- 4.31.5 NonTEFRA Examinations - Field Office Procedures
- 126.96.36.199 Introduction
- 188.8.131.52.1 Contact with Potentially Dangerous Taxpayers (PDT) or Caution Upon Contact (CAU) Taxpayers
- 184.108.40.206 NonTEFRA Pass-Through Entity Defined
- 220.127.116.11 Terminology
- 18.104.22.168 Identification of NonTEFRA Key Case Returns
- 22.214.171.124 Election by a Small Partnership to be Included Under the TEFRA Provisions
- 126.96.36.199 Determining and Identifying the Number of Partners or Members
- 188.8.131.52 S Corporations
- 184.108.40.206.1 S Corporation Statute Considerations
- 220.127.116.11 Partnership Control System (PCS)
- 18.104.22.168.1 Rules and Guidelines for Linking NonTEFRA Entities on PCS
- 22.214.171.124.2 Advantages of using PCS
- 126.96.36.199.3 Agent Responsibilities if PCS is Not Utilized, or PCS is Used But Cases Are Controlled Locally
- 188.8.131.52.4 When to Link the Key Case on PCS
- 184.108.40.206 Linking the Key Case and Investors on PCS
- 220.127.116.11.1 Initiating Timely PCS Controls on NonTEFRA Pass-Through Entities
- 18.104.22.168.2 Field Control of Investors
- 22.214.171.124.3 NonTEFRA E-Linkage Package
- 126.96.36.199.4 Transferring Work to the Campus Using a Share Drive
- 188.8.131.52.4.1 Requesting "Dummy" Taxpayer Identification Numbers
- 184.108.40.206.4.2 Entities Acting as Agents for Investors
- 220.127.116.11.5 Verification of Linkage
- 18.104.22.168 Examination Process
- 22.214.171.124.1 Starting the Examination
- 126.96.36.199.2 Notice to Investors of Examination of Key Case Entity
- 188.8.131.52.3 Control of Investor Returns Related to Key Case Entities
- 184.108.40.206.4 Control of Cases Established on PCS
- 220.127.116.11.5 Notification of Examination of the Key Case Entity
- 18.104.22.168.6 NonTEFRA Key Case Statute Control
- 22.214.171.124.7 Extension of Investor Statute for NonTEFRA Items
- 126.96.36.199.7.1 Restricted Consents
- 188.8.131.52.7.2 Extension of Investor Statute for TEFRA and NonTEFRA Items
- 184.108.40.206.7.3 25% Omission of Income
- 220.127.116.11.8 Receipt of Amended Returns and Claims
- 18.104.22.168.9 Capital Loss Carryforward Adjustments
- 22.214.171.124 Post Exam Process
- 126.96.36.199.1 NonTEFRA Examination Results
- 188.8.131.52.2 Key Cases With No Adjustments and Investors Not Linked on PCS
- 184.108.40.206.3 Key Cases With Adjustments and Investors Not Linked on PCS
- 220.127.116.11.4 Key Cases With Investors Linked on PCS
- 18.104.22.168.5 CTF Actions After Receipt of Form 6657
- 22.214.171.124 Field NonTEFRA Investor Procedures
- 126.96.36.199.1 Processing NonTEFRA Pass-Through Adjustments
- 188.8.131.52 Requesting Investor Returns From the CTF
- 184.108.40.206 Miscellaneous
- 220.127.116.11.1 Items Requiring Key Case and Investor Level Determinations
- 18.104.22.168.2 Conversion of S Corporation to C Corporation
- 22.214.171.124.3 Fast Track Settlement or Fast Track Mediation
- 126.96.36.199.4 IRC 7602 (c), Third Party Contacts
- 188.8.131.52.5 IRC 6404(g), Suspension of Interest and Certain Penalties
- 184.108.40.206.6 Preparer Penalties
- 220.127.116.11 Technical Services Pass Through Coordinator Duties for NonTEFRA Entities
Part 4. Examining Process
Chapter 31. Pass-Through Entity Handbook
Section 5. NonTEFRA Examinations - Field Office Procedures
April 21, 2017
(1) This transmits a revision of IRM 4.31.5, Pass-Through Entity Handbook, NonTEFRA Examinations - Field Office Procedures.
(1) Various editorial changes made throughout the IRM.
(2) Changed Local TEFRA Coordinator to Technical Services TEFRA/Pass Through Coordinator throughout.
(3) Changed Campus TEFRA Coordinator to Campus Pass Through Coordinator followed by a TEFRA or nonTEFRA designation, throughout.
(4) IRM 18.104.22.168.1 - Contact with Potentially Dangerous Taxpayer (PDT) or Caution Upon Contact (CAU) Taxpayers. New section.
(5) IRM 22.214.171.124.4 - When to Link the Key Case on PCS. Added additional criteria for linking a nonTEFRA key case.
(6) IRM 126.96.36.199.1 - Initiating Timely PCS Controls on NonTEFRA Pass-Through Entities. Added information to explain that a nonTEFRA linkage package must be submitted if the partnership return is already linked on PCS as a TEFRA investor.
(7) IRM 188.8.131.52.7.1 - Restricted Consents. Added a note after paragraph one to explain that a restricted statute consent needs additional language to protect the TEFRA statute.
(8) IRM 184.108.40.206.8 - Receipt of Amended Returns and Claims. Added new paragraph (2) to clarify the processing of amended nonTEFRA partnership returns.
Signed by Michael Damasiewicz,
Director, Examination - Field and Campus Policy
Small Business/Self Employed
The purpose of this chapter is to define nonTEFRA pass-through entities and to outline and explain how to use the Service's available resources to process these types of cases. Technical issues will not be found in this part of the IRM. Audit techniques for partnerships, both TEFRA and nonTEFRA, and S corporations are found in IRM 4.10, Examination of Returns.
A NonTEFRA pass-through entity is any pass-through that does not fall under the provisions for TEFRA partnerships. They are usually the types of entities described in (a) and (b) below. The Form 13813, Partnership Procedures Cheek Sheet, must be completed to ensure a proper determination is made. The completion of the Partnership Procedures Check Sheet is mandatory for every partnership examined. The completed check sheet will be included in the audit file to document that the partnership is or is not subject to the TEFRA procedures. SB/SE examiners will file this check sheet and other TEFRA work papers under a separate line item in Section 600 on the Form 4318. LB&I Industry Case examiners will file the TEFRA check sheets and work papers under SAIN number 724 on IMS and Form 4764-B. The examiner’s manager is to review the Partnership Procedures Check Sheet and work papers to ensure that TEFRA procedures were properly considered. The manager’s signature on the Form 13813, Partnership Procedures Check Sheet, indicates that the TEFRA procedures were reviewed and correctly considered.
A partnership or an LLC (limited liability company)*, which meets the small partnership exception to TEFRA partnership rules and has not elected to be included under TEFRA rules as provided in IRC 6231(a)(1)(B);
*An LLC, which has more than one member and has not elected to be classified as a corporation under Treas. Reg. 301.7701-3 (effective January 1, 1997) will have filed Form 1065.
An LLC that has only one member and has not elected to be classified as a corporation will be treated as a disregarded entity for income tax purposes.
An S corporation whose tax period begins after December 31, 1996 (the Small Business Job Protection Act of 1996 made S corporations and their shareholders not subject to TEFRA procedures. It should also be noted that S corporations cannot make an election to be subject to TEFRA after this date.);
It can also be a fiduciary or trust; a business entity which is not a trust or corporation that may be treated as a partnership or corporation (if as a corporation, an S corporation election may be made); a joint venture; or similar type entity such as a Real Estate Mortgage Investment Conduit (REMICS).
A nonTEFRA pass-through entity:
In general, has no tax liability for itself, but passes the tax consequences to its partners, shareholders, beneficiaries, or investors. S corporations occasionally pay tax at the entity level. An S corporation is a flow-through entity but can also pay tax at the entity level.
Might not file a tax return and may not even be required to file a return (i.e., a Schedule C or F syndication or promotion reported directly on each investor's Form 1040).
There is no unified proceeding as in TEFRA. There is also no NBAP, Summary Report or FPAA. However, there are similar letters that are used to keep taxpayers informed and similar procedures for linking cases on PCS.
The following is a list of key terms and a brief explanation of each:
CC - Command Code
CCP - Centralized Case Processing. This function, located at a campus, processes assessments and abatements and closes or transfers cases to files.
CTF - The Campus TEFRA Function (CTF) is the suspense, technical and report writing units for investor returns located in the Brookhaven and Ogden campuses. The two CTF's will be maintained to obtain and control, through the AIMS and the Partnership Control System (PCS), any partner or shareholder returns related to key cases within their jurisdiction. For details, see IRM 4.31.6, NonTEFRA Examinations-CTF Procedures.
Investor - The Partner, Member, Shareholder, or Beneficiary return that reflects pass-through items from a pass-through entity.
Key Case - A pass-through return, usually a Form 1120S, U. S. Income Tax Return for an S Corporation; a Form 1065, U. S. Return of Partnership Income; or a Form 1041, U. S. Income Tax Return for Estates and Trusts. It may also be a promotion or tax avoidance scheme (an agency or promoter examination) that results in pass-through items to partners, shareholders, or investors (individual returns or another pass-through entity).
PCS or Partnership Control System - The PCS is a database program designed to control and monitor pass-through entities and linked investor returns. It is described in more detail later in this chapter. The PCS will also be used to identify and establish linkages on tier entities. AIMS (IRM 4.4, AIMS Procedures and Processing Instructions) and PCS (IRM 4.29, Partnership Control System (PCS)) are also used to identify and control indirect investors and/or pass-through entities.
Tier - For nonTEFRA purposes, a tier will be a trust, an S Corporation, or a partnership. If the key case is linked on PCS, the tier appears on the PCS database as a key case record (PS) and an investor record (PN).
TS - Technical Services. The TEFRA/Pass Through Coordinator in Technical Services acts as a liaison between the field and the CTF's for both TEFRA and nonTEFRA cases for SB/SE agents in their Area and for LB&I agents in their geographical area.
Identification of returns as TEFRA vs. nonTEFRA is necessary in order to have a valid assessment of tax because the TEFRA partnership rules and the deficiency procedures that nonTEFRA entities fall under are mutually exclusive. If the Service applies the wrong procedures, e.g., erroneously proceeds as TEFRA at the partnership level rather than deficiency procedures at the investor or partner level, or vice versa, barred deficiencies and/or refunds can result.
Form 1120S returns are all nonTEFRA by statute.
For Form 1065, the examiner must determine, for each taxable year, whether TEFRA or nonTEFRA procedures apply. Comments on Form 4318, Examination Workpapers Index, are required from the examiner as to whether the pass-through return is TEFRA or nonTEFRA, and the reasons supporting this conclusion. The Form 13813, Partnership Procedures Check Sheet, which is required to be completed will assist the examiner in making the determination.
IRC 6231(a)(1) provides that TEFRA rules apply to all partnerships required to file tax returns under IRC 6031(a) whose tax years begin after 9-3-82, except for small partnerships.
The small partnership exception applies to partnerships or LLC's treated as a partnership, consisting of 10 or fewer partners or members, each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.
A partner that is a trust (including grantor trusts) or a single member LLC that it is treated as a disregarded entity, does not meet the definition "each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner" . Thus, a Form 1065 with a trust or a single member LLC as a partner/member can not be nonTEFRA, except possibly when the pass thru partner is not identified on the partnership return. See IRC 6231(g).
Generally, most S corporation income is allocated to individual shareholders. It is possible for a Limited Liability Company, owned by a single individual member, and certain trust to be an S corporation shareholder. The Schedule K-1 may reflect the LLC or trust name and identification number rather than the individual to which the income is reported. In order to properly link the case, it is extremely important that the true shareholder is identified; the individual, trust (in the case of an Electing Small Business Trust) or estate to which the income should be reported. If you cannot look at the Schedule K-1 and determine who is reporting the pass-through items, the Campus will not be able to determine it either.
If the type of entity on the investor's Schedule K-1 is "Limited Liability Company" , the agent should always check for MFT 02 on a BMFOL or check on INOLET to see if the type of return required is Form 1120, as it would be if the LLC partner has elected to be treated as a C corporation. If it has elected to be treated as a C corporation, it will be treated as a C corporation for TEFRA partnership rules including the small partnership exception.
A partnership eligible to be excluded under the rules outlined above may elect to be included under the TEFRA provisions (IRC 6231(a)(1)(B)(ii)) The election is binding for the year for which it is made and all subsequent years unless revoked with IRS consent. Since the TEFRA election is binding for the year for which it is made, as well as all subsequent years, examiners should inquire about prior year elections. The Form 8893 or an equivalent statement should be attached to the partnership return in the year the election is made.
Per the regulations, a partnership shall make the election by attaching a statement to the partnership return for the first taxable year that the election is to be effective. The statement shall be identified as an election under IRC 6231(a)(1)(B)(ii), shall be signed by all persons who were partners of that partnership at any time during the taxable year to which the return relates, and shall be filed at the time (determined with regard to any extension of time for filing) and place prescribed for filing the partnership return. The partnership may make this election on Form 8893. (Under certain circumstances they may file retroactively. Contact the Technical Services Pass Through Coordinator if the issue is raised.) Treas. Reg. 301.6231(a)(1)-1(b)(2).
The CC MFTRA, CC ACTRA, and CFOL CC BMFOL 'E' indicate whether the partnership return may be a TEFRA return. However, the facts and circumstances, as to whether or not the partnership elected to be covered by the TEFRA procedures, are controlling.
If the examiner determines that a valid election has been filed, the procedures for TEFRA will be followed.
Except for a transfer of interest by a partner, if at any time during the taxable year the number of partners exceeds the small partnership exception of ten partners, the return will fall under the TEFRA provisions. A partnership may have more than 10 partners during the year, but still fall within the small partnership exception, because it never had more than 10 partners at any point in time (as when sales of partnership interests cause more than 10 Schedules K-1 to be filed).
The small partnership exception does not apply to a partnership for the taxable year if any partner in the partnership during the taxable year is a pass-through partner. (Treas. Reg. 301.6231(a)(1)-1(a)(2).) For example, a partnership consisting of three partners; two individuals plus a partnership, an S corporation or trust will not meet the small partnership exception.
IRC 6231(a)(1)(B)(i) provides that for the purposes of the small partnership exception "a husband and wife (and their estates) will be treated as one partner" . This provision is unqualified and thus should apply to a husband and wife regardless of the manner in which they hold their interests or file their returns.
A partner must have a proprietary interest in profits or capital. Therefore, if a Schedule K-1 indicates no ownership interest, no distribution of any partnership items, and no capital account balance, the person in question may not be a partner for the taxable year involved. Consult Area Counsel, Federal law controls.
There is a TEFRA indicator on ERCS that must be entered for allForm 1065. The return cannot be updated beyond status 12 until the TEFRA indicator is entered.
The TEFRA indicator should be entered on the system as soon as the TEFRA determination is made, but no later than 60 days of the case updating to status 12.
The Revenue Agent should request that the manager and/or secretary set the TEFRA indicator through the "correct and display" screen on ERCS. The TEFRA indicator can be set or changed on this screen. See IRM 4.7, Examination Returns Control System (ERCS), for further information.
The TEFRA indicator is required on all partnership records with a Master File Transaction (MFT) Code of 06 or a Non Master File Transaction (NMFT) Code of 35. The Field Values are as follows:
Y (Yes) = Subject to TEFRA procedures;
N (No) = Not subject to TEFRA procedures; and
S (Survey) = Surveyed without determining if subject to TEFRA procedures.
Timely linkage of a partnership is important in that it maximizes the time the campus has to secure and perfect the partner returns. This becomes even more important when the partnership has tier investors.
The Small Business Job Protection Act of 1996 removed S corporations from the special audit provisions of TEFRA for tax years beginning after December 31, 1996. All S corporation examinations with tax years beginning after that date must follow nonTEFRA procedures. For S corporations, TEFRA rules may only apply to taxable years beginning after 12-31-82, and before 1-1-97. (If assigned a delinquent return that may fall under the TEFRA procedures, please contact the Technical Services Pass Through Coordinator.)
In determining whether the corporate statute needs to be protected, in addition to the shareholder level statutes, examiners should first determine whether the entity is a C corporation or is a taxable S corporation. A corporation elects S corporation status by properly completing Form 2553, Election by a Small Business Corporation. When an election is filed and accepted by the Campus, transaction code (TC) 090 is assigned on IDRS and the entity's "1120 filing requirement" changes from "01" (indicating an 1120 return is due) to "02" , (indicating that it has an S corporation filing requirement).
If the taxpayer files an S corporation return and the entity does not have a TC 090, the Campus can not process the return as an S corporation and the return rejects in normal processing. The Campus will then assign an audit code "4" and correspond with the corporation in an attempt to correct the problem. If the corporation does not respond back or is unable to substantiate a valid election (or a retroactive valid election), the Campus converts the Form 1120S to a Form 1120, but assesses no tax.
In addition to investor statutes, an S corporation may be a taxable entity and need its statute protected. For example, an S corporation that is subject to the built-in gains tax (IRC 1374 ) or the Excess Net Passive Investment Income Tax (IRC 1375) is a taxable entity. Additionally, if the S corporation election is terminated, either voluntarily or involuntarily, or if the corporation never had a valid S election, the corporation is a C corporation. As such, the entity’s statute will need to be protected.
As with any taxpayer, the statute of limitations should be verified. The Audit Information Management Systems (AIMS) database will generally reflect a statute based on 3 years from the date the S corporation’s return was filed. S corporations are not subject to TEFRA procedures, so statutes are generally controlled at the shareholder level. One hundred percent of the shareholder statutes should be reviewed and protected. In Bufferd v Commissioner 506 U.S. 523, 113 S.Ct. 927 the Tax Court held that the limitation period for assessing the tax liability of a shareholder in a Subchapter S corporation who claimed pass-through items, began to run from the filing date of the individual return and not the filing date of the corporate return.
When auditing an S corporation it is the examiners responsibility to protect the statute which includes all shareholders’ statutes. If adjustments result in the S corporation examination, the examiner will need to control the shareholder(s) return(s) or have the corporation’s shareholders linked to the corporate return. If the shareholder(s) are linked and controlled in the campus, then the campus is responsible for protecting the statutes of those shareholder they control.
To link the case you need to have a year on the statute of the corporation and all shareholder returns. When the corporation first shows up on the Statute Expiration Report it is generally too late to link the case unless statute extensions have been secured on all of the shareholder returns. See IRM 220.127.116.11, Linking the Key Case and Investors on PCS, for linkage procedures.
The S corporation may be a taxable entity and have its own statute which needs to be protected. An example of when an S corporation would be a taxable entity is when it is subject to the Built-in Gains Tax of IRC 1374 or the Excess Net Passive Income Tax of IRC 1375.
If the S corporation has the potential of being a taxable entity, protect the corporate statute. Form 872, Consent to Extend the Time to Assess Tax, is used to control the corporate statute – whether it is an S corporation or C corporation. Do not use Form 872-S (now obsolete) for an S corporation as this form is only used for TEFRA S corporations and S corporations have not been subject to TEFRA proceedings since 1997.
PCS does not preclude the examiner from controlling one or more of the investors in the group. PCS simply identifies that the return is linked to the flow-through entity. However, if the examiner controls an investor return, then they are responsible for controlling the statute for that investor.
Often the entity will have a different statute from its investors. If the investor statutes are shorter than the entity statute, steps should be taken to ensure the investor statutes are protected. Investor statutes may be protected by the examiner (establish group control on AIMS) or by the Campus (secure PCS linkage).
The PCS is a database designed to control and monitor pass-through entities and linked investor returns. It does not replace AIMS inventory control, but it provides the additional information needed to control investor and pass-through returns. It Interfaces with AIMS to establish returns, access information, and provide mass updates to AIMS.
PCS allows an unlimited number of investors to be linked to each key case or tier and allows an investor to be linked to an unlimited number of pass-through entities. The linkage charges the returns to the appropriate area office or CTF. In addition, it places the pass-through entity PICF Code 2 on the key case on AIMS and ERCS databases. It also places an investor PICF Code of 6 on AIMS and ERCS databases so that any other part of the service can see that an entity related to the investor return is under examination. This prevents premature closure of an investor return until all key case issues are resolved. It should also prevent improperly restricted statute extensions.
The campus will input an H freeze on the partnership as part of the linkage process. The H freeze will appear on the key case AIMS transcript when PCS is established for TEFRA or nonTEFRA cases.
The PCS is described in the text of IRM 4.29, Partnership Control System (PCS) Handbook.
The decision to use or not to use PCS must be made as early in the examination as possible. In some cases the use of PCS is highly recommended, while in others it is optional. The number of investors and/or their geographic location will be the factors to consider for required linkage. For entities with less than 5 investors, efficient use of the Service's resources is the important factor. In either case, the examiner should understand that using PCS will not prevent them from following package audit requirements nor interfere with the examination of any related investor. If as a result of the package audit you determine that an investor(s) should be examined and others should not, the examiner should place on AIMS the appropriate investor(s) prior to linking the case.
During the compliance checks examiners should review related returns, including shareholders. If it is determined that one or more of the shareholders has issues including basis, passive activity losses or those not related to the examination of the pass through return which warrant examination, they should place the Form 1040 under examination. Examiners should not link a return in lieu of their responsibilities to do compliance checks or to place related returns under examination which have Large, Unusual and Questionable items. If the shareholder is in another geographical area and warrants examination, you should discuss with your manager. Consideration should be made as to whether you should place the shareholder under examination or work with the other area to get the return worked.
When the key case is linked on PCS (Form 14092 or Form 14093), it establishes the investor returns on AIMS and generates Form 5546, Examination Return Charge-Out Sheet, for their tax returns. If an investor return is not already in an audit status, the investor returns are sent directly to the CTF. The CTF becomes responsible for protecting the statute on the investor cases, except for cases charged out to Compliance. For cases already charged out to Compliance, the examiner with control of the investor case has the statute responsibility. The CTF will also secure agreements, assess tax and send notices of deficiency when necessary.
If the Tax Identifying Number of the investor is incorrectly reported on the Schedule K-1, the CTF unit will identify the problem and take appropriate action. This will include determination of the correct information so that the proper tax return can be secured or notifying the examining agent that additional information is needed. The CTF will contact the examining agent for assistance when they are unable to determine the correct investor.
The CTF is responsible for inspecting the investor returns to determine if the taxpayer reported all pass-through items. If there are differences, the CTF determines the reason. After the determination is made, the CTF will contact the key case examiner, who will decide the action that should be taken. Unlike TEFRA cases, the investor return cannot be conformed to the key case return using a computational adjustment. Statutory Notice procedures must be used.
When the investor returns are received in the CTF, cases with potential non-pass-through audit issues are identified and selected for field examination.
The PCS system places a Partnership Investor Control File (PICF) Code of "6" on the AIMS record for the investor. The code alerts personnel to the existence of an ongoing examination of the key case return and prevents its premature closure. For example, an examiner in Peoria may be auditing Investor A's individual income tax return when an examiner in Boston begins the examination of a nonTEFRA S Corporation in which Investor A is a shareholder. If Investor A asks for a restricted consent, the Peoria examiner can check the PICF Code and determine whether the restricted consent should include any pass-through entities. Investor A's examination cannot be closed without addressing the PCS linkage.
If the key case return is not linked, the key case examiner assumes total responsibility for statute control for all of the investor returns. The CTF has no responsibility for any statute protection for any investor unless that investor is in the CTF because of a TEFRA or nonTEFRA linkage. Once the linkage is resolved, the CTF will no longer have responsibility for the statute.
If a decision is made not to link the return, the key case examiner is responsible for:
Establishing AIMS controls, on all investors not already open.
Preparing individual examination reports for all investors open in his/her group.
Notifying any "investor group" of the entity examination who have an investor return already open with Form 6658, Notice of Special Investor Action.
Informing the investor group on the progress of the entity’s examination and provide them with an interim report when statute considerations require the issuance of a notice of deficiency. This interim report should be prepared and mailed out when the investor has less than 210 days remaining on the statute.
Providing Form 6657, Related Returns Examination Report, and a copy of the entity report to each "investor" group.
Securing the necessary information from the investor's area/territory regarding any other key cases or tier entities in which the out-of-area/territory investor may have an interest. If a pass-through entity has any out-of-area/territory investors, it is strongly recommended that the case be linked.
The key case examiner must reconcile the items reported on the investor Schedule K-1 to the amounts reported on the investor return, and the reason for any differences must be determined. The key case examiner must inspect the investor returns to determine whether non-pass-through issues should be examined.
If the key case is not linked on PCS, there is no Form 5546, Examination Return Charge-Out Sheet, to be associated with the investor case, and there is no PICF code on AIMS. A person, other than the key case examiner, holding the investor return may be unaware of the need to include the nonTEFRA pass-through in any proposed adjustments, statute extensions, or statutory notices of deficiency. If the key case is not linked, the person holding the investor return (CTF, examiner, appeals officer, etc) is not responsible for statute control on unlinked issues for which there is no notification. For example, if the investor requests a restricted consent, the person holding the investor return will not know to include the non-linked entity in the consent.
The decision to use the PCS should be considered and made as early in the examination as possible. If the examiner waits until there is less than one year on investor statutes, they may not be able to use PCS. The examiner should make the decision within 120 days of the initial interview.
It is strongly recommended that the area/territory link all nonTEFRA key cases that meet the following criteria:
The entity has more than five investors, or
There is at least one out-of-area/territory investor, or
There is at least one out-of-operating unit investor, or
There is a investor which is a pass through entity (i.e. certain trusts and estates), or
There is an investor with an open TEFRA linkage, or
The nonTEFRA key case is a partner in an open TEFRA examination.
Linkage is mandatory when:
A NonTEFRA partnership is linked to a TEFRA partnership already under examination. In that case, a nonTEFRA linkage package must be sent to the campus. Even though the partners may already be linked on PCS, the nonTEFRA linkage package is needed to change the designation of the partner returns from TEFRA to dual status on PCS. This ensures the campus knows that they have to protect the partner's individual statute for the nonTEFRA exam. If a linkage package is not submitted, the campus will not protect the individual statute which could result in barred statutes. Barred statutes in such instances will be returned to the field for failing to notify the campus, or
One of the partners in the nonTEFRA partnership has an open TEFRA linkage. Submitting the nonTEFRA linkage package is needed to change the designation of the partner on PCS from TEFRA to dual status. Adding the nonTEFRA link will alert the campus that the individual partner statute must be protected. With TEFRA, the statute is controlled at the partnership level and not at the partner level. Failing to submit the nonTEFRA linkage package may result in barred statutes. Barred statutes in such instances will be returned to the field for failing to notify the campus.
If the key case is not linked on PCS, Appeals will only accept protesting investors cases if both of the following are met:
The entity has five or fewer investors, and
None of the investors is a pass-through entity.
As a general rule, the key case and one protesting investor will be sent to Appeals. However, Appeals will accept protesting investors with different representatives, protesting investors without representation and protesting investors with unagreed non-pass-through issues. The key case examiner must either link the key case on PCS or hold the investor returns until the key case entity issues are resolved in Appeals.
Also, all pass-through returns in which you do not control 100% of the investors (e.g. if another agent in a different state has control of one of the investors) should be linked. This will prevent the investor’s return closing without considering the results from the pass-through entity examination.
If the examiner has not determined that the examination will result in a No-Change within 120 days of the initial interview he/she should prepare the package described above and submit it to his/her manager. The group manager will review the package for timeliness and accuracy. The group manager will indicate approval by signing the Form 14092 or Form 14093.
The examiner should make every effort to have the linkage package in the hands of the campus before the last 12 months of the shortest investor statute is to expire.
It is a best practice to request linkage as soon adjustments are known, but no longer than 120 days. Delays in linkage create a bigger burden for the campus. Older returns take longer to retrieve from the Federal Records Center. This impacts the campuses ability to secure investor returns and have them ready for report writing. It also can leave them with little time to secure statute extensions.
It is important to remember that when a key case is linked, all the investors will be linked no matter where they are controlled.
NonTEFRA linkage package must be received by the CTF with at least 12 months on all investor statutes. If less than 12 months remain on an investor statute, examiners must coordinate with the Technical Services TEFRA/Pass Through Coordinator and/or the CTF Pass Though Coordinator - NonTEFRA. The campus may accept a package if there is less than 12 months, but more than 9 months, if their workload allows.
If the nonTEFRA pass through entity is already linked on PCS to a TEFRA case, nonTEFRA linkage must be established as well. If the agent does not establish nonTEFRA linkage, the campus controlling the investor returns will not know to protect the partner level statute. The campus does not control the partner level statute if there is only a TEFRA linkage. Not establishing the nonTEFRA linkage may result in barred statutes.
In those instances where there are less than 12 months remaining on the statutory period of limitations for assessment of the tax for any investor, the key case area is responsible for securing extensions of the statutory period of limitations on all related investor returns, including tier returns and their related investors. When extensions cannot be secured, the agent is also responsible for all 30-day letters or notices of deficiency. The CTF will only link if the field has established AIMS controls for all investors.
In situations where the campus agrees to accept the case and the 9 month time limitation may lapse during mailing of the package, the CTF should be notified of the package prior to mailing. If the CTF is not notified, and the there are less than 9 months remaining on the statute, then the CTF may reject the package.
The key case examiner is responsible for securing the necessary information from any investor areas regarding any other key cases or tier entities in which the investor may have an interest so as to not exclude them from any restricted consents.
When a return is properly linked, the responsibility to make adjustments from the S corporation audit that flow to the individual shareholder’s returns shifts to the campus for all investors the campus controls. This does not negate the examiner’s responsibility to conduct the compliance examination and evaluate related returns during the examination process. In auditing the S corporation, there are a number of issues which are related to the S corporation but are non flow-through issues. These include basis, at-risk, passive activity losses, gain on loan repayment and taxable distributions which can all be identified and developed as part of the corporate audit. In addition, there could be non-S corporation issues identified through inspection of the shareholder’s returns which need to be addressed which are not related to the S corporation examination. These non-S corporation issues will generally require the examiner to place the individual shareholder under examination regardless of the S corporation examination results.
If you determine that you have some shareholders which you will need to place under examination due to 1040 issues, these cannot be controlled by the Campus. The Campus will only make adjustments for flow-through adjustments. It is recommended that the examiner first control those returns which have non flow-through issues and then link the key case return which will protect all other shareholders.
The examiner is responsible for reviewing the investor returns related to Non TEFRA pass through audits for large, unusual or questionable items. If it is determined that the investor return warrants further examination, then AIMS controls should be requested.
PCS linkage is recommended on all NonTEFRA pass through entities within 120 days of the initial interview. When there is one out of area investor, greater than 5 investors or if any investor is a pass through entity the examiner must submit PCS controls for the pass through entity.
If AIMS controls exist on any investor prior to linking the pass through entity on PCS then it is important that the investor returns remain in the group until linkage is fully established. The investor return can be closed after PCS linkage is established and also when the NON pass through entity adjustments are resolved before the pass through entity examination is complete. A TSUMYP secured through AIMS will indicate if PCS linkage does exist along with a listing of investors linked. Once linkage does exist the case can be closed from the group.
Do not close the investor returns off AIMS if a key case linkage package is being submitted. This creates added work for the campus as they have to reopen those partner returns before a linkage can be established.
Once linkage has established, investor returns can be transferred to the campus through Tech Service and updated to Status 21. In addition to the normal case information, the Form 3198 should be completed as follows:
On page one, in the Special Features Box, check the other box on page 1 and write suspense case with unresolved flow through issues, non flow through issues are being surveyed/no changed/agreed/unagreed, please forward to Brookhaven if linked to a SB/SE key case or to Ogden if linked to LB&I key case.
Check Forward to Tech Services
To initiate an e-linkage, the agent must complete Form 14092 (for an SBSE key case) or Form 14093 (for an LB&I key case) and submit the linkage package to the CTF within 120 days of the initial interview.
The examiner should make every effort to have the linkage package in the hands of the CTF before the last 12 months of the shortest investor statute is to expire.
It is a best practice to request linkage as soon as possible. Delays in linkage create a bigger burden for the campus. Older returns take longer to retrieve from the Federal Records Center. This impacts the campuses ability to secure investor returns and have them ready for report writing. It also can leave them with little time to secure statute extensions.
For LB&I key cases, the agent must also include the LIN link.
If the return is not imaged, the return can be scanned or faxed.
If faxed, the check sheet and attachments should be sent via secure E-mail at the same time. Attachments include:
A spreadsheet with a reconciliation of the Schedules K-1. All attempts should be made to secure any missing Schedules K-1;
The agent must answer the questions on the check sheet;
The copying of tax returns and Schedules K-1 are no longer required at the field level when the return is imaged or scanned.
Schedules K-1 filed electronically can be accessed via the Employee User Portal (EUP) or via a TRPRT print.
The group manager must review the package and electronically sign the Form 14092 or Form 14093 before submission to the CTF. Once signed, the agent can forward the package via secured E-mail to the CTF. The E-mail address is provided on the appropriate form. The manager’s signature on the TEFRA Electronic Linkage Check Sheet indicates that the linkage package has been reviewed, is accurate and complete.
A copy of the electronic check sheet must be included in the audit file.
The Technical Services PCS coordinator is no longer used. The package are sent directly to the CTF via secure E-mail.
If the return is too big to email or fax, the information can be uploaded to a shared drive. If the information cannot be sent electronically, coordinate the mailing of the return with the Campus Pass Through Coordinator - NonTEFRA. All information should be sent electronically except for that which must be mailed.
Large files cannot be emailed. As a result, a shared drive was created to allow these large files to be transferred electronically.
In order to transfer files via the shared drive, a network pathway must be established.
To map to the drive:
Right click the My Network Places icon on the desktop
Left click Map Network Drive
A window will open with two fill in boxes. One for Drive and one for Folder.
The Drive box displays the first available drive letter for the connection. You can click on the arrow and scroll down until you see the drive letter that you want to use or you can use the drive letter listed.
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Also, make sure to check the box Reconnect at Login. This will ensure your computer reconnects to the drive each time you log on.
Check to see if the mapping was successful. Right click on the Start button on the lower left hand corner of your computer. Left click on Explore. The newly mapped drive will appear in the list. You should see the specified drive, followed by EX TEFRA Elect Notice followed by the drive name.
Left click on that drive and there will be two folders. One folder entitled LB&I OSC Notices and the other entitled SBSE BSC Notices.
Once you have mapped the drive, you will then be able to double click to the folders that you have access to. You can also create a shortcut to put on your desktop.
A new folder needs to be created to send to the campus. To create a new folder in your case folder, left click on the appropriate folder. Left click on "File" in the top menu. Left click on "New" in the drop down menu, and then on "Folder" . A new folder icon with highlighted name "New Folder" will appear in your data folder.
With the name of the folder highlighted, left click on the folder and enter a name. If the name of the folder is no longer highlighted, then right click on the folder and left click on "Rename" .
The folder should be named as follows:
XXXX-Type of Package-FL-East/West
XXXX = Last four digits of the TIN
Type of Package = NBAP
FL = First and last name of sender
East or West applies to the Ogden Campus only
Save all taxpayer files to be sent to the campus in the file folder named above.
To add the folder to the shared drive, right click on the folder being sent. Bring the cursor to the WinZip option and left click on "Add to foldername.zip" in the submenu. This will create a WinZip folder.
Right click on the .zip folder and left click on cut. Left click on the short cut folder on your desktop for the campus, or go through the network drive (long way).
Left click to open the campus folder where the package will be attached.
Right click on paste to attach the folder. When you click paste, an error message will appear to alert you that encrypted data cannot be copied or moved. Click ignore all.
The folder will not be posted to the campus folder. No password is needed because special access is required for the shared drive.
Each TEFRA campus will have an employee assigned to monitor the shared drive who will copy and save the package externally and then delete it from the shared drive. The campus will acknowledge the package within 24 hours via email stating "your linkage package has been received for XXXX (last four digits) on MMDDYY" .
The agent should also monitor the shared drive to confirm that the package was deleted.
A dummy TIN is required to link any key case that did not file, or is not required to file, a tax return.
The field office is responsible for acquiring a dummy TIN when:
It is needed for a key case. Identification of a Schedule C or F type promotion is one example of an occasion where a dummy TIN is needed.
the field chooses to work investors that did not file, or were not required to file, a return.
The campus is responsible for acquiring a dummy TIN when the campus will control the linked investor(s).
A dummy TIN is created by using two command codes. First, AMTIN7 is used to generate a dummy number. CC AMNON is then used to establish the dummy number on AIMS.
Once the entity is established, the agent can submit the Form 8341 to control all investor returns that are identified. Before the Form 8341 is input, the key case examiner must insure that the NMF TIN, MFT code, tax period and employee group code shown on AIMS are consistent with the input information on the Form 8341.
The NMF AIMS for any investor should be established before the key case is linked. That will eliminate any rejects that would occur when linking the NMF investor.
As additional investors are identified, use Form 8341 to add controls for the additional investors. All existing instructions for PCS are then applicable including case closing instructions.
Examiners may encounter situations where an entity such as a corporation is acting as an agent for investors. The agent-investor arrangement may be identified as a result of the examination of the agent-promoter or the examination of the investor. In either instance, the examiner will determine whether it should be controlled using the PCS or manual procedures.
If the agent-investor arrangement is identified as a result of the examination of the agent-promoter and there is an adjustment affecting the investors, or a determination is made to control the arrangement, the PCS procedures should be used to control the investor returns. A copy of the substitute Schedule K-1 or other similar document provided by the agent to the investors showing distributive shares of income, loss, etc. will be used in lieu of Schedule K-1.
If the agent-investor arrangement is identified as a result of the examination of an investor, nominee, etc. and it is determined that controlling the arrangement would be beneficial, the examiner of the investor's return will prepare and submit a collateral examination request to the agent's area. The procedures discussed in (2) above for controlling the investor's returns will be followed.
If it is determined, as a result of the examination by the agent, that a partnership return should have been filed, the return will be secured from a responsible party. The procedures in this Handbook, including the use of the PCS, will then be followed.
When a promoter of a Schedule C or F type promotion is identified, obtain a dummy taxpayer identification number (TIN) for the specific shelter by using the procedures outlined in IRM 4.4, AIMS/Processing Handbook. Create the dummy entity on AIMS as a non-Master File entity. Input Form 8341 to control all investor returns that are identified. As additional investors are identified, use Form 8341 to control the additional investors. All existing instructions for PCS are then applicable including case closing instructions. Before the Form 8341 is input, the key district examiner must insure that the NMF TIN, MFT Code, tax period, and PBC code shown on AIMS are consistent with the input information on the Form 8341.
The examiner should verify linkages using a TSUMYP print. No Form 886-Z is generated for nonTEFRA investors. If the examiner notices any discrepancies between the TSUMYI print and the return, the CTF Pass Through Coordinator - NonTEFRA should be contacted. The CTF Pass Through Coordinator - NonTEFRA will help rectify any linkage problems. The campus may not link all investors if they determine some will not have a material adjustment.
Additionally, an AMDISA can be secured for each investor. The PICF code 6 indicates linkage with at least one non-TEFRA key case, though it will not state the non-TEFRA key case. The AMDISA will also show the investor’s statute. If the case is in status 33, it is controlled by the non-TEFRA unit in the Campus. Be aware there may be more than one non-TEFRA key case or also TEFRA key case linkage and an AMDISA will not show the key case, so a TSUMYP is the safest method to verify linkage.
Although S corporations are no longer subject to TEFRA they could be an investor in a partnership thereby causing the partnership to be subject to TEFRA proceedings. As such, examiners should be checking PCS to see if their 1120S taxpayer is linked to any open TEFRA key case. NonTEFRA issues can be partially assessed and the return can then be sent to the campus for suspense to await the TEFRA results. Multiple nonTEFRA linkages need to be resolved together, as only one stat notice may be sent to investors for nonTEFRA issues.
Once the key case has been properly linked, the Campus is responsible for protecting investor statutes on cases they control and making flow through adjustments as a result of the examination.
The campus may not link all tier investors. For example, if a grantor trust is a shareholder in an S-Corp, the campus may opt to link the beneficiary only. Tax exempt investors are also not linked, however any tax changes will be shared with TE/GE. If the agent is concerned about a tax exempt partner being subject to tax, they should submit a referral to TE/GE.
The following subsections cover the examination process.
The examiner will issue a regular appointment letter confirming the initiation of an examination with an accompanying Information Document Request (IDR). If, within 120 days, the examiner and his/her manager have determined that PCS linkage will not be used, the investor returns not already controlled by the examiner will be requested. Any returns already open outside the group will be notified that an entity, in which their taxpayer is an investor, is under examination. Use the Form 6658 to notify other offices of the exam and send with a Form 3210, Document Transmittal. Make sure an acknowledgment copy is received to ensure the examining agent is aware of the key case examination. A copy of each investor Schedule K-1 should be included with the notification for the investor's file.
The partnership return cannot be surveyed once the examination has started. The investors are sent notification of the examination when they are linked. There should be no reason to survey a return since linkage is not needed until 60 days after the examination has started,
When the examiner has secured the investor returns but is not examining issues other than the pass-through, the examiner should use one of the following letters to inform the investors of the examination. This assures that the taxpayers first contact is not a request for a statute extension, a 30-day letter or a notice of deficiency. Separate notices should be considered for taxpayers filing joint returns.
Letter 3457, Notification of Beginning of Partnership Audit
Letter 3458, Notification of Beginning of S Corporation Audit
If it is clear the shareholders are aware of the S corporation audit, it is not necessary to issue the above letter. If the corporation is linked, the Campus will notify the shareholders of the examination.
Do not contact the taxpayer if there is "Z" Freeze or a TC 914 on the taxpayer account. If there is a "Z" Freeze or a TC 914 on the taxpayer account, give the investor information to the Pass Through Coordinator - NonTEFRA for immediate, appropriate action.
The examiner of the unlinked entity is responsible for controlling statutes and applying examination results to investors open in his/her group. The examiner must also keep any other investor groups updated on the progress of the entity's examination and provide them with an interim report when statute considerations require the issuance of a notice of deficiency. This interim report should be prepared and mailed out when any investor has less than 210 days remaining on the statute.
The AIMS databases and the tax returns for the investors of a key case will establish in the campus PBC (295), Employee Group Code 5400 and be delivered to the key case CTF, unless the investors are already established on AIMS.
When tier investor returns are received in the key case CTF, the tax returns of the tier investors will also be requisitioned. This procedure will be followed through the significant layers of the tiering arrangement.
If a TC 420 already exists on the module when a TC424 request posts, the function with the return will be notified as explained below.
Internally, notice of a key case examination is provided by Form 5546, Examination Return Charge-Out, which is produced by AIMS.
The Form 5546, Examination Return Charge-Out, delivers the investor return to the key case CTF or delivers an acknowledgment to the location of the return if it was previously charged-out to another campus function or area. The Form 5546, Examination Return Charge-Out, shows the identifying information of the entity under examination.
In general, no statute control is necessary for nonTEFRA key case entities as they are considered information returns. The statute of limitations of each investor return controls the pass-through entity issues on the investor's return.
This general rule also applies to S corporation tax years beginning after December 31, 1996. Alpha statute "GG" – Non-TEFRA Flow-thru can be used to update the corporate statute if it is determined that no entity level statute of limitation exists. Caution should be exercised before assigning any alpha statute code; once an alpha code is assigned, the statute will not be reflected as imminent on Statute Expiration Reports. Alpha statute "GG" should only be used on an S corp if all the following items are confirmed:
The entity is not liable for entity level tax. For S corporations that includes the Built-in Gains Tax (IRC 1374), Excess Net Passive Investment Income Tax (IRC 1375), LIFO Recapture Tax (IRC 1363(d)), recapture of prior years investment credit, tax paid on fuels, or application of penalties under IRC 6707A and IRC 6699. For S corporations and partnerships it can also include application of penalties under IRC 6707A, IRC 6698 and IRC 6699.
The S corporation election is valid and has not had a terminating event (including, but not limited to, an invalid shareholder, three years of excessive net passive income, or a revocation).
A final determination has been made that the partnership does not come within the TEFRA provisions.
All of the shareholder statutes are protected by being controlled on AIMS or properly linked at the Campus.
Generally Form 5348 , AIMS/ERCS Update, is used to update the statute date by adding the alpha code "GG" . Both AIMS and ERCS may need to be updated. As an example, if the 3 year corporate statute was to expire 3-15-09, the statute date on the Form 5348 would be 03GG2009.
The Non-TEFRA flow-through alpha code "GG" should only be used when all investor statutes are protected.
Caution should be exercised in updating the statute to any alpha code; if it is not used properly it may result in a barred statute. The Non-TEFRA pass through alpha code "GG" should only be used when all investor statutes are protected. Any time you receive a case with an alpha statute, you should take steps to confirm that it is proper.
The entity level statute may also need to be protected for penalty purposes. Applicable penalties include IRC 6707, Failure to furnish information regarding reportable transactions, IRC 6698, "Failure to file partnership return" , and IRC 6699, "Failure to file S corporation return" . The failure to file penalty is normally assessed by the Campus during processing but occasionally it will need to be assessed by an examiner, see discussion below.
If the entity has the potential of being a taxable entity, protect the entity statute. Secure a consent for the S corporation or Partnership, for entity level taxes or penalties, on Form 872, Consent to Extend the Time to Assess Tax. Please note if the IRC 6707A penalty is applicable, there may be special language required.
Form 872 is used to control the entity statute – whether it is an S corporation or NonTEFRA partnership. Form 872-S was made obsolete since S corporations have not been subject to TEFRA proceedings since 1997.
The "kind of tax" line on Form 872 will be "income" when the entity is taxed as a C corporation, subject to built-in gains tax, excessive net passive income tax or the Income Tax Credit claimed for Fuels. If the entity is subject to a penalty, then the specific penalty will also be specified on the "kind of tax" line.
When the corporation is taxed as a C corporation because the S election is not valid or has terminated, or if the S corporation statute is being extended to assert the built-in gains tax, the net passive investment income tax, the LIFO recapture tax or the recapture of prior C corporation credits, the kind of tax on the Form 872 should be Income Tax.
The examiner charged with the investor return is responsible for the IRC 6501 statute for all nonTEFRA issues on the investor return. All regular statute extension request procedures must be followed when soliciting Form 872, "Consent to Extend the Time to Assess Tax" , including requests for restricted consents. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised Form 872, after the conditions are reviewed by Counsel, and re-mail to the taxpayer for signature.
The case file must be documented that managerial approval has been obtained to solicit a consent to extend the statute of limitations from the taxpayer 210 days prior to the statute expiration date.
It is recommended that all investor statutes be listed and attached to the Form 895. The attachment should indicate that the statutes are being controlled at the investor level. A statement should be included that indicates if any entity level penalties exist. The Form 895 should be initialed and dated by both the examiner and the manager.
The Restructuring and Reform Act of 1998 (RRA '98), section 3461(b), imposed provisions that must be followed in soliciting a consent to extend the statute of limitations. The provision requires the IRS to provide the taxpayer(s) or their authorized representative(s) with an explanation of their rights to decline to extend the assessment statute of limitations, or to request that any extension be limited to a specific period of time or to specific examination issues.
In order to meet the provisions of RRA '98, the IRS has established the following procedures whenever an extension to the statute of limitations is solicited:
Letter 907, and Publication 1035, Extending the Tax Assessment Period, must be provided to both the taxpayer and any authorized representative. In the case of a joint return, both spouses must be separately notified. A copy of Letter 907 must be attached to the Form 872 in the file, and its mailing documented in the case activity record.
Examiners should ensure that the proper extension form is transmitted to the taxpayer and representative.
Upon receipt of the executed copy from the taxpayer or authorized representative, the consent should be date stamped received and processed to the manager for execution. All requests for restricted consents must be considered. If the examiner receives a return letter with a signed consent that places conditions on the extension, the examiner should include these terms in a revised Form 872, after the conditions are reviewed by Counsel, and re-mail to the taxpayer for signature. A copy of the executed consent must be returned to the taxpayer and/or authorized representative(s) with the original attached to the tax return. The team should ensure that both the AIMS and ERCS databases are properly updated to reflect the new statute of limitations date.
If the taxpayer or authorized representative does not wish to execute a consent, they should be notified that the case will be evaluated to determine whether a Statutory Notice of Deficiency should be issued.
Further guidance on the control of statutes can be found at IRM 25.6, Statute of Limitations Handbook.
If any investor statute of limitations expires, the responsible agent will follow the statute expiration procedures as outlined in IRM 18.104.22.168, Barred Assessments/Barred Statute Cases.
Restricted consents are quite common with TEFRA investor cases. Care must be taken to ensure all restricted issues are covered.
Research the investor for other linkages. If other linkages exist, contact the examining agent to see if other restrictions exist.
There is a restricted consent indicator on AIMS that signifies if a restricted consent is secured. An "R" will follow the Statute Date if a restricted consent was secured. If an extension was secured with no restriction, an "X" will follow the Statute Date.
More than one restricted consent can be secured for a taxable year.
Once the original IRC 6501 statute is gone, each existing restricted consent must be extended timely to keep the statute open.
No other restricted issues may be added after the original IRC 6501 statute has passed.
In Alan H. Ginsburg v. Commissioner, 127 T.C. 75 (2006), the Tax Court held that a consent that did not reference affected items was not sufficient to extend the statute of affected items of taxpayers with pass-through entity interests subject to TEFRA.
All examiners soliciting consents to extend the statute of limitations should now use Form 872, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, for any taxpayers that are direct or indirect investors in one or more entities that file, or should file, a Form 1065 . This is especially important where the pass-through entity is not under examination; therefore, no Form 872-P has been secured at the partnership level.
Although an S corporation is not subject to TEFRA procedures, it can own an interest in a partnership. Any partnership with an S corporation partner (or other pass through entity, including a single member LLC) is automatically TEFRA. Therefore if the S corporation is a taxable entity, or has the potential to be a taxable entity, an unrestricted Form 872 (10-2009 revision) should be obtained.
An unrestricted Form 872 is recommended for all cases where the taxpayer is a direct or indirect investor in pass-through entities that file (or should file) a Form 1065. As an example, a large corporate taxpayer may be invested in hundreds of partnerships or limited liability companies subject to the TEFRA partnership administrative and judicial procedures. In this situation, it may not be known which of these pass-through entities are subject to TEFRA. If a significant TEFRA partnership adjustment is picked up during an examination of a taxpayer/investor, the period of assessment will be held open by the executed Form 872. It is very important to note that a TEFRA partnership proceeding is still required in order to make this adjustment even though the taxpayer who has executed the Form 872 consent may be the only partner adjusted as a result of the TEFRA partnership proceeding unless other partners or the TMP have also extended the period for assessing partnership items.
If the taxpayer declines to execute an unrestricted Form 872, the taxpayer should be advised that due to the implications of the Ginsburg decision the Service will take all necessary steps to protect the Government's interest.
In those cases where it is appropriate to solicit a partner level extension, but the partner refuses to sign the consent, the examiner should document the refusal in the case file.
Anytime the statute is extended at the partner level, a copy of the extension must be sent to the campus that linked the case.
It is recommended that all investor statutes be listed and attached to the Form 895. The attachment should indicate that the statutes are being controlled at the investor level. A statement should be included that indicates if any entity level penalties exist. The Form 895 should be initialed and dated by both the examiner and the manager.
If it can be shown that a taxpayer understated their gross income by 25%, a special 6-year statute applies per IRC 6501(e). On a non-taxable, Non-TEFRA return, the computation of the substantial understatement will be made at the investor level.
The general rule is the investor’s gross income includes the investor's pro rata share of the pass-through entity's gross income. Treas. Reg. 1.1366-1(c)(1). Gross income for a business is the total amount of sales received or accrued prior to the reduction for cost of goods sold.
In determining whether an individual has a substantial understatement of income, you would total the gross income reported on the individual tax return and compare it to the correct total of gross income.
The following items would be totaled in arriving at the investor’s gross income:
Wages, Salaries, Tips, etc.,
Interest Income (not including tax exempt interest),
Gross Income from Business or Farm (before cost of sales),
Net Gains from the Sales of Property (not the gross sales price),
Proportionate Share of Gross S Corporation and Partnership Income,
• Gross Receipts (before cost of sales)
• Gross Rents
• Net Gain from Form 4797
• Other Income Included in Total Income
• Gross Income from Farm Included in Total Income
Gross Rents or Royalties, and
In establishing a 25% omission of income case, the burden is on the government. An item other than an overstatement of basis is not considered omitted from gross income if the taxpayer adequately disclosed the item on the return or on an attached statement. The disclosure must adequately apprise the Service of the nature and approximate amount of the item; the actual dollar amount of the omission need not be disclosed. An understatement of gross income caused by an overstatement of basis is an omission from gross income for the tax period for which the assessment statute was open on July 31, 2015 and for returns filed after July 31, 2015.
Due to the requirement to use the proportionate share of gross receipts, it may be difficult to trigger the 25% omission rule where the individual taxpayer reports the distributive share of income or loss of the S corporation or partnership ownership interests.
On the other hand, this gross income test could actually trigger the 6-year statute if the investor failed to report his entire share of the entities pass-through income.
Based on Treas. Reg. 1.1366-1(c)(2), the amount of gross income reported by the investor depends on whether the investor reports all of their pro-rata share of pass-through income. If all of the pass-through income is not reported, then all of the gross income for the 25% omission test has not been reported.
Example – Six Year Statute
Ann owns 25% of S, Inc., an S corporation with gross income of $200,000 and ordinary income of $20,000.
This means that Ann’s gross income from the S corporation is $50,000. Also, her share of the ordinary income is $5,000.
If Ann only reports $3,000 of ordinary income, and failed to report $2,000 of ordinary income, she would also fail to report $20,000 of gross income (2,000/5,000 of $50,000).
Assume Ann's only other income is $25,000 of W-2 income. Her total gross income is $75,000 ($25,000 W-2 income plus $50,000 S corp. income).
She has omitted $20,000 of the $75,000 of income which is a 26.67% omission. This triggers the 6-year statute.
Be careful when computing substantial understatement of income, especially relating to pass-through entities. The pass-through entity’s gross income versus pass-through taxable income should be used in the calculation. Situations where an individual fails to include their entire share of S corporation or partnership income can result in a 25% omission of income.
The agent should review and process all amended returns and claims received per IRM 22.214.171.124, Claims.
NonTEFRA partnership amended returns have no statute of limitations and are information returns like their originally filed Form 1065. An examination of the amended nonTEFRA partnership is conducted in the same manner as any other nonTEFRA partnership examination. NonTEFRA examinations can be linked on PCS, see IRM 126.96.36.199, Partnership Control System (PCS). Since the partnership is nonTEFRA, all statutes are controlled on by the partners’ IRC 6501 statutes.
Generally S corporation returns are non-taxable entities. If an amended return is filed, it does not extend the statute of the non-taxable corporation or the shareholders. On occasion an amended S corporation return statute is improperly updated to "AA" indicating a claim statute. When the S corporation is a non-taxable entity it cannot be a claim.
The individual investor’s 1040s should have timely filed amended returns relating to the amended S corporation or partnership return. AIMS should be reviewed for each investor to see if the amended returns were filed and whether the claims were paid.
If an investor claim has not been paid, even though the regular statute has expired, the investor return can be audited and an assessment can be made up to the amount of tax requested in the claim. In other words, the tax refund requested in the claim can be offset by other audit adjustments.
If one, or more, of the investor claims have been paid and the regular statute has expired, there is no statute with respect to that investor. One exception to this is if the refund is an erroneous refund, which is rare. The determination of whether or not an erroneous refund exists would need to be made by the local Counsel attorney.
Unfortunately claim returns relating to a Non-TEFRA pass through entity and related investors are not currently reviewed together.
Claims and taxable amended returns received for any investor controlled on PCS should be reviewed by the agent for potential examination or statute issues.
If no examination or statute issues exist, the claim should be forwarded to the controlling CTF.
All taxable amended returns should be assessed before forwarding to the campus.
A capital loss carryforward is governed by the investor's IRC 6501 statute for the carryforward year. IRC 6501(h) would extend the investor's statute based on the loss year only for carrybacks. If a carryforward adjustment is possible, the investor's statute will need to be protected on all carryforward years.
The following subsections cover the post exam process.
NonTEFRA reports are similar to those for TEFRA partnerships. The agent prepares a Form 4605, a Form 886-A, Explanation of Items, and a Form 886-S, Form 886-X, Form 886-W or Form 886-Z to show the corrected pass-through amounts for each investor. The Form 4605 is used to secure agreement from the entity. All are available on RGS.
There is no summary report letter. Instead, for cases with adjustments, Letter 921, Report Transmittal for a Partnership, Fiduciary or S-corporation, is used for the entity and Letter 950 (30-Day Letter) for each of the investors. When investors do not file a protest to the 30-day letter or when the statute does not allow time for the 30-day letter, a notice of deficiency is issued.
A Letter 992, No-change Letter, is used for the entity when it is no-changed. The examiner will also prepare Form 6657, Related Returns Examination Report, as a cover for the reports for investors not under their control.
These forms and letters are used for both PCS linked and unlinked cases. Letter 992 and Form 6657, whether or not case is PCS linked, will be issued by the agent.
The unified proceeding with NBAP's, a Summary Report and FPAA's used under TEFRA are not available for these entities. The subsections below discuss the procedures for processing the results of the key case examination.
The examiner will immediately issue a Form 4605 indicating no adjustments and mailed to the entity along with Letter 992. A copy will be issued to the POA as required. There is no requirement for the pass-through entity to sign the forms. IRM 4.10.8, Examination of Returns, describes the report writing requirements if no changes are proposed for the pass-through entity.
The examiner will prepare a Form 6657 indicating a no-change. The Form 6657 and a copy of the report must be associated with any investor files that are open. The Form 6657 must be sent with the report for all investors not under the control of the examining entity agent. Any investors that have been contacted will need to be notified of the no-change. Letter 3401, Preliminary No-Change Report Transmittal Letter, will be used to notify the investors when all issues are no-changed. Letter 590, No Change Letter, is checked off on Form 3198, and is issued when the case is officially closed.
If all examined years result in a no-change, a no-change stamped impression is placed on the Procedural Reminders side of Form 4318, Examination Workpapers, or on the top of the Large Case workpapers, if Form 4605 is not used.
An examination is not considered a no-change with adjustments case merely because there is no tax at the entity level.
It may be important to notify the taxpayer of, or secure agreement to, audit adjustments to basis, passive/non-passive activity or recourse/non-recourse type items so that the items will be properly reflected in subsequent returns of the taxpayer. If so, a report on Form 4605 (with explanatory pages) should be prepared and given to the pass-through entity at the conclusion of the examination.
If the taxpayer raises affirmative issues, they should be considered by the agent as part of the examination. If adjustments are made in the taxpayer's favor, the adjustments should be made by the examiner on the key case and the investor returns. It would no longer be considered a no-change. The agent will issue Letter 950, 30-Day Letter, to each of the investors.
If the examiner determines that the affirmative issues are not allowable, a no-change report will be issued. The fact that the issues were considered but not allowed will be noted in the remarks section of the Form 4605 and explained on Form 886-A. This report should be associated with the investor files for future reference. There is no procedure similar to the AAR procedure under TEFRA for nonTEFRA entities. Investors will have to file claims for any further consideration.
Unless there are other issues to be determined for the investor returns, the key case and investor returns case will be closed to CCP. There is no special handling needed in TS.
The examiner will furnish a copy of the examination report to the responsible individual for the entity. A copy of the examination report should be transmitted to the pass-through entity by Letter 921. A copy will be provided to the POA as required. This letter informs the responsible person in the entity that the investors will receive a 30-day letter reflecting their share of the adjustments made at the entity level. Only the investors will be able to request a hearing with Appeals because there is no "deficiency" at the entity level.
The examiner will discuss any proposed adjustment(s) with a responsible individual for the entity at the conclusion of the examination. This provides an opportunity to secure from the responsible person at the entity level an agreement with respect to the treatment of any key case adjustments. The examination report will contain a complete explanation of adjustments including any penalty items.
The responsible individual should sign in the space provided on Form 4605, Examination Changes-Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations. While the Form 4605 is not binding, the fact that a responsible person at the entity level has agreed to the adjustments may help secure agreements from investors.
The examiner will prepare a Form 6657 indicating agreed or unagreed (at entity level). The Form 6657 and a copy of the entity report must be associated with any investor files that are not under their control.
Whether a responsible person at the entity level agrees or does not agree, the examiner must still solicit agreements from investors under their control. A Letter 950, 30-Day Letter, will be used to propose adjustments to each of the investors.
If an investor does not agree to the proposed key case adjustments and files a protest, both the key case and generally one protesting investor return will be sent to the Appeals Office for the area/territory that examined the key case return. Appeals requires at least one year remaining on the statutes of the investor returns. The examiner should allow at least an additional 30 days of processing time for the returns to reach Appeals. See Appeals IRM 188.8.131.52.1.2, Protest.
If a nonTEFRA key case is unagreed, not linked, and has more than five investors, Appeals will not accept all the investors returns. Appeals will accept protesting investors with different representatives, protesting investors without representation and protesting investors with unagreed non-pass-through issues. The key case examiner must either link the key case on PCS or hold the investor returns until the key case entity issues are resolved in Appeals.
When no investors file a protest to the 30-day letter or when the statute does not allow time for the 30-day letter, a notice of deficiency is issued.
When all investor cases are agreed, the key case and investor returns will be closed to CCP. There is no special handling needed in TS.
Except for the closure of the key case, key cases with PCS linkages are worked in the same manner as those without linkages. There is no difference in the reports or cover letters issued to the entity. The reports issued to any investors under the examiners control are also the same. The main difference is that the key case must be closed to Technical Services for special handling. This is true even when an in-area investor has requested an Appeals hearing. The examiner will notate on the Form 3198, Special Handling Notice, "PCS linked nonTEFRA Key Case, forward to area examination Technical Services" . In the Technical Services the case will be assigned to the TEFRA/Pass Through Coordinator for a procedural review before closing the case to the CTF responsible for servicing the examiner's operating division.
Adjustments to the pass-through items from the key case entity should be proposed in the examinations of the income tax returns of all investors open in the area. A copy of the key case RAR must be included in the investor files. If any of the investors do not agree, the procedures in IRM 4.10.8, Examination of Returns, should be followed.
For all closures the key case examiner should prepare a single Form 6657, and place a copy in the key case file.
There are additional actions that must be taken if the key case examiner has control of any of the investors and the key case is linked.
The examiner will close the investor returns following normal procedures but because of the PCS linkage on the investor, (PICF 6), they must initiate a change to the PCS to allow the investor to close. Unagreed investors will not require this action.
The examiner will prepare a Form 8339, "PCS Change" , for each investor for which it has jurisdiction. The Form 8339 will be included in the investor case file on top of the Form 5344. More than one Form 8339 may need to be prepared if the assessment is the result of adjustment of more than one key case. The Form(s) 8339 will be input before attempting to close the case at the terminal. Box 11, Change(s), will be completed with item number 05, investor one-year assessment statute date field. The entry will be, for a no-change, 22222222$NCT (time in tenths of an hour). For a change/ no-change, it will be 22222222$CNCT). For a deficiency, it will be 22222222$ (enter whole dollars) T. For an overassessment, it will be 22222222$ (enter whole dollars)-T. As an example, a deficiency in the amount of $3,400.00 with 4 hours of time on the pass-through portion of the case would require an entry of 22222222$3400T4.0. AIMS will not allow the investor case to close until the preceding is entered.
The examiner must also answer yes to the question "TSCLS?" when completing the Form 5344 on RGS. If completed manually, check the TSCLS box in the upper left-hand corner.
When they have received the closed key case from the area TS, the CTF will send the appropriate letters and reports to linked investors in their jurisdiction and will prepare any additional Form 6657 that may be needed to make other offices aware of the pass-through entity results.
The key case CTF will receive the examiner's key case administrative file and one Form 6657, Related Returns Examination Report, properly completed along with a complete copy of the entire examination report when the examination of the key case is completed. In lieu of listing all investors on the Form 6657, a TSUMYP print of the key case may be attached to the form and included with the copy of the report.
The Form 6657 will reflect the closing status (agreed, no-change, unagreed) of the pass-through entity.
The examination report and the Form 6657 should be reproduced and a copy associated with each investor case file.
For agreed or no-change key case examinations, the results (if any) will be included in the investor examination report. No feedback to the key case area is required. If any of the investors do not agree, the procedures in IRM 4.10.8, Examination of Returns, Report Writing will be followed.
For unagreed key case examinations, the Form 6657 will provide guidance for issuing the appropriate letter. The investor area or the investor CTF should take the action indicated as soon as the status of the investor case permits. Adjustments will be proposed to each investor. If any of the investors do not agree, the procedures in IRM 4.10.8Examination of Returns, Report Writing, will be followed.
Field examiners (Revenue Agents and Tax Compliance Officers) other than the key case examiner will in some cases be responsible for applying the results of the key case examination. He/she may have been assigned the case before the nonTEFRA entity examination was initiated or received it because it was classified and sent to the field by the CTF after linkage.
If linked on PCS, a Form 5546, Examination Return Charge-Out, should be received labeled "Flow Through Notification" . If classified by the CTF the Form 5546 will be in the file when assigned.
When not linked, a Form 6658, Notice of Special Investor Action, should be received from the key case examiner. The investor examiner should find an attached Schedule K-1 print for the investor.
If the investor examiner has completed the non-pass-through issues and has not received the results of the entity examination, he/she may contact the campus or key case agent depending on whether the case is linked or not.
The procedures below can be completed with or without the resolution or completion of any TEFRA issues.
All issues, other than key case issues, should be completed for the investor's return. If the proposed adjustments from the key case examiner are received while the investor's return is still under examination, the adjustments will be incorporated into the report.
Upon receipt of the proposed adjustments from the key case examiner, the CTF will forward the proposed adjustments to the examination group to prepare an examination report if the investor's case is in the field.
If the examination of all other issues is completed prior to the completion of the key case examination, a partial agreement should be obtained for the resolved items using forms prescribed by IRM 4.10.8Examination of Returns, Report Writing.
For revenue agents, a statement is inserted in the "Other Information" section of the Form 4549, Income Tax Examination Changes, stating that the items contained in the Form 4549 do not include adjustments attributed to the examination of the related key case and that the related adjustments, if any, will be proposed upon completion of the key case examination.
For Tax Compliance Officers/Tax Auditors, a similar statement will be on the Form 886-A (Explanation of Items) or the Form 3547, Explanation of Adjustments, and attached to the Form 1902-B, Report of Individual Income Tax Examination Changes.
For all such cases, Form 3198, Special Handling Notice, is attached to the front of the case file. The "Partial Agreement" block and "Other" block will be checked. After "Other" the following statement will be made: "Suspense Case with Unresolved Pass-through Entity Issue - forward to CTF (or return to group ) after assessment." (See IRM 184.108.40.206.1, Processing NonTEFRA Pass-Through Adjustments.) After the assessment is made, the case(s) will be suspensed until the completion of the related key case examination. These cases will be updated to suspense status code 33 if they are in the CTF. If they are in the Compliance Technical Services Unit, the case(s) will be updated to status code 21. If they are in the examination group, the case(s) will be updated to status 14.
Investor returns that are joint committee, CIC corporations, or other corporate specialty cases (Form 1120 with letters after the 1120 other than A, S, or X) are suspensed in the field by the examination group charged with the return. The investor return will be suspensed in the examination group that has control of that return for that year after the group has had all other nonTEFRA adjustments processed. If the return was never examined (i.e. surveyed), prior to being linked to a nonTEFRA key case, the return will be suspensed with the examination group that would have examined the return had it been examined. The return will not be suspensed in PSP and under no circumstances will the return be suspensed in the CTF.
For unagreed cases, reports are prepared as prescribed by IRM 4.10.8, Examination of Returns. Form 3198 will be attached to the front of the case file. The "Other" block will be checked and the following statement made: "Unagreed Suspense Case with Unresolved Pass-through Entity Issue - forward to CTF (or the examination group)." (See IRM 220.127.116.11.1, Processing NonTEFRA Pass-Through Adjustments.) Normally, no Appeals action will be taken on any items until the resolution of the pass-through entity items.
For no-change cases, Form 3198 is attached to the front of the case file. The "Other" block is checked and the following statement made: "Suspense Case with Unresolved Pass-through Entity Issue - Forward to CTF (or the examination group)." (See IRM 18.104.22.168.1, Processing NonTEFRA Pass-Through Adjustments.)
After the examination of other issues is completed and assessment of the agreed portion, if any, is made, the return is placed in suspense by the CTF pending receipt of the proposed adjustments from the key case examiner.
Statute control for nonTEFRA issues is the primary responsibility of the area that has control of the investor return. If less than 210 days are left on the statute the examiner should solicit an appropriate extension before closing to the CTF. If the examiner is unable to secure an extension, they should ask their Technical Services Pass Through Coordinator how to proceed.
Any return that the area does not choose to examine should be stamped "Surveyed" and closed through Technical Services. Technical Services will forward to CCP, and then CCP will forward to the controlling CTF. The controlling CTF can be found using CC TSINQ which displays the CTF Indicator. The agent will need to attach Form 3198 to the front of the case file. The "Other" block is checked and the following statement made: "Surveyed Suspense Case with unresolved Pass-through Entity Issue - Forward to CTF" . The CCP will update AIMS to Status Code 33, Employee Group Code 5417, and send the return to the CTF via Form 3210. The CTF will acknowledge the Form 3210 within three days of receipt.
Special computations exist for oversheltered returns related to a partnership return with a taxable year after ending August 5, 1997.
An oversheltered return is an income tax return which will have no tax due after applying the proposed adjustments.
A notice of adjustment, Letter 4151, Notice of Adjustment, may be sent to the taxpayer if:
the taxpayer files an oversheltered return,
adjustments are proposed (for other than partnership items) for the taxable year, and
the adjustments being proposed do not create a deficiency, but would create a deficiency if there were no net partnership losses.
A notice of adjustment must be sent to the taxpayer via certified or registered mail.
The law allows the taxpayer to petition the Tax Court even though no deficiency exists.
If the taxpayer does not petition the Court, or the court upholds the adjustments, the adjustments will be taken into account in determining the amount of any computational adjustment in connection with a subsequent partnership proceeding.
Non-oversheltered returns (and oversheltered returns related to partnership returns with tax years ending before August 6, 1997) are returns that will have a taxable amount owing after the proposed adjustments (for other than partnership items).
For non-oversheltered returns, Munro computations will continue to be used.
When adjusting a taxpayers return for nonTEFRA pass-through issues and the Form 4549 results in a reduced deficiency because of large TEFRA partnership losses, the examiner will prepare a report without consideration of any TEFRA partnership income or losses.
Prepare a report starting with the original return, or as amended, and remove all TEFRA issues from open TEFRA proceedings. This will establish adjusted "per return" figures without taking the TEFRA losses into consideration. Label this report as: "Information Only – Do Not Process" . Using this report as the starting point, prepare a report making the nonTEFRA pass-through adjustment.
The result is that the taxpayer may be assessed at a higher tax rate by removing the TEFRA losses. If the taxpayer is already filing at the highest tax rate, there is no reason to prepare this computation.
When there is an open TEFRA proceeding, the following paragraph should be used on the statutory notice of deficiency:
In computing the deficiency attributable to the adjustments in this notice, which adjustments are neither partnership items nor affected items, as defined by IRC 6231, all TEFRA partnership items subject to an open TEFRA proceeding, whether income, loss, deduction or credits have been ignored exclusively for the purpose of computing the deficiency which is attributable to the adjustments set forth herein. All TEFRA partnership items subject to an open TEFRA proceeding have been ignored in this notice of deficiency for computational purposes only and this notice is not a substitute for any Notices of Final Partnership Administrative Adjustment (FPAA) which may be issued in regard to the TEFRA partnerships. This computation is being made pursuant to the Tax Court decision in Munro v. Commissioner, 92 T.C. 71 (1989).
The following sample paragraph should be included in the explanation of items:
The following TEFRA partnerships are subject to partnership level proceedings pursuant to the partnership audit and litigation procedures of IRC 6221 through IRC 6234 with respect to the taxable year(s) and accordingly, all partnership items, whether income, loss, deductions or credits, have been disregarded for purposes of computing a deficiency attributable to the adjustments in this notice:
ABC Partnership $(30,000.00) XYZ Partnership (7,000.00) HIJ Partnership (27,700.00) Total $(64,7000.00)
A Munro computation may result in an inflated deficiency due to a change in tax bracket until treatment of the TEFRA items is finally determined.
When an examiner determines that a linked (PICF code 6) investor's return is needed to complete an examination due to basis, passive activity, at-risk or other investor level issue, he/she may request it from the controlling campus CTF. The controlling CTF can be found using CC TSINQP which displays the CTF Indicator.
Order IDRS Command Code TSINQP on each year of the key case
Look in the CTF field for either OSC (Ogden) or BSC (Brookhaven)
If the TSINQP shows OSC, then Ogden is the key case Campus
If the TSINQP shows Brookhaven, then order IDRS Command Code TXMODC on the TEFRA key case; if there is no data, then Ogden is the key case Campus; if there is data, look in the "Control Base and History Information" section; if the "Assign To" column has numbers that begin with 01, then Brookhaven is the key case Campus; if there are no numbers in the "Assign To" column, then Ogden is the key case Campus.
Both of the CTF's will establish a liaison to respond to area requests for tax returns. The name, address, and telephone number of the CTF PCS/AIMS Coordinator is posted on the TEFRA web site under the TEFRA/PCS Coord. Locator tab. The examiner should consult the TEFRA web site for this information.
The CTF will send the entire investor file to the requestor via a Form 3210. The requestor will acknowledge the Form 3210 within three days of receipt. If the individual who would normally acknowledge the Form 3210 is unavailable, the manager will ensure the Form 3210 will be acknowledged by another employee (or himself/herself) within that three day period. The CTF will ensure that the AIMS data base has been updated to reflect the requesting area's status, PBC, SBC and EGC, and the correct statute date.
This section covers other areas that may be a concern during an examination.
The key case examiner may need to examine both the entity and investors for some issues such as passive loss, at-risk, and basis issues. Determinations at the key case level and the investor level are required to develop the issue factually. Unlike TEFRA, adjustments are made as part of the same report to the investor.
Partnership level components for basis:
Amount of the initial capital contribution to the partnership.
Amount of each distribution from the partnership.
Amount of all subsequent capital contributions to the partnership.
Amount of partner's share of taxable income, non-taxable income, losses and deductions.
Amount of liabilities used to secure or improve an asset at the partnership level.
A partner level component for basis is: "Did the partner buy his interest from another partner without the partnership making a IRC 754 election?" In this situation the partnership does not have to know the purchase price because the partnership cannot adjust the basis of partnership without IRC 754 election in effect for the taxable year. In addition, the partnership does not have to take the purchase price into account for its taxable year.
An at-risk issue requires certain determinations at the key case level. In situations where loans or notes appear on the books of an entity, it must be determined in the entity level examination whether the loans or notes are recourse or nonrecourse to the entity. In determining the amount for which a partner is at-risk, several items must be addressed, including situations where:
The loans or notes appear to be recourse, but the partnership is protected from loss.
The loans or notes are nonrecourse in substance.
The loans or notes are nonrecourse.
The investors cannot use their proportionate share of income, gain, loss, deduction, or credit from the partnership in determining their at-risk amount for deducting losses.
Partnership level components for at-risk are:
Was a particular loan or note recourse or nonrecourse?
What was the amount of the loan or note?
Whether a partner is a limited or a general partner.
Whether the lender has an interest other than as a creditor.
Partner level components for at-risk are:
Are there third party side agreements (guarantees, stop-loss or assumption agreements)?
Did the partner contribute money borrowed from another partner to the partnership?
Did a partner bear the ultimate economic risk of loss with respect to a particular partnership liability?
A passive activity loss issue requires certain determinations at the entity and investor level as to type(s) of activity.
Partnership level components for passive loss are:
Whether the partnership is engaged in a rental activity.
Whether the partnership is engaged in a trade or business for purposes of IRC 162.
Whether a partner is a limited or a general partner.
Whether income is portfolio income.
A partner level determination for passive activity loss is: "Did the partner materially participate in the business?" In this situation the partnership may know if the partner materially participates.
When a Form 1120S return is filed with an untimely election (Form 2553, Election by a Small Business Corporation), the return is treated as a C corporation. This includes when:
no proper election was filed
the election terminated because the corporation ceased to be a small business corporation (for example, due to an improper shareholder)
in certain circumstances, the corporation has excessive passive investment income, or
the election was revoked.
If a valid election was not filed, the return needs to be reviewed to determine the amount taxable to the C corporation (if any), and provide the basis for an adjustment to the shareholders.
If the campus receives a Form 1120S for which no Form 2553 is on file, and for which the taxpayer has not responded to queries from the campus, then the unprocessed Form 1120S will be processed as a Form 1120 by attaching a blank Form 1120 to the front of the Form 1120S. A TC 150 with an amount of "0" is generated.
If the Form 1120S was processed as an S corporation return, but the examiner subsequently determines that it is a C corporation, the examiner will follow the procedures outlined in IRM 4.4, AIMS/Processing Handbook, and IRM 4.10.8, Examination of Returns, Report Writing. There will be two RAR's. One, using Form 4549 will show the taxable income and any tax due to the C corporation. The other will use Form 4605 and Form 886-X to remove items of income and separately stated items from the shareholder's returns.
The filing of either a Form 1120 or Form 1120S (later determined to be invalid or if the Form 1120S is a taxable entity such as when the built-in gains tax applies), starts the running of the statue of limitations. Remember, Form 1120 (or Form 1120S) is due 21/1 months after the end of the tax year or March 15th for a calendar year return.
Fast Track Settlement (FTS) is a service offered by the IRS designed to expedite case resolution. It involves an Appeals Officer who has been trained in mediation techniques acting as a mediator between the Taxpayer and Compliance (Examination/Collection). The purpose is to facilitate communication and to help the parties resolve the issue(s). This service is available for unagreed issues on nonTEFRA key cases and should be considered by the examiner before reports are issued to investors. At the conclusion of an examination/collection determination, if the Taxpayer does not agree to the proposed changes, the examiner will determine whether the case qualifies for FTS using the case criteria set forth in FTS Eligibility. If the case qualifies for FTS, the examiner should offer and explain the benefits of utilizing FTS. If the case does not qualify for FTS, standard procedures for unagreed cases should be followed.
For nonTEFRA partnerships or S corporations, reasonable advance notice is provided (by issuing any one of Letters 3164 A through 3164 V), as appropriate, to the entity when the examination is being conducted at the entity level. When the examination of the entity is being made as part of the examination of a particular partner/member or shareholder's return, a Letter 3164 should be issued to both the entity and the particular investor. If an entity level examination is being conducted, contacts with the partners/members or shareholders of the entity are not considered IRC 7602(c) contacts. On the other hand, if the examination of the entity is being done as part of the examination of a particular partner or shareholder's return, then contact with any other partner or shareholder (other than the partner or shareholder under exam) should be treated as a third party contact.
The notice date for the purposes of IRC 6404(g) is the date adequate notice is mailed or provided to the individual investor. For nonTEFRA purposes, it is not the date a report is given to the entity. All other IRC 6404(g) rules apply.
In the case of an individual who files a return on or before the due date for the return (including extensions), the Service has a 36-month period (18 months effective for tax years where the 18 month period ended on or before November 25, 2007) beginning on the later of:
the date on which the return is filed; or
the due date of the return without regard to extensions,
in which to provide notice to the taxpayer specifically stating the taxpayer's liability.
If notice is not provided to the taxpayer before the close of the 36-month period, then any imposition of interest, penalty, additions to tax or additional amounts that are calculated in reference to the 36 month time frame (18 months effective for tax years whose 18 months end on or before November 25, 2007.) are suspended.
If, as of November 25, 2007, the 18 month period has closed and the Service has not provided notice to the taxpayer, interest and applicable penalties will be suspended beginning on the day after the close of the 18 month period and ending on the date that is 21 days after the notice is provided. In all other cases, interest and applicable penalties will be suspended beginning on the day after the close of the 36 month period and ending on the date that is 21 days after the notice is provided.
The exceptions to the 36 month (18 months effective for tax years where the 18 month period ended on or before November 25, 2007.) notice requirement are:
any penalty imposed by IRC 6651;
any interest, penalty, addition to tax, or additional amount in a case involving fraud;
any interest, penalty, addition to tax, or additional amount with respect to any tax liability shown on the return;
any interest, penalty, addition to tax, or additional amounts with respect to any gross misstatement;
any interest, penalty, additions to tax or additional amounts with respect to any reportable transactions with respect to which the requirement of IRC 6664(d)(2)(4) is not met and any listed transaction (as defined in IRC 6707A(c)); or
any criminal penalty.
The term suspension periods means the period:
beginning on the day after the close of the 36-month period under (1) above and
ending the date which is 21 days after the date on which notice is provided to the taxpayer.
Under Treas. Reg. 301.7701-15(b)(3), a preparer of the key case entity return is considered a preparer of the investor's return if the "pass-through" share of income, credits, deductions, etc. from the key case entity reportable on the investor's return constitutes a "substantial" portion of the investor's return.
For purposes of this section, whether an entry, schedule, or other portion of an investor's return is "substantial" depends on its length, complexity, and the associated tax liability, relative to the return as a whole. A single entry, schedule, or other portion involving amounts of gross income, deduction or basis for computing a credit that is either (i) less than $10,000, or (ii) less than $400,000 and also less than 20% of gross income (or AGI for an individual), shall not, by itself, be "substantial" . If there are several entries, schedules, or other portions, the preceding amounts (and percentage) are applied to the aggregate. See Treas. Reg. 301.7701-15(b)(ii)(3)(A) and (B).
In those situations where a preparer penalty under IRC 6694(a) or IRC 6694(b) may be warranted:
The key case area will alert the investor area or CTF by placing a comment on line 5 of Form 6657, stating that a penalty is being considered;
The investor area or CTF should complete their examination; and
Send a memorandum to the key area with a copy of the RAR, and copies of pertinent sections of the investor's income tax return. This allows the key area to decide whether the pass-through items from the key case entity are, in fact, a substantial part of the investor's return, and whether a penalty should be applied.
The following subsections cover the duties of the NonTEFRA Coordinator.
The Technical Services Pass Through Coordinator is the main contact for LB&I and SB/SE field agents and managers to explain and clarify the nonTEFRA audit procedures for linked returns.
The Technical Services Pass Through Coordinator responsibilities include the following:
Function as the liaison with the CTF functions for PCS linkage and any related linkage problems if requested by the PCS coordinator;
Verifying that the CIC group timely writes the RAR and requests removal of PCS controls and input of the Form 8339 for linked CIC investors;
Coordinate with Counsel on key case technical questions involving TEFRA vs. nonTEFRA issues;
Give advice on the preparation and signing of statute extensions;
Provide on site case visitations/consultations for key cases with procedural problems as necessary;
Complete a procedural review of closed nonTEFRA key case entities and related investors;
Forward closing nonTEFRA key case packages to the CTF; and
Forward PCS reports to examination groups within the area.
Upon receipt in TS of a nonTEFRA key case closed from a group, the Technical Services Pass Through Coordinator should review the following areas of the case file:
Proper determination as nonTEFRA? See IRM 22.214.171.124, Identification of NonTEFRA Key Case Returns.
If attached, is the Power of Attorney (POA) completed correctly? Two areas of the Form 2848 need to be reviewed.
For a Form 1065. Item #3 - Type of Tax - Partnership Proceeding , Tax Form Number - 1065 and Consequential Adjustments. Item #9 - The signature block should be signed by a responsible person including their title, such as general partner.
For a Form 1120S. Item #3 - Type of Tax - Income, Tax Form Number - 1120S and Consequential Adjustments. Item #9 - The signature block should be signed by a responsible person including their title. Any corporate officer that can bind the corporation under State law may sign.
Statute Extensions - If statute extensions are part of the package, review any investor consents to determine if they have been prepared and signed correctly. If there are any errors, and the normal statute is still open, a new consent will be secured. If the normal statue is gone, consult with local Counsel on the validity of the consent. An S corporation can need the IRC 6501 statute protected when corporate level tax issues under IRC 1374, IRC 1375, or IRC 55 are to be raised. The agent would solicit a regular, unrestricted Form 872.
The examiner's RAR will be reviewed for required content and accuracy. The Technical Services TEFRA/Pass Through Coordinator will ensure that all forms required for a nonTEFRA examination are included. If any required items are missing or incorrect, the package may be returned to the originating office or the reviewer may invite the examining agent to appear at the Technical Services office to complete or correct the case there. Minor errors may be corrected by the coordinator.
The Technical Services TEFRA/Pass Through Coordinator will review the PCS linkage using TSUMY to see that it is complete and correct.
Form 8339 will be prepared and submitted to CCP for any agreed or no-changed field controlled investors in the package.
The coordinator will close all PCS linked key cases through CCP to the SB/SE or LB&I CTF for completion of the investor returns.
When the coordinator has determined that the package is procedurally correct, the administrative file will be closed to the proper CTF. The Form 3198 will be noted to request for SB/SE cases, disposal code 30, and updates to PBC 295 and EGC 5417 (Brookhaven) or for LB&I cases, disposal code 30, and updates to PBC 398 and EGC 5417 (Ogden).
The nonTEFRA key case will be closed to the appropriate CCP. Although Brookhaven is processing both SBSE and LB&I related nonTEFRA investors, the Ogden CTF will still suspense nonTEFRA LB&I key cases until full closure. Ogden will forward the closing package on to Brookhaven to process the investors.
Prepare Form 8339 for the key case, with completion of item 8, partnership adjustment amount. The amount to enter as the adjustment amount will vary. As a rule, all adjustments should be combined to arrive at one net adjustment. Adjustments to credits will be divided by 30% (credit amount / 30% = credit adjustment amount). This will allow credits and ordinary income/expense adjustments to be combined without skewing the results due to the credits.