4.24.5 Large Business and International (LB&I) Examination Program Procedures for Excise Employees

Manual Transmittal

August 24, 2016


(1) This transmits a revision to IRM 4.24.5, Excise Tax, Large Business and International (LB&I) Examination Program Procedures for Excise Employees.

Material Changes

(1) Minor editorial changes have been made throughout this IRM. Website references, legal references, and IRM references were reviewed and updated as necessary.

(2) The table below identifies the significant changes in content since the October 1, 2012, revision of this IRM.

IRM Section Description of Change, Concurrent Examination of Income and Excise Tax Returns Retitled subsection Examination of Excise Tax Returns - General Procedures. Content was updated and references to, LB&I Examination Process, Planning the Examination, Excise and Employment Tax, and, Instances When Separate Examinations May Be Warranted, were deleted. These subsections referred to general procedures when working an excise tax issue referred to Excise Tax by LB&I. The deletions have no impact on LB&I., Preparation of Risk Analysis/Audit Plan Content was updated and references to Exhibit 4.24.5-1 were deleted. To prepare an audit plan, user was directed to an optional replacement form.
Exhibit 4.24.5-1, An Example of an LB&I CIC Excise Tax Examination Plan Exhibit was deleted because it no longer applies to preparing an audit plan. In lieu of the exhibit, user was directed in to an optional replacement form.

Effect on Other Documents

This material supersedes IRM 4.24.5 dated October 1, 2012.


SB/SE Excise Managers, Excise Employees, and Excise Tax Specialists

Effective Date


Alfredo Valdespino
Acting Director, Specialty Examination Policy
Small Business/Self Employed

Definition of a Coordinated Industry Case (CIC)

  1. LB&I cases fall into two categories, Coordinated Industry Cases (CIC) or Industry Cases (IC).

  2. A CIC is a taxpayer and its effectively controlled entities that warrants the application of team examination procedures and meets the required point criteria. A case qualifies as a CIC if after using the point criteria the case totals 12 or more points as outlined in IRM Exhibit 4.46.2-2, Criteria for the Identification of Coordinated Industry Case Program.

  3. The factors used in computing the point criteria are as follows:

    • Gross Assets

    • Gross Receipts

    • Operating Entities

    • Multiple Industry Status

    • Total Foreign Assets

    • Total Related Transactions

    • Foreign Tax

  4. An IC is a taxpayer and its effectively controlled entities that warrants the application of team examination procedures but does not meet the definition of a CIC.

  5. The provisions below provide specific procedures relating to LB&I CIC cases for excise employees.

LB&I Case Titles

  1. LB&I has titles for the persons assigned to a CIC or IC case.

  2. Team Coordinator is the Lead Income Tax Agent on the case and is in charge of all aspects of the case including taxpayer contacts.

  3. Team Manager is the Team Coordinator’s Manager. The Team Manager is the lead manager on the case who will potentially have a part in approving all of the Form 4564, Information Document Requests (IDR), Form 5701, Notice of Proposed Adjustment (Form 5701), and adjustments on the case.

  4. Specialist Managers are the Group Managers for each of the specialists assigned to the case.

  5. Specialists are agents that have received training in their respective specialty areas.

  6. Specialists assigned to the case would include:

    1. International

    2. Excise

    3. Employment

    4. Financial Products

    5. Computer Audit Specialist (CAS)

    6. Engineer

    7. Economist

    8. Tax Computation Specialist (TCS)

  7. Each specialist is assigned specific audit areas. Each specialist may have knowledge of the taxpayer’s operations, which would help the excise employee in the audit.

CIC Program - General Procedures

  1. The majority of CIC cases involve taxpayers liable for one or more types of excise taxes. Many excise taxes are complex and difficult to administer. The excise employee has the expertise to assist the Team Coordinator in identifying potential excise tax examination areas. Many of these areas, such as foreign insurance and the importation of ozone-depleting chemical products are related to international issues.

  2. CIC Team Managers and Team Coordinators will involve excise employees early in the examination to identify industry-related issues and to achieve uniform compliance on an industry-wide and issue basis.

  3. Excise group managers are involved in the planning of all CIC examinations. Both the Excise Group Manager and excise employee are invited by the Team Coordinator to both the pre-examination conference and the formal opening conference of each CIC examination.

Examination of Excise Tax Returns - General Procedures

  1. LB&I requests the participation of the Excise Tax Specialist by making a mandatory referral through the Specialist Referral System (SRS) to Work Load Selection and Delivery (WSD).

  2. When the excise employee determines the taxpayer had delinquent tax returns associated with the examination, the excise employee should bring the taxpayer current.

  3. Upon conclusion of the excise tax examination, the excise employee will close the case and send a copy of the historical file (including the excise tax report) to the Team Manager for historical purposes.

Specialist Referral System (SRS)- Overview

  1. Use of SRS is required for all CIC case referrals to the excise tax group. The SRS is programmed to require an entry in the excise screen for the Team Coordinator. The referral is then assigned to the excise employee through coordination between WSD and the Excise Group Manager via SRS. See web site:http://lmsb.irs.gov/hq/fs/InformationResources/srs/FS_referral.asp.

  2. The Excise Group Manager must submit an Automated Information System User Registration/Change Form and Online Form 5081 to receive SRS on-line excise tax referrals from other operating divisions. For an excise employee to receive SRS referrals, the excise employee must submit an Online Form 5081, subject to manager approval.

  3. Notification of the case assignment is received via an e-mail from "SRS Referral System@irs.gov" . The e-mail will provide a direct link to the SRS so that the excise employee can retrieve the referral information.

  4. The following information is included on the referral:

    • Taxpayer name and address

    • Taxpayer EIN

    • Income tax years under audit

    • Estimated start date and closing date of the income tax audit

    • Comments concerning excise taxes

    • Team Name and Team Manager names and phone numbers

  5. The SRS referrals relating to taxpayers involved in the Compliance Assurance Program (CAP) and Pre-Filing Agreement (PFA) Program will be treated as a regular CIC referral by WSD and follow the same case control and IMS procedures. WSD may utilize specific tracking codes for these referrals to allow for effective monitoring and reporting.

  6. A Fuel Territory CIC referral requires an invitation to the General Excise Program group manager. Similarly, if a Fuels referral is received by a General Excise Program group, the Fuels manger will be invited to participate in the examination. WSD will coordinate notification to both Fuels and non-Fuels groups.

  7. All referrals are initially worked as a "consultation" .

  8. The consultation should include the pre-contact case coordination procedures at IRM, as necessary, to determine the excise tax liability. Activities include, but are not limited to:

    1. Consultation with the International Examiner assigned to the case.

    2. Consultation with Excise Subject Matter Experts.

    3. Review of Form 851 , Affiliations Schedule (Form 851).

    4. Review of Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations (Form 5471).

  9. A recordation of the consultation or examination is maintained in the group historical file. Additionally, both the consultation and examination are performed in IMS (Information Management System). All work done in IMS will be available for future reference.

Timing Requirements

  1. Once WSD receives an SRS referral, the following actions must be taken:

    1. The SRS referral is acknowledged by WSD when the referral is accessed on the system.

    2. WSD will contact the Excise Group Manager in the geographic area of the CIC referral and relay the referral information. If the Excise Group Manager cannot accept the referral, WSD will endeavor to locate another Excise Group Manager who can respond to the referral.

    3. Once the referral is accepted by the Excise Group Manager, he or she will assign the referral to an excise employee who must acknowledge receipt of the SRS request within 15 calendar days.

  2. Accepted SRS referrals will be assigned as consultations for the purpose of evaluating information to determine if an excise tax audit is warranted and should commence or the consultation should be closed due to lack of audit potential. The excise employee has 30 calendar days from receipt of the referral by the Excise Group Manager to contact the referring LB&I employee and place the MFT B5 case into Status 12. The assigned excise employee then has an additional 30 calendar days to perform the consultation and evaluate whether an excise audit is warranted.

  3. The excise employee performing the consultation will notify the Excise Group Manager of the recommendations before the expiration of the 30 calendar days.

  4. Generally, consultation time should not exceed 16 hours without manager involvement. Once the excise employee determines he or she will be requesting controls on a particular entity, subsequent time charges should be charged to that specific entity controlled.

Examination Return Control System (ERCS) and IMS Controls

  1. All consultations are controlled in ERCS and IMS. Once it is determined which group will work the SRS referral, the consultation will be assigned to the group in ERCS. The Excise Group Manager will assign the consultation to an excise employee, who should establish the consultation in IMS. The following codes will be used for all referrals established in IMS:

    • Cycle Type Code: EX - CIC 598 Referral

    • MFT: B5

    • Return Type: Form 720

    • Source Code (SC): 99

    • Activity code: 598

    • Tracking code: 6418 (Excise CIC Referrals)

    • SAIN: EX-598


    A request for books and records constitutes actual examination time and would not be charged under Activity Code 598.

Consultation Expanded to Exam

  1. Once the examiner determines he or she will be requesting controls on a particular entity, subsequent time charges are charged to the specific entity controlled (i.e., MFT 03 / 60 / etc.).


    The MFT B5 case file should be documented in IMS regarding the entities controlled (i.e., names, EINs, periods). The MFT B5 file should be closed using Disposal Code 00 in IMS. ERCS Status Code should be updated to 90 and the Disposal Code to 00.

    See IRM .

  2. If the consultation does not result in an examination, a subsequent closing or withdrawal from the referral must be explained by the excise employee on a detailed closing memo or workpaper. The closing memo or workpaper must reflect all actions taken in arriving at the determination and the specific reasons why the case was not examined. The closing memo should contain more than merely a statement that no excise issues exist. The proposed closing memo must be approved by the Excise Group Manager and included in the IMS MFT B5 case file. If the examiner determines that the referral has no potential, it is essential to provide a thorough explanation.

  3. The territory group managers shall report to WSD classifiers/coordinators the name of the excise employee assigned the consultation/examination and an examination start date. This information is maintained by WSD and made available to the territory managers on a monthly basis.

Specialist and Manager Involvement

  1. Once a referral is received for consultation or expanded to an examination, the excise employee and the Excise Group Manager work together and coordinate with the Team Coordinator on the timing of the excise involvement in the case. This includes determining the dates of:

    1. Case opening

    2. The planned closing

  2. This aids in determining the timing of the excise audit procedures. A risk analysis is made to aid in determining:

    1. The number of days needed for all planned issues

    2. Each entity under excise examination

    3. Time spent on administrative items such as meetings, statutes, and case closing procedures

    See IRM

  3. The excise employee and the Excise Group Manager should also plan to attend all meetings concerning the case. This includes:

    1. The planning meeting, see IRM

    2. The opening meeting, see IRM

    3. Periodic audit meetings as warranted, see IRM

    4. The closing examination critique meeting, see IRM

  4. When the excise employee decides the entity and period(s) to examine, Form 5345-D, Examination Request ERCS (Examinations Return Control System) Users, is prepared as per IRM, AIMS Procedures and Processing Instructions, Delinquent and Substitute For Return Processing, Form 5345-D, Examination Request ERCS (Examination Return Control System) Users. The following items on Form 5345-D must be properly completed:

    1. Is case LB&I/CIC? (N/P/S) N= Not Applicable; P=Primary/Secondary; S=Support)


      For a CIC taxpayer examination the proper entry is


    2. Use SC 71 for the pick-up of the primary return and SC 72 for the subsequent/related pick-up returns. If the taxpayer is a non-filer, use SC 24 for the primary tax period and SC 44 for the subsequent tax periods.

    3. Use Tracking Code 6418 when expanding the examination scope of a B5 examination.

  5. The excise employee is responsible for ensuring all statutes of limitation are adequately protected with respect to excise tax matters upon assignment of the CIC case.

Pre Contact Case Coordination

  1. When an SRS referral is received by WSD, the referral will be classified and referred to the local excise field group manager. Information used to classify the taxpayer will be made available to the local excise field group manager.

  2. Within 30 days after the SRS referral is received from the group manager, the excise employee is to contact the Team Coordinator. During the contact, the excise employee:

    1. Obtains information concerning the business operations of the taxpayer.

    2. Obtains information concerning the business operations of the taxpayer’s subsidiaries.

    3. Pays special attention to the business activities of the taxpayer and subsidiaries which have excise tax potential.

    4. Coordinates dates of the planning and opening meetings and on-site visits to the taxpayer.

    5. Discusses the time commitment or number of days allocated to the excise issues which helps determine the audit plan.

    6. Obtains a list of the other assigned specialists and the information located on-site, which is useful in pre-audit activities.

    7. Obtains general information about the business, as needed.

Contact Other IRS Agents

  1. The excise employee should meet with the other audit team members such as:

    • The Computer Audit Specialist (CAS)
      The CAS should be consulted to determine if a high volume of records is needed, a specific type of file is required, or to determine if the excise tax records are machine-sensible and contained in the Retention Agreement. As machine-sensible records are identified, the excise employee should consult with the CAS to include these records in the new Retention Agreement at the end of the current income tax examination cycle (useful for future excise tax examinations).

    • The International Examination Examiner (IE)
      The IE should be consulted when captive off-shore insurance company issues arise as treatment of these types of companies, reinsurance, and treaty considerations directly relate to the Foreign Insurance Excise Tax. The IE should also be consulted about imports from controlled subsidiaries and possible pricing issues. The IE assists in determining the existence and location of all foreign subsidiaries and entities and helps determine the business purpose of each foreign entity.

    • The Financial Products Specialist
      The Financial Products Specialist helps in determining the amount and type of imported products as well as the existence of any global notes and securities. The Financial Products Specialist should be consulted for information on debt, which was issued in foreign markets. The issue applies to Obligations Not in Registered Form.

    • The Excise Employee on the Prior Cycle Audit
      The excise employee assigned to the prior cycle audit of the taxpayer is a valuable source of information about the taxpayer. In addition to discussing the taxpayer and the taxpayer’s operations, information concerning the taxes audited and findings during the prior cycle, can help determine aspects of the current cycle audit plan.


      For example, if an area of tax planned for the current cycle was reviewed in the prior cycle with no adjustment or no unusual items were noted, and there has been no change in the operations of the taxpayer in this area of tax, the scope of the excise tax audit may be limited in respect to this tax. Facts and circumstances of the case need to be considered as well as managerial approval for any limitations of audit scope.

    • The Engineer
      The Engineer should be consulted on related excise tax issues such as the water content of coal, various chemical manufacturing flow charts, chemical substance items, and ozone depleting chemical items. Depending on the expertise of the engineer assigned to the CIC examination, a separate excise tax referral to the engineer group for a mineral, chemical or other specialty Engineer may be required.

    • The Form 637 Territory Lead Technician (LT).
      The Form 637 Territory LT should be consulted to determine if the taxpayer or any subsidiary holds a Form 637 registration and to provide any relevant copies of work papers or forms located in the registration file. The excise employee will coordinate with the Form 637 LT if a Form 637 compliance review is needed on the registrant. Copies of any findings of the regular excise audit are forwarded to the Form 637 LT for inclusion in the Form 637 IMS case file.

    • Excise Subject Matter Experts (SME)
      The excise SME can provide information concerning current issues pertaining to specific excise taxes as well as ideas and help in obtaining and reviewing information during the audit. Should an excise employee uncover an issue during the audit, a SME request is made by completing a Guidance Request Memorandum. See IRM, Requesting Excise Subject Matter Expert (SME) Assistance, for procedures. The SME can supply support and help in working the issue. The SME web page Is located at: http://mysbse.web.irs.gov/examination/specialty/excise/issues/eis/default.aspx.

Other Sources of Pre-Contact Analysis

  1. In addition to other agents and specialists, the excise employee needs to gather information from other sources. A main source of information is Form 851, or a subsidiary schedule with Employer Identification Number (EINs) of all subsidiaries. It is important to identify all affiliates and related entities and determine the business purpose of each. Request the appropriate Integrated Data Retrieval System (IDRS) research to determine each related entity’s filing requirements and compliance status. Consider each subsidiary for inclusion in the audit plan. In cases where the subsidiary list is voluminous, use risk analysis procedures to prioritize those entities to include in the examination plan, and notate those entities and/or areas, which must be left for another audit cycle.


    Disregarded entities are not listed on Form 851.

  2. Review the income tax returns of the parent and any related entity to determine whether the taxpayer has filed a Form 4136, Credit for Federal Tax Paid on Fuels. If so, obtain a copy of the form and any attachments. Review the information for any large and unusual fuel credits and/or potential for duplication of claims filed on the same type of fuel.

  3. In addition to the Form 4136, the income tax return of the parent and related entities are reviewed for the existence of Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. The Form 5471 notes ownership of a foreign subsidiary and its location and business purpose of the subsidiary. Information on the Form 5471 is helpful in determining potential imported products subject to excise tax as well as foreign insurance on the transportation of the items. The Form 5471 will also note foreign insurance entities potentially subject to foreign insurance excise tax on premium transactions.

  4. Review the income tax returns of the parent and any related entity to determine the amount of insurance expenses reported in Other Deductions and Cost of Goods Sold. Review the balance sheet for long-term liabilities which may include global debt obligations.

  5. Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, monitors transactions of foreign-owned corporations. This form will aid in determining foreign manufacturers for potential imported products and foreign insurance on shipments. It is a source for whether the foreign parent is providing insurance to domestic companies. It also helps identify foreign insurance entities for potential foreign insurance excise tax. Review the balance sheet for long-term liabilities, which may include global debt obligations. Review the statement attachments pertaining to various expenses, looking for fuel expenses, heavy highway vehicle operation, air transportation, or any indication of possible excise tax exposure.


    If there is heavy highway vehicle use, this may lead to questions concerning the filing of Form 2290, Heavy Highway Vehicle Use Tax Return.

  6. Corporate Annual Reports 10-Ks, and audited financial statements can also yield information about the taxpayer. Review these financial reports for the years under audit and for prior and subsequent years if available. Pay special attention to the discussions about the company’s operations, litigation, and risk factors, and note any changes in the corporate structure including new entities or divisions and/or sales or disbanded entities or divisions. All Securities and Exchange Commission (SEC) filings are available either on the taxpayer’s web site or independently through sources, such as SEC/Electronic Data Gathering, Analysis, and Retrieval (EDGAR). All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR.

  7. Filed Form 720, Quarterly Federal Excise Tax Return, and Form 8849, Claim for Refund of Excise Tax, are reviewed for large and unusual items as well as for current or emerging issues. Potential non-filed returns are considered based on the activities of the entity. Filed claims are reviewed for large or unusual items, even if already paid. Should a paid claim be selected for review, follow paid claim procedures found at IRM, Paid Claims (Source Code 31) - Introduction.


    Each business unit that has or is required to have a separate EIN must file a separate Form 720 and Form 8849.

  8. State and local governmental reports may aid in determining the audit plan of the entity. Examples of state and governmental reports are import documents, state fuel tax reports for fuels sold during the period, and annual state reports filed by insurance companies with their State Insurance Commission. The annual state reports will note premium transactions with foreign reinsurers. Many states prepare state coal reports, including Office of Surface Mining federal reports relating to coal. Reconcile these reported quantities on Form 720 to the state and federal reports.

  9. Transcripts should be requested on all entities related to the taxpayer. From the transcripts, determine the filing status, the amount, and the types of excise taxes filed by each entity, and whether statutes are imminent. The parent and all related entities can be researched on the Internet for information concerning domestic and international manufacturing as well as products and services offered.

  10. Review the information contained in the group historical file from prior excise audits. Information concerning the findings and resolutions of the case are used to expand or contract the audit plan based on the facts and circumstances of the case.

  11. Excise employees will ensure that the following excise taxes are considered in the planning of each CIC case:

    1. Premiums paid to Foreign Insurers - IRC 4371

    2. Ozone Depleting Chemicals and Imported Products -IRC 4681(b)(1) and IRC 4681(b)(2)

    3. Transportation of Persons by Air - IRC 4261


    The above list does not constitute the only excise taxes considered in a CIC examination; they are those that are relevant to the largest number of taxpayers.

  12. Excise employees will notate in the workpapers the actions taken to determine whether these excise taxes were considered in the examination planning process of the taxpayer or its subsidiaries.

  13. Excise employees should review the Audit Technique Guides (ATG) for each of the above taxes to determine if the potential tax issues are applicable to the taxpayer and the procedures necessary to properly develop the issue. ATGs are found on the Examining Excise Taxes web-page at:http://mysbse.web.irs.gov/examination/specialty/excise/library/atg/default.aspx.

Specialist Withdrawal Notification Procedures

  1. If, after reviewing the available information concerning the taxpayer, it is determined that an excise audit is not warranted, the excise employee will:

    1. Discuss the facts of the case as well as the recommendation to close the consultation with the Excise Group Manager.

    2. Upon Excise Group Manager concurrence, prepare a memorandum, which discusses the reasons for closing the consultation and obtain the group manager’s signature.

    3. Forward the original memorandum to the Team Coordinator and maintain a copy in the group’s historical file and in the IMS MFT B5 case file.

    4. Upload all work done in IMS and close the consultation in both ERCS and IMS. All work is performed in IMS, and there is to be no hard copy (paper file) of the consultation case.

    5. Close the consultation case using Disposal Code 00 in IMS. ERCS Status Code (SC) should be updated to 90, and Disposal code to 00.

Procedures for the Examination of LB&I Coordinated Industry CIC Case Referrals

  1. The exam stages of LB&I coordinated cases are:

    1. Planning Meeting

    2. Opening Conference

    3. Preparation of Risk Analysis/Audit Plan

    4. Information Document Request (IDR) Procedures

    5. Periodic Audit Meetings

    6. Audit Determination

    7. Form 5701, Notice of Proposed Adjustment (Form 5701)

    8. Audit Report

    9. Closing Memorandum

    10. Closing Examination Critique Meeting


The Planning Meeting

  1. The first meeting attended by the excise employee and the Excise Group Manager is the planning meeting. The planning meeting is an IRS meeting for all agents, specialists, managers, and may include the taxpayer.

  2. The meeting is held to discuss the taxpayer’s activities as well as the planned areas of the audit.

  3. The excise employee shall discuss the areas of excise tax subject to audit for each entity.

  4. The planning meeting is also a good time to coordinate with other specialists for information they may have. The excise employee should listen to all other agents and specialists for information on additional potential areas of excise tax.

  5. The Team Coordinator and the Team Manager will discuss the overall examination timelines, including start dates for IDR submission, broken down into start dates for excise employee submissions, responses, last follow-up IDR submissions, Form 5701 report submission dates, 50% and 75% completion dates, etc. Additionally, the time allocated or requested by the excise tax specialists will be discussed.

The Opening Conference

  1. The opening conference is held with the taxpayer present and is an introduction to the agents and specialists assigned to the case.

  2. The excise employee shall give a brief synopsis of the excise taxes that will be covered in the excise portion of the audit and will answer any of the taxpayer’s questions.


    The opening conference is not an interview of the taxpayer.

Preparation of Risk Analysis/Audit Plan

  1. Use of risk analysis is mandatory and aids in developing an audit plan. The excise employee will use risk analysis information to project the number of days or hours allotted to each issue and aid in scheduling the timeline of the audit to ensure timely completion. Risk analysis is used to:

    1. Develop the audit potential of each type of tax for each entity.

    2. Create a formal listing or notes concerning each type of tax or entity and the reasons to audit or not audit a particular tax.

    3. Determine the entities for examination.

    4. Determine the initial scope of the audit for each entity.

    5. Define the issues within each particular tax.


    A risk analysis is prepared for the excise Form 720. The LB&I Team Manager is not required to approve an excise employee's risk analysis and it should not become a part of the income tax examination.

  2. The risk analysis should consider those excise taxes for which the taxpayer may be liable. The analysis includes identifying:

    1. Potential computation errors in determining the tax due, especially for complex tax laws.

    2. Potential for incorrect exemptions.

    3. Tax avoidance schemes.

    4. Impact on future years.


      An entity expanding into a new industry may have excise compliance issues in the future. Although there may be no or a de minimis excise tax liability, the future may bring larger filing requirements.

  3. The risk analysis is to consider current industry issues. These can be determined from the excise web site or by contacting a SME. Considerations are also to be made for additional time, work, and research for issues that are in litigation and may result in unagreed cases.

  4. Excise is not subject to LB&I case materiality thresholds. The excise employee should exercise good judgment when determining materiality as each case is different.

  5. In performing a risk analysis, the reliance on the taxpayer’s systems and controls is considered. If the taxpayer has a history of poor internal controls, additional time and sources of information may be needed including third party contacts. If the taxpayer has a good history of returning information requests quickly, the time span of the audit can potentially be adjusted. Determination of scope limitations and expansions goes hand in hand with historical examination information through consideration of prior issues and results.

  6. The excise employee’s experience with each type of tax for the audit should be considered. If the excise employee has a high amount of experience in a specific tax, the time allocated to the audit item may be reduced. However, if the excise employee has a limited amount of experience with a particular tax, the amount of time allocated to the audit of that tax should be increased due to additional time needed for research and familiarization with the issues and tax. Time may also be increased or decreased depending upon the facts and circumstances of the case for SME involvement and/or other specialists’ involvement.

  7. After a risk analysis is performed for each entity and each type of tax, an audit plan is prepared for each entity. For this purpose, use Form 13744-I , Issue-Based Examination Plan and Risk Analysis. This form is optional and replaces Form 4764,LMSB Examination Plan, Form 4764-A, LB&I Examination Plan, Part III - Summary of Assignments, Form 4764-B, LMSB Examination Plan, Part III - Examination Procedures Section, and Form 13744, Risk Analysis Worksheet, as well as the examination timeline. Each audit plan will note the taxes, the issues within each tax, and the time allocated to each tax and issue. This number can be adjusted as the facts and circumstances of the audit change.

  8. The determination of the time on case is based on a number of factors including but not limited to the:

    1. Size and types of activities of the entity and subsidiaries.

    2. Experience of the excise employee.

    3. Potential amount of research needed.

    4. Amount of time needed for general examination items such as statute controls, meetings, and case closings.

    5. History of the examiner with time charged on other cases.

  9. The excise employee and the Excise Group Manager will determine the initial time on case as well as with any expansion and contraction of the case and issues, in coordination with the Team Coordinator and Team Manager.

  10. Once the audit plan is finalized, the excise employee will obtain the excise group manager’s signature on the plan and forward to the Team Coordinator. A copy of the plan will remain in the case file. If an appointment date for an on-site visit has not been arranged, the excise employee will coordinate with the Team Coordinator to set that appointment.

  11. The excise employee will complete Form 6782, Certification of Financial Interest in a Work Assignment, and Form 13664, LMSB LB&I Financial Interests or Other Conflicts of Interest and Disclosure, if requested by the Team Coordinator.

  12. The excise employee should verify whether Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization, if on file, includes the excise tax for the period under examination prior to requesting information from the taxpayer. If not, the excise employee should work with the Team Coordinator to obtain the appropriate authorization form from the taxpayer and ensure that the proper excise tax and periods are listed.

Information Document Request (IDR) Procedures

  1. At the on-site appointment, the initial IDRs are issued. The excise employee should not overburden the taxpayer with requests for information or overly detailed requests for information. The excise employee will discuss the issuance of the initial IDR with the Team Coordinator and obtain information for inclusion in the IDRs, such as:

    1. The name of the person to whom they should be issued.

    2. The numbering system of the IDRs.

    3. The response due date for the information requested.

  2. The excise employee will update the case IDR log as requested by the Team Coordinator. Each IDR is tailored to a specific issue and/or type of tax. Do not issue one IDR with many different types of taxes included. In addition to the case IDR log, the excise employee will maintain an Excise Tax IDR log with the following:

    • IDR number

    • Entity to which it was issued

    • Issue involved

    • Date issued

    • Date the information is received from the taxpayer

  3. The excise employee should determine what information is needed for a decision as to whether an issue exists and then proceed with more detailed IDR requests. For example, do not request insurance contracts with the first IDR. Instead, request a summary of all activity and choose specific contracts to view. The summary of insurance policies can then be reviewed and total premiums reconciled with General Ledger insurance expense accounts. The CAS can assist with these accounts.

  4. Use the Excise Tax IDR log to follow-up on overdue IDRs with the taxpayer on a regular basis. A helpful forum for obtaining updates on the progress of IDRs is the periodic meetings held with the taxpayer. Open communication with the taxpayer may help in answering questions or clarifying what items are needed to fulfill the IDR. If the taxpayer is not responding in a timely fashion and resolution does not appear to be forthcoming, the Excise Group Manager and Team Coordinator may be contacted to assist the excise employee in resolving the delays.

  5. LB&I issued two Directives relating to IDRs: Directive LB&I 04-0613-004 issued on June 18, 2013 and Directive LB&I 04-1113-009 issued on November 4, 2013 (the “Prior Directives”). These Directives reflect, in part, the best practices applicable to IDRs that are being utilized by LB&I examiners across the division.

Periodic Audit Meetings

  1. The periodic audit meetings are arranged by the Team Coordinator and are between the taxpayer and members of the IRS audit staff. These meetings can be formal monthly meetings or informal weekly updates.

  2. At each meeting, an update of open IDRs is obtained from the taxpayer including a potential date by which the taxpayer will provide the information requested.

  3. The taxpayer may also want to provide or obtain an update on an issue. Information concerning specific issues or the taxpayer’s position on an issue can be discussed.

Audit Determination

  1. All cases are worked using management-specified report generating software and utilizing the appropriate lead sheets and templates. The current reporting system used by the excise employee is the Issue Management System (IMS). Information regarding use of IMS may be found at IRM, Excise Issue Management System (IMS), and on the IMS and Notebook web page on the Examining Excise Taxes Programs and Systems web site at:http://mysbse.web.irs.gov/examination/specialty/excise/prog/imsnotebook/default.aspx.

  2. Once all information is gathered, an audit determination for each issue can be made. All taxpayer contacts to obtain specific information are coordinated through the Team Coordinator. All issues are discussed with the Team Coordinator before they are raised with the taxpayer. The Team Coordinator will consider the overall materiality of the issue in making his or her decision to discuss with the taxpayer. It is up to the excise employee to provide the Team Coordinator with information concerning materiality in relation to excise taxes as well as any future compliance issues.

  3. When the audit determination is made, the issues are discussed in full with the taxpayer along with obtaining information concerning the taxpayer’s position to the issue. For unagreed issues, the excise employee should consider Fast Track Mediation and discuss the option with the Team Coordinator and the taxpayer.

  4. The excise employee is responsible for the opening of prior and subsequent periods as necessary, if the periods are out of the current examination cycle.

Notice of Proposed Adjustment Form 5701

  1. For each issue with a proposed adjustment by the excise employee, a Form 5701 is prepared along with a detailed explanation of the issue on Form 886-A, Explanation of Items. The issuance of a Form 5701 is coordinated with the Team Coordinator concerning the numbering and entry into the Form 5701 log. A separate Form 5701 is prepared for each issue.

  2. A separate excise Form 5701 log is maintained by the excise employee which notes the:

    • Form 5701 number

    • Issue

    • Date issued

    • Date of receipt of a response

    • Taxpayer’s response to the issue

  3. If local LB&I procedures do not require Form 5701, then it need not be prepared. However, it is strongly recommended since it provides consistency with team procedures and provides a mechanism for tracking issues, especially when there are numerous entities and issues. The Form 5701 also allows for a written response from the taxpayer to an issue, as it is completed.

Audit Report

  1. Once all of the Forms 5701 are returned from the taxpayer with the taxpayer’s response, the appropriate excise audit reports are prepared according to the report writing guidance found in IRM 4.24.20, Excise Tax Report Writing Guide. If a Form 4136 is under audit with an adjustment, the adjustment will be reflected on the Team Coordinator’s audit report. Therefore, a memorandum of adjustments is prepared to notify the Team Coordinator of:

    • The adjustment

    • The amount adjusted

    • The tax year of the adjustment

    • An explanation of the adjustment

Closing Memorandum

  1. A closing memorandum is prepared at the conclusion of the audit which notes:

    1. The entity name.

    2. EIN and quarter of each entity audited for excise taxes.

    3. The time charged to each entity.

    4. Detailed discussion of each type of tax and issue audited along with the findings, even if the audit resulted in a no-change.

    5. If a Form 637 compliance review was performed, the findings of the compliance review.

  2. The closing memorandum may also be used to provide a critique of the excise portion of the audit. The critique includes a discussion of the relationship with the taxpayer and a mention of any items needed for future excise audits. The original closing memorandum is forwarded to the Team Coordinator. A copy is placed in the group historical file, which is maintained at the audit site with the audit team. The IMS system must also have a copy of the closing memorandum.

  3. If the audit involved a Form 637 registrant, a copy of the closing memorandum is sent to the appropriate excise territory Form 637 Lead Technician for inclusion in the Form 637 electronic case file.

Closing Examination Critique Meeting
  1. The Excise Group Manager and the excise employee may participate in the closing examination critique meeting. The Excise Group Manager and excise employee should discuss all problems related to the examination, such as the taxpayer’s IDR response time and overall cooperation during the course of the examination.

Group Historical Files

  1. Upon completion of a CIC examination, a copy of the Excise Tax Revenue Agent Report (RAR) will be kept at the audit site location with the audit team. A copy of the RAR will also be maintained in IMS.

  2. The taxpayer information is kept in the historical file for a period of two examination cycles.

  3. For CIC referrals worked as a "consultation" and not opened as an examination, a historical file is kept as in IRM above and also contain a memorandum or other workpaper(s) detailing the actions taken in evaluating the referral’s non-acceptance for examination. The detail should be sufficient to provide a clear understanding of procedures used, documents reviewed, and personnel queried to arrive at the determination. The file should be kept for a period of two examination cycles at the audit site with the audit team.

  4. Consultations and examinations are performed in IMS. All work performed will be available in IMS historical files.

Time Charges

  1. All time spent in actual audit activities are charged to regular excise tax controls. Pre-examination activities, such as consulting, research and review of company information, are charged to Activity Code 598. All Activity Code 598 time is recorded on Form 9984, Examining Officer's Activity Record.

  2. Once the first IDR, requesting books and records is issued and/or work performed on a specific issue has occurred, regular excise tax controls are requested and used.

  3. Master File controls using Substitute for Return (SFR) procedures may be used when the taxpayer has not filed a Form 720 and Form 720 taxes are under audit. See IRM, Establishing Substitute for Return (SFR) Controls on Non-Filer Cases, for the appropriate SFR procedures.

Compliance Assurance Process (CAP) Overview

  1. The Compliance Assurance Process (CAP) is designed to provide a high level of certainty for both the IRS and taxpayers that returns are substantially accurate when filed or as close to the end of the reporting period as possible while minimizing resources required.

  2. The CAP is a method of identifying and resolving tax issues through open, cooperative, and transparent interaction between the IRS and LB&I taxpayers prior to the filing of a return. Through the CAP program, the taxpayer should achieve tax certainty sooner and with less administrative burden than conventional post-filing examinations.

  3. The IRS and the taxpayer will work together on a contemporaneous basis toward the goal of achieving an acceptable level of tax compliance prior to the filing of the federal income tax return. Non-income tax returns, such as Form 940 , Employer’s Annual Federal Unemployment (FUTA) Tax Return, Form 941, Employer’s Quarterly Federal Tax Return, Form 5500,Annual Return/Report of Employee Benefit Plan, Form 720, Form 1042, Annual Withholding Tax Return for US Source Income of Foreign Persons, are not included in the CAP and may be the subject of traditional post-filing examinations.

  4. The excise employee is able to examine the most current filed excise tax returns. The Team Coordinator helps coordinate such items as work space and contacts between the excise employee and the taxpayer. However, the excise employee is not a part of the CAP team. The excise employee tracks issues and IDRs in the separate Excise Tax Issue Management System (IMS) case. The excise employee would not be a team member in the IMS CAP case and would not enter the non-income tax returns and work papers in the CAP case on IMS.

  5. It is important to keep in mind that although non-income tax audit are not part of the CAP team, it does not preclude audit activities by the non-income tax auditors.

  6. For more information regarding CAP see the following link: http://lmsb.irs.gov/hq/pftg/CAP/index.asp.

Excise Tax Pre-Filing Agreement (PFA)

  1. Rev. Proc. 2009-14 made permanent the existing PFA program. This Rev. Proc. supersedes Rev. Proc. 2007-17, which provided the guidelines that permit an LB&I taxpayer to request the examination of specific excise issues relating to a return before the return is timely filed.

  2. The PFA guidelines outlined in IRM 4.30.1, Pre-Filing Agreement Program, should be utilized by the excise employee except when:

    1. A request for a PFA on an excise tax issue is received, the PFA Program Manager will forward for comment a copy to the Excise Tax Policy Manager for the resolution of all excise issues.

    2. The Tier One screening of the PFA information is forwarded to both the Industry Director and the Executive Officer, Specialty Examination Policy.

    3. The Tier Two screening is completed jointly by both the appropriate LB&I Industry Director and Executive Officer, Specialty Examination Policy. A written notification letter from both directors to the taxpayer will specify the reason(s) for the acceptance or non-acceptance, and the amount of the user fee, if accepted and the remittance address.

    4. All meetings involving the excise issue submitted for a PFA will involve the Excise Tax Policy Manager or designee.

  3. For more information see the PFA web page at: http://lmsb.irs.gov/hq/pftg/pfts/pfa/preagree.asp.

Delegation Order Number DO-4-25

  1. Delegation Order Number DO-4-25 provides resolution authority to all LB&I Team Managers and SB/SE Territory Managers on Technical Advisor (TA) Coordinated Issues and Appeals Coordinated Issues (ACI) for which appeals has approved settlement guidelines.

  2. For a TA Coordinated Issue, the procedures found in IRM 8.7.3 4, Technical and Procedural Guidelines, Domestic and International Programs, Factors for Designating Issues as Appeals Coordinated Issues (ACI) or Emerging Issues (EM), should be followed. IRM, Review and Concurrence of Coordinated Issues Under DO-4-25 (Revised), allows LB&I Team Managers and SB/SE Territory Managers to settle coordinated issues when an Appeals Settlement Guideline has been approved and discusses the relevant procedures. One of the goals of the program is to achieve fair, equal, and consistent treatment for all coordinated issues.