taken to verify the taxpayers’ statements, if appropriate.
IRC section 7491 provides that the burden of proof in a court proceeding will shift from the taxpayer to the Service effective for court cases arising out of examinations started after July 22, 1998 in the following areas:
Income, estate, gift, and generation skipping taxes, if the taxpayer meets certain requirements described below.
Cases where any item of income is based solely on statistical information from unrelated taxpayers.
Shift burden of production only with respect to penalties.
The term examination includes an audit, the matching of amounts from information returns (IRP), and the review of a claim for refund prior to the issuance of the refund.
Congress reasoned that individual and business taxpayers were at a disadvantage in court against the IRS, and that there was fundamental unfairness in the process. With the burden of proof on the taxpayer, there was a presumption of "guilt, until proven innocent." Congress believed that if a taxpayer is generally law abiding, then the Service should prove that the position taken by the taxpayer is wrong.
IRC section 7491 applies specifically to income, estate, gift, and generation-skipping transfer taxes. For this purpose. self-employment taxes are treated as income taxes. It should be noted that the Director, Compliance (Examination) has determined the policy of Examination is that the general burden of proof provisions should apply to all Examination determinations of Federal tax liability. The proper identification, development, proposal and resolution of as many issues as possible is a good examination practice.
IRC section 7491(a)(1) shifts the burden of proof in a court proceeding from the taxpayer to the Service if the taxpayer produces credible evidence regarding the factual issues relevant to determining tax liability and also satisfies the criteria below.
The new legislation provides the criteria for shifting the burden of proof to the Service. For the shift to apply, the taxpayer has the burden of proving the following:
Met all substantiation requirements of the Code and regulations;
Maintained all records required by the Code and regulations;
Cooperated with any reasonable request for information, documents, and witnesses by the Service;
Exhausted all its administrative remedies, including appeal rights; and,
Met certain net worth qualifications but only if the taxpayer is a partnership, corporation, or trust. Special rules apply to Qualified Revocable Trusts (see Section 7491(a) of the Internal Revenue Code). There is no net worth qualification for individuals (an estate is considered an individual).
IRC section 6201(d) became effective in 1996 and applies without regard to IRC section 7491. If the taxpayer meets the conditions of IRC section 6201(d), the Service has the burden of producing information to support income items reported on the information return.
IRC section 6201(d) requires that the Service produce " reasonable and probative information" in any court proceeding regarding a deficiency based on an information return if: (1) the taxpayer raises a reasonable dispute and (2) the taxpayer has fully cooperated with the Service. Full cooperation includes timely compliance with requests for information, including access to witnesses and documents within the control of the taxpayer. If the taxpayer does not raise a "reasonable dispute" , the Service will not be required to produce any information beyond the information return.
The examiner should take the following actions when a taxpayer disputes receipt of income reported on an information return (IRP), or disputes the accuracy of the information return:
Contact the third party payer and request verification of the accuracy of the information document;
Document the examiner’s activity record to show the date the letter was sent;
Retain a copy of the letter and third party payer’s response in the case file;
If the third party payer does not respond to the verification letter, or responds that the records no longer exist, the adjustment may need to be conceded if the Service cannot obtain reasonable and probative information from another source.
It should be noted that relatively few audits result in litigation, the outcome of tax litigation rarely turns on who has the burden of proof, and those cases where the taxpayer refuses to provide documents and refuses to cooperate are not affected at all by IRC section 7491(a). However, this does not mean examiners should not follow sound audit practices.
Even before the burden of proof provisions were enacted in 1998, the Service sought to make sure that its technical positions were well thought out, the facts were appropriately developed, audit conclusions were well supported, and the case file was well documented.
If the examination ultimately reaches litigation, and it becomes necessary to determine whether examiner requests for information were made and were reasonable, the determination will depend upon the facts and circumstances of each case as documented in the case file.
The use of Form 9984, Examining Officer's Activity Report, or the RGS equivalent, is required for:
Uniform case file documentation of examination activities,
Examination Quality Measurement System (EQMS) case reviews,
The possibility of having to respond to a taxpayer's claims for interest abatement under IRC section 6404(e), and
Determining whether taxpayers fully cooperated with reasonable requests for information.
Examiners and any person (Group Manager, Group Secretary, Appointment Clerk, Audit Accounting Aid, Tax Examiner, Reviewers, etc.) are required to document each action taken on the case using the Form 9984 (or RGS equivalent). Documentation of activity begins on the date the taxpayer is notified in writing of the commencement of an examination. Actions after assessment (i.e., audit reconsiderations, collection referrals, etc.) must also be documented on Form 9984.
The following information will be accurately documented on Form 9984 for each action taken on a case:
Date of the activity,
Location of the activity,
Time charged, and
Remarks and/or actions taken.
In the Remarks, Notes, Actions Taken section of Form 9984 it is very important to record all activity, as well as inactivity (i.e., details, training, extended leave, etc.), including but not limited to:
All contacts with the taxpayer and/or representative, whether in writing or by telephone,
Appointments, conferences, meetings, etc. with the taxpayer and/or representative, group manager, or other persons,
Report preparation and issue resolution,
Date the case is closed to the manager, as well as the date the case is closed from the group to Case Processing, and
Any other activity that assists in bringing the examination to a resolution.
Examiners should utilize workpapers and audit reports to support audit adjustments and document the extent of taxpayer cooperation. This includes making complete copies of documents submitted by the taxpayer in appropriate cases.
These workpapers/reports should be used to:
Explore and document all requirements of the law with respect to the treatment of an item for tax purposes;
Fully describe all documents reviewed or inspected that support audit conclusions and proposed tax adjustments; and,
Fully describe the audit steps taken and analysis which supports audit conclusions.
IRC section 7491(b) places the burden of proof on the Service in any court proceeding when the Service reconstructs any item of the taxpayer’s income using solely statistical information. See IRM 184.108.40.206.1.3 for more detailed discussion on the use of Bureau of Labor Statistical (BLS) data.
The use of BLS or Consumer Price Index (CPI) information is still appropriate in some situations. If the Service has some direct or indirect evidence that links the taxpayer to unreported income generating activities, the burden of proof does not shift to the Service under this specific burden of proof. When this supplemental evidence is present, then the general burden of proof rule applies.
The Nonfiler manual, which contains specific audit procedures for the Nonfiler Examination Program, has not been changed in any way by the new Burden of Proof legislation. That section of the IRM discusses what an examiner should do when examining a taxpayer who procrastinates or is an uncooperative nonfiler.
Remember that if an examiner determines that a taxpayer has unreported income, the use of statistical data must be supported by supplemental information that links the taxpayer to an income producing activity.
When using statistical information provided by either BLS or CPI, an examiner must develop supplemental information to support the finding of unreported income. Such evidence could include proof of assets owned, verification of personal living expenses, and verification of the likely source of income.
Most importantly, the examiner should develop direct or indirect evidence that links the taxpayer to income generating activities. Some audits steps which would support such a determination could include:
Checking for business listings in the local phone book;
Contacting any known employers;
Identifying any non-taxable sources of income;
Securing copies of financial statements from lending institutions who have made loans to the taxpayer;
IRC section 7491(c) states that the Service now has the burden of production in a court proceeding when the issue is a penalty, an addition to tax, or an additional amount imposed by the Internal Revenue Code. In any court proceeding, the IRS must first present evidence that imposition of the amount is appropriate. Only then must the taxpayer assume the burden of persuasion to raise appropriate defenses, such as reasonable cause, to the imposition of the penalty. IRC section 7491(c) applies only to individuals.
The following definitions are related to the burden of proof requirements for assessment of penalties:
Penalties include all penalties assessed under this title. An example is IRC section 6662 that imposes the accuracy related penalty.
Addition to Tax is any amount computed by reference to the amount of tax. An example is the addition to tax imposed by IRC section 6654 for failure by an individual to pay estimated income tax.
Additional Amount refers to an amount that can be assessed by the Service that is not an addition to tax or penalty. An example is the amount imposed under IRC section 6673 for the sanctions and costs awarded by a court when a taxpayer’s position is frivolous.
The Service must first present evidence that a penalty, addition to tax, or additional amount is appropriately applied to the taxpayer. It is then the taxpayer’s responsibility to present evidence of reasonable cause, substantial authority, or other similar defense in showing that the amount should not be asserted.
For example, if a delinquency penalty is asserted under IRC section 6651, the Service would meet its burden of production by showing that the filing date was after the due date for the tax return, and that there was no evidence the taxpayer filed for an extension.
Examiners should treat a penalty issue as any other issue by including the following information in the case file:
The facts surrounding the issue
Application of the facts to the law
Examiners should consult IRM 4.10.6, and IRM 20.1, Penalties, for additional information when developing penalty issues.
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|U.S. Claims Court|
|* The Court of Appeals for the Federal Circuit was created to hear decisions appealed from the U.S. Court of Federal Claims.|