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

Manual Transmittal

October 01, 2012


(1) Revised IRM. 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) Organizational titles changed throughout this IRM section from Large and Mid Size Business (LMSB) to Large Business and International (LB& I).

(2) Section title changed from Large and Mid-Size Business Examination Program Procedures for Excise Examiners to Large Business and International (LB &I) Examination Program Procedures for Excise Employees to better reflect nature of content and current organizational title.

(3) Excise Tax Examiner title changed to excise employee to eliminate job series confusion.

(4) In the table listed below are other changes made to the content of this section from the 6-15-2010 revision.

IRM Description Definition of a Coordinated Industry Case (CIC) Title changes. LB&I Case Titles Title changes. CIC Program - General Procedures No Changes. Concurrent Examination of Income and Excise Tax Returns Update link to the MOU. Remove date of MOU. Add reference to Excise Operations Support who receive all referrals. Specialist Referral System (SRS)- Overview Updated link to SRS. Added new guidance relating to use of IMS and the role that EOS plays in the SRS process. Update IRM cites. Timing Requirements Include new EOS procedures and reworded cites for clarity. Specialist and Manager Involvement Reorganized content for clarity. Pre Contact Case Coordination Include new EOS procedures and reworded cites for clarity. Contact other IRS Agents Updated positions of the Form 637 Coordinator and EIS to reflect their new titles and responsibilities. Updated hyperlink. Other Sources of Pre-Contact Analysis Add hyperlink to Audit Technique Guides. Update spelling and grammar. Specialist Withdrawal Notification Procedures Reword cite for clarity. Add information regarding role of EOS. Procedures for the Examination of LB&I Coordinated Industry CIC Case Referrals No changes. The Planning Meeting Reorganized existing content for clarity and added that the taxpayer may participate. The Opening Meeting Reorganize existing content for clarity. Preparation of Risk Analysis/Audit Plan Reorganized content for clarity. Added new content regarding materiality thresholds. Corrected grammar. Information Document Request (IDR) Procedures Reorganized existing content for clarity. Periodic Audit Meetings Reorganized existing content for clarity. Audit Determination Reorganized existing content for clarity. Added hyperlink to IMS and Notebook. Notice of Proposed Adjustment Form 5701 Reorganized existing content for clarity. Audit Report Reorganized existing content for clarity. Closing Memorandum Reorganized existing content for clarity and changed job titles of 637 Coordinator to LT. Closing Examination Critique Meeting No changes. Group Historical Files Updated to reflect use of IMS and to clarify the location of files. Time Charges No changes. Compliance Assurance Program (CAP) Overview Updated hyperlink to CAP. Excise Tax Pre-Filing Agreements (PFA) Streamlined procedures, updated job titles and hyperlink to PFA. Limited Issue Focused Examinations for Excise Tax Returns Added hyperlink to LIFE web page. Delegation Order Number DO-4-25 No changes.
Exhibit 4.24.5-1 An Example of a LB&I CIC Excise Tax Examination Plan Deleted SAIN table at end of exhibit to reflect IMS.

Effect on Other Documents

This material supersedes IRM 4.24.5, dated 06/15/2010.


This section is for SBSE Excise Managers, Examiners and Specialists.

Effective Date


/s/ John Imhoff
Director, Specialty Programs
Small Business/Self Employed  (10-01-2012)
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.

  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 Case 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. Normal excise examination procedures apply for non-CIC LB&I cases.  (10-01-2012)
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 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 has specific areas that they are assigned to audit. Each of the specialists may have knowledge of the taxpayer’s operations which would help the excise employee in the audit.  (10-01-2012)
CIC Program - General Procedures

  1. The majority of cases in the CIC program 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 areas of the examination. 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.  (10-01-2012)
Concurrent Examination of Income and Excise Tax Returns

  1. With the reorganization of the IRS, a division between agents who worked on large cases was formed. The large case agents and most specialists were placed in LB&I and Excise was placed in Small Business and Self Employed (SBSE). This created a problem in accounting for and allowing SBSE excise employees to work on LB&I cases. To rectify this problem, a Memorandum of Understanding (MOU) was signed by the Commissioners of LB&I and SBSE. The MOU emphasizes the participation of the Excise Tax Specialist by making a referral to Excise Operations Support (EOS) mandatory. The current MOU may be found on the Examining Excise Taxes Issues and Procedures CIC web page at http://mysbse.web.irs.gov/Specialty/excise/issues/cic/default.aspx .

  2. IRM requires centralized control by the Team Manager of each CIC examination, including the excise tax area. In no case however will the exercise of such control by the Team Manager be exhibited by a non-referral to EOS, or the non participation of an excise employee in the examination. The Team Manager should plan for concurrent examinations of both income tax and excise tax even if the periods examined are different. The primary advantage in this approach is that the Team Manager can perform a coordinating role for the case which may produce savings in time. IRM also requires that the Team Manager plan for employment and excise tax if warranted, and should include employment and excise employees in the examination team.

  3. If concurrent examinations are not possible (e.g. the income tax examination is "skip-cycled" ) but an excise examination is warranted, separate examinations will be planned under the Team Manager’s control for the different tax periods involved, one following the other.

  4. When the excise employee determines that a CIC taxpayer has delinquent returns associated with the examination, the excise employee should bring the taxpayer current (with the approval of the Team Manager).

  5. IRM presents instances where separate control is not justified. However, certain conditions might exist that require separate examinations of the excise portion of the CIC examination and controlled by the excise employee. The excise employee should maintain regular contact with the Team Coordinator to provide information about the excise tax examination, particularly if there is an ongoing income tax examination.

  6. Upon conclusion of a separate excise tax examination (whether controlled by the Team Manager or separately controlled), 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 inclusion in the next cycle’s results.

  7. If the excise group manager feels that an examination is warranted, but the Team Manager does not, and the matter cannot be resolved, both managers will document the facts and submit the matter to their respective territory managers.

  8. Where the excise group manager and the Team Manager cannot agree as to whether control should be transferred to the excise group manager, both managers will document the facts and submit the matter to the respective territory manager for resolution.

  9. If the excise tax case and the income tax case are located in different areas and there is a difference of opinion as to separate examinations, the matter should be referred to the respective territory managers. If the territory managers cannot agree, the Director, Field Operations in LB&I, after hearing presentations by both territory managers and consulting with their counterpart in the area where the taxpayer is located, will make this decision.  (10-01-2012)
Specialist Referral System (SRS)- Overview

  1. SRS is required for all CIC case referrals to the excise tax group. The SRS has been modified so that an entry in the excise screen is mandatory for the Team Coordinator. The referral is then assigned to the excise employee through coordination between EOS and the excise group manager via SRS. See web site http://lmsb.irs.gov/hq/fs/InformationResources/srs/FS_referral.asp for details about SRS.

  2. The excise group manager must submit an Automated Information System User Registration/Change Form and Online Form 5081 in order to receive On-Line excise tax referrals from other operating divisions via the SRS. In order 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. The e-mail address will read "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:

    • Name and address of the taxpayer

    • EIN of the taxpayer

    • Income tax years under audit

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

    • Any comments concerning excise taxes

    • Name and phone number of the Team Coordinator and Team Manager

  5. SRS referrals relating to taxpayers involved in the Compliance Assurance Program (CAP), Pre-Filing Agreements Program, and Limited Issue Focused Examinations (LIFE) Program will be treated as a regular CIC referral by EOS and follow the same case control and IMS procedures. See IRM EOS 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. EOS 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. These 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, Affiliation Schedule, and

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

  9. A recordation of the consultation or examination is maintained in the group historical file. Additionally, both the consultation and examination will be performed in IMS (Information Management System). All work done in IMS will be available for future reference.  (10-01-2012)
Timing Requirements

  1. Under the MOU, the excise employee must meet certain timing requirements.

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

    2. EOS will contact excise group managers in the geographic area of the CIC referral and relay the referral information to them. If the group manager cannot accept the referral, EOS will endeavor to locate a field group manager who can respond to the referral.

    3. Once the referral is accepted by the field group manager, the field group manager will assign the referral to an excise employee.

    4. The excise employee must acknowledge receipt of the SRS request within 15 days.

  2. SRS Referrals will either have an excise employee assigned or be rejected within 30 days from the date of acknowledgement by EOS. Assignment or rejection is noted by EOS on the SRS which will generate an e-mail to the Team Coordinator.

  3. All accepted SRS referrals will be assigned as consultations for the purpose of evaluating information to determine if an excise tax audit is warranted. The excise employee is to perform the consultation and notify the excise group manager of the recommendations before the expiration of the 30 days. The result of this consultation will determine whether an exam is commenced or the consultation is closed due to lack of audit potential.

  4. Generally, consultation time should not exceed 16 hours without manager involvement. Once the excise employee determines that they will be requesting controls on a particular entity, subsequent time charges should be charged to the specific entity controlled.  (10-01-2012)
ERCS and IMS Controls

  1. All consultations will be 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 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 placed in IMS:

    • Cycle Type Code: EX - CIC 598 Referral

    • MFT: B5

    • Return Type: Form 720

    • Source code: 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.  (10-01-2012)
Consultation Expanded to Exam

  1. Once a consultation is established in ERCS and IMS, all work is to be performed or uploaded into IMS. A consultation requires no paper files. If the consultation indicates an exam is warranted, the consultation is to be closed from ERCS and IMS. Consultation case should be closed using Disposal Code 00 in IMS. ERCS status code should be updated to 90, and Disposal code to 00.

  2. Establish exam in ERCS using standard exam controls, see IRM

  3. Group management in the territory shall report to the EOS classifier/coordinators the name of the excise employee assigned to the consultation/examination and a start date for the exam. This information will be maintained by EOS and made available to the territory managers on a monthly basis.  (10-01-2012)
Specialist and Manager Involvement

  1. Once a referral is received for consultation or expanded to an exam, the excise employee and the excise group manager are to work together and coordinate with the Team Coordinator on the timing of the excise involvement in the case. This includes determining the date of:

    1. case opening, and

    2. the planned closing date of the audit.

  2. This will aid 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, and the

    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, and

    4. the closing examination critique meeting, see IRM

  4. When the excise employee has decided on the entity and period(s) to examine, Form 5345-D Examination Request ERCS (Examinations Return Control System) Users, is prepared as per IRM The following section of the 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

    "P" .

  5. The excise employee is responsible for ensuring that all statutes of limitation periods are adequately protected with respect to excise tax matters upon assignment of the CIC case.  (10-01-2012)
Pre Contact Case Coordination

  1. When a SRS referral is received by EOS, 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 two weeks after the SRS referral is received, the excise employee is to contact the Team Coordinator. During the contact, the excise employee will:

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

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

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

    4. Coordinate dates of the planning meeting, the opening meeting and on-site visits to the taxpayer.

    5. Discuss the time or number of days allocated to the excise issues which will help in determining the audit plan.

    6. Obtain a list of the other specialists assigned to the case and what information is located on site which will be useful in pre-audit activities.

    7. Obtain general information about the business as needed.

    8. Obtain directions to the site as well as procedures to follow and/or directions to the audit room if needed.


      Currently, with increased security at many large case sites, the excise employee may need to provide information to the Team Coordinator so that security clearances and temporary badges are obtained.  (10-01-2012)
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 sort of a particular file is required, or to determine if the records related to excise taxes are machine sensible and contained in the Retention Agreement. As machine sensible records are identified, which would be useful for future excise tax examinations, the excise employee should consult with the CAS to have these records included in the new Retention Agreement at the end of the current income tax examination cycle.

    • The International Examination Examiner (IE)
      The IE should be consulted about captive off-shore insurance companies as the treatment of these off-shore insurance 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 as they relate to excise taxes on various imported products. Imported pricing used for computing excise tax on products containing ozone-depleting chemicals should agree with the pricing used by the IE for determining the profit center. The IE could also assist in determining the existence and location of all foreign subsidiaries and entities and help determine the business purpose of each of these foreign entities.

    • The Financial Products Specialist
      The Financial Products Specialist can help in determining the amount and type of imported products as well as the existence of any global notes and securities.

    • 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 on the prior cycle, as well as the findings of the prior cycle, can help to determine the audit plan of the current cycle. 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 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 Lead Technician (LT) for their Territory.
      The territory Form 637 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 their 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 in the 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 ia located at http://mysbse.web.irs.gov/Specialty/excise/issues/eis/default.aspx.  (10-01-2012)
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, Affiliations Schedule, or a subsidiary schedule with Employer Identification Numbers (EIN) 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 status. Consider each subsidiary for inclusion in the audit plan.

  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 any related entity is 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 as well as the location and the 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 further inquiries whether the foreign parent is providing insurance to domestic companies. It also will help in identifying foreign insurance entities for potential foreign insurance tax.

  6. Corporate Annual Reports 10-K’s, 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 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.

  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

  8. State and governmental reports may also 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.

  9. Transcripts should be requested on all entities involved with the taxpayer. From the transcripts, determine the filing status, the amount, and the types of excise taxes filed for 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 prior excise taxes audited and 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) & (2), and

    3. Transportation of Persons by Air- IRC 4261.


    The above list does not constitute the only excise taxes which are considered in a CIC examination, they are those which 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 issues within each tax are applicable to the taxpayer and the procedures necessary to properly develop the issue. ATG are found on the Examining Excise Taxes web page at http://mysbse.web.irs.gov/Specialty/excise/library/atg/default.aspx.  (10-01-2012)
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 group manager concurrence, prepare a memorandum which discusses the reasons for closing the consultation and obtain the group manager’s signature.

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

    4. Consultation case should be closed using Disposal Code 00 in IMS. ERCS status code should be updated to 90, and Disposal code to 00.  (10-01-2012)
Procedures for the Examination of LB&I Coordinated Industry CIC Case Referrals

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

    1. Pre-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. Notice of Proposed Adjustment (Form 5701),

    8. Audit Report,

    9. Closing Memorandum, and

    10. Closing Examination Critique Meeting.

    .  (10-01-2012)
The Planning Meeting

  1. The first meeting that the excise employee and the excise group manager are to attend 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 to be audited 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 of the other agents and specialists for information on additional potential areas of excise tax.  (10-01-2012)
The Opening Conference

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

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


    The opening conference is not an interview of the taxpayer.  (10-01-2012)
Preparation of Risk Analysis/Audit Plan

  1. The use of a risk analysis is to aid in developing an audit plan and is mandatory. The excise employee will use risk analysis information to determine the number of days or hours to be spent on each issue and aid in scheduling the time span 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 to audit a particular tax.

    3. Determine the entities to be examined.

    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 excise tax liability or it may be deminimus, 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 which 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 to be 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 to be audited should 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 to be prepared for each entity. For an example of an audit plan see Exhibit 4.24.5-1. Each audit plan will note the taxes, the issues within each tax, 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 to be performed.

    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 work together to 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 the appointment.

  11. The excise employee will complete Form 6782, Certification of Financial Interest in a Work Assignment and Form 13664, LMSB 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 , which may be on file, include 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 form from the taxpayer and ensure that the proper excise tax and periods are listed.  (10-01-2012)
Information Document Request (IDR) Procedures

  1. At the on-site appointment, the initial IDRs are to be 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 to be included on the IDRs such as:

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

    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 to be 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 information:

    • 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 to make a decision as to whether or not 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.  (10-01-2012)
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.  (10-01-2012)
Audit Determination

  1. All cases are to be worked using management specified report generating software and utilize 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/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 with the Team Coordinator and the taxpayer.

  4. The excise employee will be responsible for the opening of prior and subsequent periods as necessary, if the periods are out of the current examination cycle.  (10-01-2012)
Notice of Proposed Adjustment Form 5701

  1. For each issue the excise employee is proposing adjustments, a Form 5701 is prepared along with a detailed explanation of the issue on Form 886-A. 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 of 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.  (10-01-2012)
Audit Report

  1. Once all of the Form 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 4.24.10. 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 to be prepared to notify the Team Coordinator of:

    • the adjustment

    • the amount adjusted

    • the tax year of the adjustment

    • an explanation of the adjustment  (10-01-2012)
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 and 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 cite with the audit team. The IMS system will also have a copy of the closing memorandum.

  3. If the audit involved a Form 637 registrant, a copy of the closing memorandum is also sent to the appropriate excise territory Form 637 Lead Technician for inclusion in the Form 637 electronic case file if applicable.  (10-01-2012)
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 response time to IDR’s, and the overall cooperation during the course of the examination.  (10-01-2012)
Group Historical Files

  1. Upon completion of a CIC examination, a copy of the Revenue Agent Report will be kept at the audit site location with the audit team. A copy of the Revenue Agent Report 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.  (10-01-2012)
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 is 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 4.24.6 for the appropriate SFR procedures.

  4. In cases where a Form 4136 is under audit, the excise employee may request controls for a collateral examination under the MFT of the income tax audit.  (10-01-2012)
Compliance Assurance Program (CAP) Overview

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

  2. The current Memorandum of Understanding (MOU) with LB&I requires Excise to support LB&I. It does not distinguish the type of support and can be taken as all encompassing.

  3. The excise employee's role in the CAP case is essentially the same as in any post filed excise examination in that the excise employee will determine what excise tax liabilities exist, if any, and work with the taxpayer to determine the proper excise tax treatment of those transactions prior to the filing of Form 720.

  4. The excise employee will record time on Form 4502, Technical Time Report, using Activity Code 525. The entity is established using MFT C1, the CAP cycle year, and the EIN of the CAP taxpayer. LB&I will input the case control. The excise employee will not request a separate case control. The excise employee should contact the Team Coordinator to obtain case control information for time reporting purposes. The time will be reflected at the bottom of Form 4502 as "returns are not owned by the employee." This will remain on Form 4502 until the income tax case deletes the controls.

  5. The excise employee will request records for the most current unfiled Form 720 period. If an excise tax liability exists in the current period and no previous Form 720 returns were filed, the excise employee would secure previous periods using regular AIMS controls. If the taxpayer did file a Form 720 for the previous quarter and it was determined they are treating transactions incorrectly, the excise employee should examine the previous filed Form 720 periods.

  6. Instances may occur where an analysis of the current period transactions does not reveal an excise tax liability, but the taxpayer has previously filed Form 720 during or prior to the CAP Cycle Year. In this case, the excise employee should consult with the excise group manager as to whether to start an examination of the filed Form 720. In doing so, the excise employee could then determine if transactions were properly handled and what impact this may have on the CAP Cycle Year. If an analysis of the current period transactions does not reveal an excise tax liability at the end of the cycle, the period should be established and a no change report issued to the taxpayer for that period.

  7. As the CAP process is not conducive to a quarterly filed tax return such as Form 720, the excise employee will request the latest filed Form 720 for examination. The spirit of the CAP process will be preserved whenever possible in working with the taxpayer on the excise tax consequences of future potential issues.

  8. For more information regarding CAP see http://lmsb.irs.gov/hq/pftg/CAP/index.asp.  (10-01-2012)
Excise Tax Pre-Filing Agreements (PFA)

  1. Rev. Proc. 2009-14 makes the existing PFA program permanent. 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 Pre-Filing Agreement guidelines outlined in IRM 4.30.1, should be utilized by the excise employee except for the following:

    1. When a request for a Pre-Filing Agreement on an excise tax issue is received; the PFA Program Manager will forward a copy to the Excise Tax Policy Manager, who has the responsibility for the resolution of all excise issues, for comment.

    2. The PFA Program Manager will forward a copy of the screening package to the Excise Tax Policy Manager for information.

    3. All meetings involving the excise issue submitted for a Pre-Filing Agreement 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.  (10-01-2012)
Limited Issue Focused Examinations (LIFE) for Excise Tax Returns

  1. Effective November 1, 2002, LB&I implemented a new type of examination known as Limited Issue Focused Examination (LIFE). These procedures limit the scope of an examination to only those few issues that represent the greatest compliance risks.

  2. The Memorandum of Understanding between the Internal Revenue Service and the taxpayer covering a LIFE must specify the specific tax return covered by the agreement.

  3. No LIFE agreement covering excise tax returns can be entered into without the involvement of the Team Manager assigned to the case.

  4. The LIFE process provides Team Managers with the authority to waive specific mandatory compliance items, but not the ability to waive the examiners obligation to make referrals to specialists when required. See IRM

  5. Excise employees and excise group managers will participate in the risk analysis.

  6. If the Team Manager and the excise group manager disagree on the scope of the examination with respect to the excise employee’s activity on the LIFE case, the matter should be resolved as described in IRM Management of Specialists.

  7. For more information see the LIFE web page at http://lmsb.irs.gov/hq/pqa/Post-Filing/pfa_LIFE_home.asp.  (10-01-2012)
Delegation Order Number DO-4-25

  1. Delegation Order Number DO-4-25 provides resolution authority to all LB&I Team Managers and SBSE 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 should be followed. IRM allows LB&I Team Managers and SBSE 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.

Exhibit 4.24.5-1 
An Example of a LB&I CIC Excise Tax Examination Plan

Excise Tax Examination Plan - XXX Corporation

Taxpayer: XXX, Inc.
035 Weston Street
East Northport, ME 04669
Subsidiary Under Examination:


Consolidated Form 720's are not permitted. Each subsidiary must file it's own Form 720. Each subsidiary should have it's own Examination Plan.

Tax Form: Form 720
Type of Tax: Facilities and Services-Foreign Insurance IRS No.030
Air Transportation Tax IRS No.026
Obligations Not in Registered Form IRS No.031
Communications Taxes - Local Telephone Service IRS No.022
Environmental Taxes - ODC Tax-Import Products IRS No.019
Audit Period: 200012 (199812, 199912, 200012 income tax return cycle)
EST Excise Tax Reported: $82,200 tax per quarter
Audit Time: 25 to 30 days

Audit Scope

  1. Examine taxpayer’s copies of Form 720 and

    1. Supporting consolidated work papers,

    2. Supporting divisions and/or plant semi-monthly sales and/or tax reports.

  2. Examine taxpayer’s annual financial statements, income tax returns, general ledgers, and journals.

  3. Examine samples of credit memos for the periods under exam to detect any blind credits taken on the Form 720 returns.

  4. Request and inspect the insurance policies to see if the foreign insurance tax is properly computed on the correct premium amounts. Check other insurance amounts for policies placed with foreign insurance companies located in non-treaty countries. Coordinate with the International Examiner assigned to the case.

  5. Review all reinsurance contracts with companies in non-conduit treaty countries to see if a valid closing agreement is in place covering the foreign insurer.

  6. Review all reinsurance contracts with companies in conduit treaty countries to see if a valid certificate of residency for treaty coverage is in force.

  7. Review the Vermont insurance subsidiary for potential Vermont captive reinsurance issue.

  8. Check for subsidiaries that have made Section 953(c) or (d) elections to make sure that the foreign insurance tax is paid on further reinsurance by the electing foreign subsidiary.

  9. Check the corporate structure for offshore and domestic captive insurance companies and verify the actual shifting of risk time to determine if the correct excise tax rate was used in computing the foreign insurance tax. Also check the taxability of the transaction at the time of risk shifting and passing of consideration.

  10. Check for air transportation taxes due for use of corporate aircraft. Check aircraft log books for number of passengers and amount of cargo, trip route, and business purposes, and relationship of passengers to corporate family. Coordinate with the Employment Tax Specialists assigned to the case.

  11. Check the offering of foreign bonds and notes, verifying that the regulation requirements are met so as not to be subject to the tax on obligations not issued in registered form. Check FPI Currency Summary Report for debt offerings of the company. Coordinate with the Financial Product Specialists assigned to the case.

  12. Check the hotel related properties for evidence of a telephone service reseller. Taxpayer has one subsidiary for cellular phones, but no return filed.

  13. Review the corporate structure and determine if any manufacturing of electronic equipment takes place in the many South American and Asian subsidiaries. Imports of these products could be subject to ODC tax upon importation.

  14. For products manufactured by and /or imported by the taxpayer overseas which relate to ODC products, determine the manufacturing process and the method used to determine the use of ODC chemicals. If this information is not obtainable, the products will be taxed at the rate assigned by the Treasury Regulations.

  15. Prepare all necessary audit work papers and reports as required.

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