4.31.6 Investor Level Statute Control (ILSC) Pass-Through Examinations - CPF Procedures

Manual Transmittal

April 05, 2019

Purpose

(1) This transmits revised IRM 4.31.6, Pass-Through Entity Handbook, Investor Level Statute Control (ILSC) Examinations - CPF Procedures.

Material Changes

(1) Many references to nonTEFRA returns were changed to Investor Level Statute Control (ILSC) returns. This generic term is used for nonTEFRA, BBA elect out partnerships and S corporation returns and their investors.

(2) Section title changed to replace NonTEFRA with ILSC.

(3) Changed Campus TEFRA Function (CTF) to Campus Pass-through Function (CPF).

(4) IRM 4.31.6.1 - Program Scope and Objectives. New section.

(5) IRM 4.31.6.1.1 - Background. New section.

(6) IRM 4.31.6.1.2 - Authority. New section.

(7) IRM 4.31.6.1.3 - Roles and Responsibilities. New section.

(8) IRM 4.31.6.1.4 - Program Management and Review. New section.

(9) IRM 4.31.6.1.5 - Program Controls. New section.

(10) IRM 4.31.6.1.6 - Terms/Definitions/Acronyms. New section.

(11) IRM 4.31.6.1.7 - Related Sources. New section.

(12) IRM 4.31.6.2.1 - Linkage Criteria. Changed paragraph (1) to allow 120 days to submit a linkage package to the campus. Added clarification that the need for timely linkage applies if the campus will be controlling the investors. Paragraph (2) explains that the minimum statute of limitation requirement applies only if the campus will be controlling the investors.

(13) IRM 4.31.6.2.1.1 - Limited Linkage. New section.

(14) IRM 4.31.6.2.2 - Linking ILSC Investors. Added paragraph (2) to warn that incomplete packages may be returned to the examiner. Paragraph (8) added that campus will verify there is a valid election out of BBA.

(15) IRM 4.31.6.2.7 - Notification of the Beginning of a Pass-Through Audit. Changes made to reflect that the audit notification letters have been consolidated into one letter.

(16) IRM 4.31.6.2.8 - Verification of Schedule K-1 Income (Loss). Added statement to paragraph (1)(d) to warn that any penalty must be approved by the employee’s manager. Paragraph (2) updated to reflect that partnerships electing out of BBA may have S corporations as partners, but disregarded entities and other pass-through entities will make the election invalid.

(17) IRM 4.31.6.2.11 - Statute Control. Paragraph (1)(c) updated to reflect that Forms 895 are required unless there is a Form 15041 reflecting the approval not to link those investors.

(18) IRM 4.31.6.2.12 - Extension of Investor Statute. Paragraph (2)(a) clarified to show one copy of the Form 872 will be sent separately to each spouse.

(19) IRM 4.31.6.2.12.1 - Restricted Consents. Removed references to the obsolete Form 872-I.

(20) IRM 4.31.6.2.12.2 - Entity Extensions. Paragraph (1) changed to address NonTEFRA and BBA elect out cases.

(21) IRM 4.31.6.2.13 - Related Return Suspense Files. Added sentence to paragraph (2)(b) for examiner to provide an estimated completion date for follow up.

(22) IRM 4.31.6.2.15 - Receipt of Amended Returns and Claims. Added bullet to (2)(a) that campus will not work if the return is already open in the field. Added same statement to table before (2)(e) as well. Added new paragraph (3) and moved existing (3) to (5).

(23) IRM 4.31.6.2.16 - Power of Attorney (POA) for Investor Level Statute Control (ILSC) Partners. Added clarification to paragraph (2) to explain need to not rely on the CAF.

(24) IRM 4.31.6.3.3 - Report Writing Refund Cases. Removed old paragraphs (3) and (4) that were TEFRA related paragraphs inadvertently copied into the ILSC IRM.

(25) IRM 4.31.6.3.6.1 - Special Computation for Non-Oversheltered Returns (Munro Decision). Added new paragraph (1) to better explain Munro.

(26) IRM 4.31.6.3.7.3 - Request for Appeals. Paragraph (1), added a 15 day time line for getting a perfected protest to Appeals to align with Technical Service’s processing time frames and in order to ensure taxpayer rights are protected and expedited.

(27) IRM 4.31.6.5.8.1 - Petition Filed. Clarified that Tax Court decisions will be provided by Appeals.

(28) Various editorial changes made throughout the IRM.

Effect on Other Documents

IRM 4.31.6, Pass-Through Entity Handbook, Investor Level Statute Control (ILSC) Examinations - CTF Procedures, dated 4-21-2017 is superseded.

Audience

Field and campus personnel working pass-through entities that are not subject to TEFRA or have a valid election out of the centralized partnership audit regime and/or their investors. LB&I plans to develop a separate IRM. Until that occurs, LB&I personnel should check with their manager to see if the particular IRM section applies or if there is other guidance to follow.

Effective Date

(04-05-2019)

Daniel R. Lauer,
Acting Director, Examination - Field and Campus Policy
Small Business/Self-Employed Division (SB/SE)

Program Scope and Objectives

  1. This Internal Revenue Manual (IRM) section provides guidance on field office procedures related to examinations of partnerships not subject to provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 or those partnerships that elect out of the Bipartisan Budget Act of 2015 (BBA), and S corporations.

  2. Purpose: This handbook describes:

    • Screening incoming mail;

    • Campus key case procedures;

    • Campus partner procedures;

    • Closing package procedures;

    • Releasing an H freeze;

    • Partial agreements;

    • Protecting and monitoring investor statutes;

    • Undeliverable correspondence;

    • Report writing procedures; and

    • Key case administrative file suspense.

  3. Audience: Campus examination Revenue Agents (RAs) and campus RAs, Tax Compliance Officers (TCOs), Tax Examiners (TEs) and Clerks working pass-through entities and/or their investors linked on the Pass-through Control System (PCS).

  4. Policy Owner: Director, Small Business/ Self Employed (SB/SE), Headquarters Examination, Field and Campus Policy (SE:S:E:HQ:EFCP)

  5. Program Owner: Program Manager, Campus Examination and Field Support (SE:S:E:HQ:EFCP:CEFS)

  6. Primary Stakeholders: SB/SE, Large Business and International (LB&I), and Appeals

  7. Program Goals: Establish an electronic linkage between the pass-through entities being examined and their underlying investors in order to generate notices required by statute, monitor and control statutes, and gather closing information.

  8. Contact Information: To recommend changes or make any other suggestions related to this IRM section, see IRM 1.11.6.6I, Providing Feedback About an IRM Section -Outside of Clearance.

Background

  1. TEFRA was passed in 1982 to allow examinations and statutes to be controlled at the partnership level. TEFRA was replaced by the BBA for tax years beginning January 1, 2018. Certain small partnerships and S corporations are not subject to TEFRA. The period to assess investors of entities not subject to TEFRA or BBA is determined at the investor level.

  2. The BBA applies to all partnerships, but allows some eligible partnerships to elect out. Those partnerships that elect out will be processed similarly to nonTEFRA partnerships. Partnership returns filed after November 2, 2015 and before January 1, 2018 may elect into BBA. BBA does not impact S corporation entity examinations.

  3. As a result there are four possible partnership regimes:

    1. TEFRA for partnerships whose tax year ended prior to December 31, 2017 and which did not make an election into the BBA.

    2. BBA for partnerships whose tax year ends after December 31, 2017 or who made a valid election into the BBA for years ending after November 2, 2015 and before January 1, 2018.

    3. NonTEFRA for those partnerships that are not statutorily TEFRA, or did not elect into TEFRA.

    4. Partnerships that elect out of BBA whose tax year ends after December 31, 2017 and who made a valid election out.

  4. The PCS was created to establish an electronic linkage between the pass-through entities and their underlying investors. This helps ensure that all investors are issued notices and adjusted in a timely manner. PCS linkage allows all Business Operation Divisions (BODs) to recognize when a taxpayer is subject to a pass-through examination. If an examiner chooses not to control the investors, it allows the campus to work those investors so the examiner can focus on pass-through examinations. PCS also allows the campus to systemically generate notices, control statutes, and gather closing information.

Authority

  1. Investor level statute control (ILSC) policy was establisheded in the campuses in response to the partnership provisions of the TEFRA. Similar policies will continue to be needed for S corporations and partnerships that elect out of BBA.

Roles and Responsibilities

  1. The Director, SB/SE, Headquarters Examination, Field and Campus Policy, Campus Exam and Field Support (SE:S:E:HQ:EFCP) is responsible for:

    1. Coordinating and implementing linked pass-through policy changes;

    2. Coordinating resolutions for linked pass-through related problems; and

    3. Updating this Handbook.

  2. The SBSE, Program Manager, Examination Field and Campus Policy, Campus Exam & Field Support (SE:S:E:HQ:EFCP:CEFS) is responsible for:

    1. Ensuring that linked pass-through procedural changes and computer program changes are implemented and coordinated with area office and campus examination personnel; and

    2. Monitoring and evaluating area office and campus examination PCS quality control procedures.

  3. Field Territory Managers, Field Area Directors, Director over LB&I Ogden and Director, Examination - Brookhaven, are responsible for ensuring that linked pass-through policies and procedures are followed.

  4. Field Examination Managers and Campus Field Support Operations managers are responsible for:

    1. Maintaining an updated copy of IRM 4.29, Pass-through Control System (PCS) Handbook, in their respective functions;

    2. Ensuring the training of technical and clerical employees in linked pass-through procedures; and

    3. Establishing PCS records and acting on PCS reports in a timely manner to assure an accurate PCS database.

  5. The campus ILSC Coordinator works with:

    • The other ILSC Through coordinator(s) and TEFRA Coordinators.

    • Their local employees

    • Other campus functional areas to ensure timely processing of ILSC related returns

  6. The campus PCS Coordinator is charged with:

    • Identifying and resolving technical problems

    • Identifying and coordinating the resolution of PCS systemic problems

  7. Following are specific campus ILSC Coordinator responsibilities:

    1. Coordinate with campus and field pass-through coordinators on case processing issues;

    2. Coordinate with Headquarters on any legal issues that need to be addressed by Chief Counsel;

    3. Review closing packages for completeness;

    4. Provide technical support to employees.

Program Management and Review

  1. Program Reports: Each year a closure goal is established for the campus.

  2. Program Effectiveness: The closure goal is monitored monthly to ensure the objectives are met. The closure goal is monitored monthly to ensure the objectives are met and investor return closures are evaluated throughout the year and the goal is adjusted as needed.

Program Controls

  1. The number of statute dates are monitored to estimate if the closure goal is attainable, or if it needs to be adjusted.

Terms/Definitions/Acronyms

  1. There are several terms unique to ILSC cases. Examples of these words:

    Defined Terms and Acronyms

    Word Definition
    Affected Item Any item that requires adjustment as a result of an adjustment made to a partnership item. There are two types of affected items: computational and factual. Factual affected items are those that require a determination at the partner level.
    AIMS Audit Information Management System (AIMS) provides inventory and activity controls of active Examination cases. It uses linkage to Integrated Data Retrieval System (IDRS) to input status changes, adjustments, and case closing actions.
    BBA Bipartisan Budget Act of 2015. Partnership taxable years beginning on or after January 1, 2018 are subject to BBA unless the partnership meets specific criteria, at which point the partnership may elect out.
    BEO BBA Elect Out. Partnership returns that elect out of BBA for partnership taxable years beginning on or after January 1, 2018.
    Campus ILSC Coordinator Acts as a liaison between the CPF and the field offices, Appeals and counsel for Investor level statute control (ILSC) cases. They also provide technical support for the CPF.
    CC Command Code
    CCP Centralized Case Processing (CCP) - This function processes assessments and abatements and closes or transfers cases from the area to the campus or to files.
    CPF (Formally CTF) Campus Pass-through Function (CPF) - The CPF is the suspense unit for investor returns located in the Brookhaven campus and Pass-Through Entities (PTE) Ogden. The two CPFs will be maintained to obtain and control, through the AIMS and Pass-through Control System (PCS), any partner, shareholder or investor returns related to key cases within their jurisdiction. For details see IRM 4.31.3 and IRM 4.31.6
    EIN Employer Identification Number. (EIN)
    EUP The Employee User Portal (EUP) is a Web hosting infrastructure. It supports an Intranet portal that allows IRS employees to access business applications and data [e.g., e-Services and Modernized e-file (MeF)]. The EUP communicates with MeF via Application Message and Data Access Service (AMDAS). The EUP infrastructure is located on the IRS Intranet.
    ILSC Investor Level Statute Control (ILSC). These are entities or investors that are not subject to the TEFRA or BBA regime.
    Investor Partner, Shareholder, or Beneficiary - An investor return that reflects pass-through items from a pass-through entity return, which is controlled (via PCS and AIMS). Examples of investor returns includes, but is not limited to, Form 1040, Form 1041, Form 1120, Form 1120-S and Form 1065.
    KIN K-1 Imaging Network (KIN) stores Schedule K-1 images from the Service Center Recognition/Image Processing System (SCRIPS).
    Key Case A pass-through return established on PCS, usually a Form 1065, U. S. Return of Partnership Income (NonTEFRA) or a Form 1120S, U. S. Income Tax Return for an S Corporation, that results in pass-through items to partners, shareholders, or investors (individual returns or another pass-through entity).
    Linkage The electronic relationship established in PCS between a pass-through entity and its investor.
    LB&I Large Business and International (LB&I). Serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million.
    LIN LB&I Imaging Network (LIN). The system used by LB&I to store images of returns.
    NonTEFRA Partnership returns that are statutorily excluded from TEFRA procedures. Impacts partnership returns with tax years beginning September 3, 1982 until December 31, 2017. S corporations are also excluded from TEFRA.
    PCS Pass-through Control System (PCS)(formally Partnership Control System) - Database used to establish an electronic linkage between a key case partnership and it's underlying investors. The database is used to manage inventory, systemically generate notices, and control statutes.
    PLSC Partnership Level Statute Control (PLSC). These are entities or investors where the statute is controlled at the partnership level as under the TEFRA or BBA regime.
    Record Information stored on the PCS database for a key case or an investor.
    SB/SE Small Business and Self-Employed (SB/SE). Serves taxpayers who file Form 1040, Schedules C, E, F or Form 2106, as well as small businesses with assets under $10 million.
    TMP Tax Matters Partner (TMP). The designated partner to whom the Service looks as the primary representative of the partners of a partnership that is subject to a TEFRA proceeding.
    TS Technical Services (TS) is the field office review staff.
    Technical Services TEFRA/Pass-Through Coordinator The TEFRA/Pass-Through Coordinator in Technical Services acts as a liaison between the area and the CPFs for both TEFRA and linked ILSC cases. The field examiner can locate their Technical Services TEFRA/Pass-Through Coordinator by searching their geographical area on the TEFRA web site's TEFRA Coord Locator tab.
    TEFRA Tax Equity and Fiscal Responsibility Act (TEFRA ) of 1982. Partnerships are subject to TEFRA procedures by statute, or those excluded by statute may elect into TEFRA. Impacts partnership returns with tax years beginning September 3, 1982 until December 31, 2017.
    Tier A pass-through entity that is a partner of a pass-through entity. An S-corporation would be a tier partner of a partnership that elects out of BBA.

     

Related Resources

  1. The following Internal Revenue Manual (IRM) cross-references may be helpful:

    1. Management of Interrelated and Related Cases: IRM 4.31, Pass-Through Entity Handbook

    2. Audit Information Management System (AIMS): AIMS/Processing Handbook, IRM 4.4

    3. Appeals IRM 8.19.9

    4. Statute IRM 25.6.22, Statute of Limitation, Extension of Assessment Statute of Limitation by Consent

    5. Statute IRM 25.6.23, Statute of Limitation, Examination Process-Assessment Statute of Limitations Controls

    6. TEFRA website. http://tefra.web.irs.gov/m1/1a_home.asp

Investor Level Statute Control (ILSC) PassThrough Entities Linkage and Suspense

  1. The following subsections cover ILSC linkage and suspense.

Linkage Criteria

  1. A linkage package should be submitted to the campus within 120 days of the key case being under examination. The campus needs sufficient time between linking and closing in order to secure the investor returns. Failure to timely link cases creates processing problems in the campus if they are controlling the investors.

  2. In those instances where there is less than one year remaining on the statutory period of limitations for assessment of the tax for any investor the campus will control, 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. This must be done before the linkage package is sent to the CPF for input.

    1. The key case RA is responsible for securing information from the area working the investor regarding any other linked key cases or tier entities in which the investor may have an interest.

    2. This information is required to ensure adherence to the Service policy to only secure an extension of the statutory period of limitations from investors for those key case returns that are currently under examination (see IRM 25.6.22.8.8, Non-TEFRA Pass-Through Entities).

      Note:

      Only an unrestricted Form 872 should be used to secure investor statute extensions, if the investors will ultimately be controlled by the campus after linkage.

Limited Linkage
  1. Generally, all ILSC pass-through investors must have their statutes secured. However, there are times when it is clear that not all investors will be affected by an adjustment. When this occurs, Form 15041, NonTEFRA Pass-Through Entity Intent Not to Pursue Investor - Statute Protection, may be used to secure approval to let an investor statute expire.

  2. The examining agent or the campus may identify investors that may not be subject to adjustment and may not require linkage. When this occurs, Form 15041, NonTEFRA Pass-Through Entity Intent Not to Pursue Investor - Statute Protection, will be used to:

    1. identify the investor(s) that will not be linked,

    2. the reason(s) for not protecting the statute or linking, and

    3. for manager approval.

  3. Approval must be secured prior to the expiration of the investor’s statute, and ideally at least 12 months prior. See IRM 25.6.23.4.5.1, Inconsistent Application of Investor Returns - NonTEFRA.

  4. The initiator of the Form 15041 must have their manager as well as their Department Manager or Territory Manager agree with the decision to limit linkage by signing the Form 15041. The high level of approval is necessary since the statute will be allowed to expire.

  5. Allowing an investor’s statute to expire may make sense if it is highly likely the investor will not be adjusted. This will save resources and reduce taxpayer burden. Linking such an investor would result in unnecessary contacts with them, including requesting statute extensions and other communication.

  6. If the CPF initiates the decision not to protect an investor statute, CPF should contact the examining agent to obtain their concurrence. The examining agent may have other information that would require the protection of an investor statute that might not otherwise appear to need protecting. Investors whose statutes are not protected will not be linked on PCS.

Linking ILSC Investors

  1. After meeting ILSC key case linking criteria, the key case examiner will forward the Form 14092, ILSC Linkage Request Check Sheet (SBSE) or Form 14093, ILSC Linkage Request Check Sheet (LB&I), directly to the campus when an ILSC key case examination is initiated.

  2. A complete package must be submitted or the campus may return it to the examiner.

  3. The check sheets provide instructions on the contents that need to be provided to the campus. This includes a spreadsheet with a reconciliation of the Schedules K-1.

  4. All information should be provided electronically if possible. If the information is too large to email, then some information can be faxed or sent via mail.

  5. If using mail, the packages will be transmitted via a Form 3210 to the appropriate CPF. The Form 3210 will be acknowledged within 10 working days.

  6. The CPF will input an "H" freeze code on the key case AIMS record using command code (CC) AMFRZ.

  7. The CPF will establish a key case administrative file after reviewing the package for completeness, statute consideration, and compliance with procedures.

  8. The CPF will perform basic research of the Schedules K-1 to find the ultimate taxpayer before establishing linkage, including where applicable:

    1. Spouse's SSN

    2. Parent/Subsidiary

    3. Employee Plan (EP)/Exempt Organization (EO) investors

    4. Grantor Trusts

    5. non-Master File (NMF) investors

    The campus ILSC Coordinator will check to determine that the pass-through entity qualifies to be an ILSC case. The agent will be informed if the return should be worked under TEFRA or BBA.

    Note:

    The campus will not link intervening or non-taxable investors unless necessary.

  9. Prior to linking the partners, a Revenue Agent Reviewer will complete a preliminary build out analysis based upon local criteria using the Tier Structuring Tool (TST). This could include:

    1. Analyzing the build out to identify the material investors throughout the ILSC structure.

      Note:

      Materiality is defined in IRM 4.31.6.3.2 #, ILSC Report Writing Assessment Cases, and IRM 4.31.6.3.3 #, ILSC Report Writing Refund Cases.

    2. Identifying any unknown investors and looking for special allocations.

    3. Direct any Schedule K-1 perfection that needs to be started immediately. This could be the K-1 of an unknown investor that has a large percentage of ownership.

    4. Determine if there will be more than 100 material investors (direct and indirect).

    5. Determine the suspense period (3-12 months) before indirect linkage or follow up. The linkage of the indirect investors may be delayed until the field audit has more time to develop and potential adjustments are more solid. The age of the case, statute or other special circumstance need to be considered when determining the length of the suspense period.

      Note:

      You may need to contact the field agent to determine their proposed adjustments if those weren’t provided on the linkage request form.

    The campus should delay linking the material indirect investors until adjustments are known. It may be necessary to begin some limited linkage before adjustments are known in order to ensure there is enough time to process any investor adjustments, or to secure returns before they are destroyed. Start linking if two years from year filed, regardless of statute. (Confirm with agent that adjustments are still being pursued). The investor returns will need to be secured before statute extensions are requested.

  10. The CPF will research and verify the Schedules K-1 Taxpayer Identification Numbers (TINs) are correct. If the TIN is incorrect, the CPF will attempt to obtain the correct TIN. If the CPF is unsuccessful, the field agent may be contacted for assistance on direct level investors that need to be linked. The preliminary build out will be updated as new information is received.

  11. The key case CPF will perform the research to verify that an investor return has been filed by using CC IMFOL or CC BMFOL. If no Transaction Code (TC) 150 is posted on Master File (MF) and the investor is material then non-filer procedures should be followed. A NMF AIMS will need to be established prior to linkage.

  12. Only the remaining partners identified as material should be linked. No investor (direct or indirect) should be linked if they are not on the build out. Linkage of additional investors should only be done after consultation and approval of the Linkage Agent.

  13. The Revenue Agent Reviewer will ensure K-1 perfection is complete. A perfected K-1 is one that has the correct entity information. Schedules K-1 may be secured using LB&I K-1 Imaging Network (KIN), Employee User Portal (EUP) or using data from yK1.

  14. Revenue Agent Reviewer will initiate partner linkages by providing the final build outs to the linkage TEs.

  15. The CPF will input CC TSLOD, using Form 8341, PCS Establish or Add. CC TSLOD accesses the MF to verify the investor TIN, name control, and Master File Tax Code (MFT). It rejects any input that does not match. A successful linking of the key case on the pass-through control system will generate AIMS control and two Forms 5546, Examination Return Charge Out, for each investor. These are referred to as a "Notification Charge-Out" and a "Flow Through Notification Charge-Out" . If there is no AIMS record anywhere prior to the link, the investor return will go to the key case CPF to be suspensed. If the investor has an AIMS record prior to the linkup, the link will go to the existing AIMS record. Linking the record creates a Partnership Investor Control File (PICF) code of 6 on the investor account record unless the investor is also linked to a TEFRA partnership in which case the PICF code will systemically change to 4. When only one type of linkage remains, the PICF code will systemically update to reflect either a TEFRA or ILSC linkage. The PICF code of the CPF key case will be 2.

  16. The CPF will process the linkage package within 30 days after receipt. After 30 days, the key case agent will verify the investor linkages by pulling up a TSUMYP. TSUMYP is an IDRS CC that will show the investors linked to a specific pass-through return on the PCS. The key case agent should place a copy of the TSUMYP in the key case file to verify that all taxable investors were linked.

  17. After loading, compare investors linked to TSUMY and build outs to verify that all material investors are accounted for and the structure is complete.

  18. A CPF code is established on the linkage record for each investor based upon where the linkage is input. The CPF code determines the campus where PCS notices are generated and on which campus reports the returns appear.

  19. Do not forward key case for processing until PCS and AIMS are fully established.

  20. The investor’s percentage of profits will be entered on all linked material direct and indirect investors. (CC TSCHG Item 06). The input of the percentage of profits is important as they will be used to determine materiality once the pass-through adjustments are finalized.

  21. To expedite linking of the indirect investors, AM424 may be done prior to linkage.

  22. When complete, PCS linkage must match the build out. Verify that all AIMS is fully established before building case files for the investor returns.

  23. Key case administrative files must be filed in TIN sequence. An action sheet must be included in each key case administrative file to show significant dates of key case and investor activity.

Contact with Potentially Dangerous Taxpayers (PDT) or Caution Upon Contact (CAU) Taxpayers
  1. If you need to contact a taxpayer designated as Contact with Potentially Dangerous Taxpayers (PDT) or Caution Upon Contact (CAU), please refer to IRM 25.4, Employee Protection, for the most current guidance.

CPF Employee Group Codes
  1. All ILSC investor returns in the CPF are maintained in AIMS status 33.

  2. The CPF will use the following AIMS Employee Group Codes (EGCs) to control their inventories. No other EGCs may be used.

    Employee Group Code Description Aging Criteria
    5400-5499 ILSC Returns See below
    5400 Newly Established Investor Returns 60 days
    5401-5408 Incomplete Files 90 days
    5409 LB&I Imaging Network (LIN) Returns 14 days
    5410 Classification (local option) 60 days
    5416 Dual Status (TEFRA to ILSC transfer) None
    5417 Transfers-In (incoming to the CPF) 30 days
    5418 Regular Suspense Files None
    5419 Carryback or Carryover (local option) None
    5420-5439 Report Writing 60 days
    5440-5449 30-Day Letter 45 days
    5450-5459 90-Day Letter 105 days
    5460-5469 Tiers None
    5470-5479 Appeals suspense - awaiting report. None
    5490 Key Case Suspense 180 days
    5480-5499 Reserved for future use None
  3. Where EGC ranges are provided (except 5480-5489 and 5491-5499), codes within the range may be assigned at local option. Organization Codes 5000-5399 are reserved for Correspondence Examination; 5800-5899 are for TEFRA (See IRM 4.31.3.4.1, CPF Employee Group Codes.); 5500-5699 and 5900-5999 are available for local option.

TE/GE Investors
  1. Tax Exempt/Government Entity (TE/GE) investors will not be linked at the request of TE/GE. The campus will send a memo and a copy of the ILSC Schedule K-1 to a TE/GE analyst whose name is provided by the SBSE HQ TEFRA Analyst. If the TE/GE investor is subject to tax, TE/GE will pursue the investor adjustments or work with the ILSC key case agent. A copy of the ILSC entities Report Agents Report (RAR) will be sent to TE/GE when the case is closed.

Grantor Trusts
  1. For purposes of an S Corporation or S Corporation that is an investor, the campus will not link the grantor trust or Qualified Sub-chapter S Trust (QSST). The campus will link the taxable beneficiary that reported the Schedule K-1 amounts. Partnerships with a trust are subject to BBA or TEFRA.

Form 5546, Examination Return Charge-Out

  1. The key case CPF will receive a Form 5546, Examination Return Charge Out, labeled "Flow Through Notification" for each investor that is successfully linked on PCS and established on AIMS. If the investor's return was not previously established on AIMS, the investor's Form 5546 will generate with employee group code 5400 and will cause the income tax return to be pulled from files and sent to the key case CPF.

    1. Generally the investor file will be controlled in the same CPF as the key case. A contact point in each CPF will be established to send the Form 5546, or Form 6658, with Schedule K-1 attached when the investor file is located in the other CPF or the field.

    2. The original of the Form 5546 is filed in the key case administrative file.

  2. An investor Form 5546 labeled "Related Investor Notification" is generated to notify the function (field office or CPF) in possession of the investor return that a ILSC pass-through linkage is present.

    1. This Form 5546 identifies the pass-through return as ILSC and identifies the AIMS PICF code as 6.

    2. The Form 5546 will show the assigned primary business code, employee group code and status code.

Using AIMS Reports to Perfect Rejects

  1. When accounts loaded through CC TSLOD do not match at MF, they are listed on the AIMS transaction code 424 reject register as status 99 rejects.

    1. These accounts do not establish on AIMS and do not produce a Form 5546, Examination Return Charge Out.

    2. This condition may be caused by an incorrect TIN, name control, or MFT (a name control error will reject at terminal input if the LAP/NAP was up). This condition may also be caused by the lack of a TC 150 (filing of a tax return) posting on the tax module or when the requested module has moved to retention.

    3. The TC 424 Reject Register is distributed weekly to each CPF.

    4. Status Code 99 rejects must be worked promptly by each CPF.

    5. See IRM 4.4, AIMS/Processing Handbook, for instructions on resolution of TC 424 rejects.

  2. The AIMS Duplicate Records Report is generated through the AIMS program if an attempt is made to link a taxpayer account through PCS while the account is in status 90.

    1. These accounts are identified by the "CLP" message.

    2. A TC 421 must be input to the MF, allowed to cycle in, and then the account must be reestablished on AIMS using CC AM424.

  3. The key case CPF will perform the basic research to verify that no return has been filed by using CC IMFOL and CC BMFOL. If no TC 150 posted on the MF, the investor return is established on NMF AIMS and linked to the key case.

    1. The User Special Message can be used to identify specific problems or unique situations. An example would be to enter the literal "Parent" and its TIN where a subsidiary is the investor in a pass-through entity. Another example would be to enter "TE/GE" for a tax-exempt entity that is an investor.

    2. The AIMS NMF database is retained in the key case CPF, and research performed utilizing Nation Access Information (NAI), CFOL CCs, NAMEE and NAMES.

    3. The key case CPF will send a non-filer letter to obtain information regarding the loss, income or deduction taken on the corporation, partnership, trust or individual return.

      Caution:

      Returns filed by individuals with substantial income exceeding a certain amount must be controlled on NMF. These can be identified by TC 590 cc 19. In addition, you may also see large estimated tax payments on the account.

Non-Filer Procedures

  1. If the key case CPF cannot secure the return from the investor, the CPF will request an Information Returns Processing (IRP) transcript from the Information Returns Master File (IRMF). Use CC IRPTR to order the transcript. When the transcript is received, the CPF will associate it with the case file.

  2. The transcript and Schedule K-1 will be screened to determine if a Substitute for Return (SFR) needs to be established. SFR procedures can be found in IRM 4.19.17, Non-Filer Program, and IRM 4.4.9, Delinquent and Substitute for Return Processing. If it is determined that an SFR is needed, one will be prepared and sent for processing. A linkage will be established to the key case after the TC 150 posts to MF.

  3. The NMF record will be closed after the MF linkage is in place. If there is not a filing requirement, the case will remain as a NMF record.

Key Case Administrative and Tier File Maintenance

  1. Monthly, each CPF will receive PCS Report 22-3, National Directory, for each pass-through record for which it has an administrative file and for which one or more investors were linked during that month. This report will be generated quarterly for all pass-through entities even if no new investors were linked to that pass-through entity during that quarter. Report 22-3 shows the key case or tier record's AIMS and PCS data elements and information about each newly linked investor. Report 22-3 is used to monitor investor linkages and must be worked monthly as follows:

    1. Investor linkages without a full AIMS data base which appear with a name control and no statute date must be perfected before they drop off the data base;

    2. Each Schedule K-1 investor that does not appear on Report 22-3 must be re-established;

    3. Investors in status 90 must be checked to ensure that they have not closed prematurely; and

    4. The Reports 22-3 must be filed in the key case (tier) administrative file.

  2. Report 21-3(N), NonTEFRA Key Case Action Report CPF, is a weekly report listing key cases whose status codes have been updated to 8X or 90.

    1. The CPF should follow up on key cases, which were updated, to status 90 to ensure that an Revenue Agents Report (RAR) was received by the CPF.

    2. The administrative files of the key cases that have been updated to status 82 should be flagged to show that the case is in docketed status.

  3. PCS reports are covered in IRM 4.29.4, PCS Reports.

Notification of the Beginning of a Pass-Through Audit

  1. Letters 3457 was created to notify ILSC investors of a pass-through audit. This letter is not required by law but is available to send as a courtesy to taxpayers that may not otherwise be aware of a pass-through audit.

  2. ILSC Investors may be unaware of an examination until they receive an audit report or a request to extend the statute. These letters were created to help keep taxpayers informed and avoid any surprises.

  3. A notification of the beginning of an ILSC pass-through audit will be issued to each ILSC investor controlled by the campus unless the field agent requests no notification be provided.

  4. The key case examiner will send a Letter 3457, Pass-Through Audit Notification Letter, to investors they control as they deem appropriate.

Verification of Schedule K-1 Income (Loss)

  1. The distributive share of income or loss and other pass-through items reflected on the copy of the Schedule K-1 received from the key case CPF will be matched against the amount of the pass-through items reflected on the investor's return.

    1. Where the amounts do not reconcile, appropriate action will be taken to clarify mismatched information through taxpayer contact.

    2. This mismatch may be attributed to a variety of situations (i.e., the name on the Schedule K-1 may be a nominee, actual losses may exceed the allowable loss limitation, etc.)

    3. After contact, any pertinent information will be provided to the key case field examiner and/or key case CPF. Only information that would impact the audit computations should be forwarded.

    4. If the taxpayer has not reported income or loss consistent with the Schedule K-1, and has not responded with information which explains the difference, the file will be referred to an RA for consideration of the IRC 6662 penalty. Any penalty must be approved by the employee’s manager before the statutory notice of deficiency is issued.

  2. In some instances, shareholders of an S corporation key case can be trusts or nominees. It is possible to have several tiers. Partnerships that elect out of BBA may have S corps as partners.

    1. Any adjustments to an S corporation key case may pass to individual taxpayers (i.e., the shareholders of the S corporation, and the beneficiaries of the trust, etc.) through the particular entities of which they are members and not directly from the principal entity.

    2. When a tiering situation is found, necessary steps to control the additional returns should be taken. This includes the preparation and submission of Form(s) 8341 for the additional tier(s).

    Note:

    It is important to remember that a nominee or other pass-through partner (including a single member Limited Liability Company (LLC)) will result in a partnership failing the small partnership exception under TEFRA. IRC 6231(a) (prior to amendment by the BBA) and Treas. Reg. section 301.6231(a)(1)-1 explain the definitions of pass-through partners and the small partnership exception. If there is a nominee situation, and the key case partnership is being processed as a nonTEFRA entity, then a TEFRA partnership proceeding will have to be initiated. The field agent in charge of the case must be contacted immediately.

    Note:

    Partnerships electing out of BBA may have S corporations as a direct pass-through partner. A disregarded entity, trust, or other pass-through entity partner will make an election out of BBA invalid.

Non-Pass-Through Issues on Investor Cases

  1. Newly secured investor returns must be screened for non-pass-through issues. If issues are identified, the CTP will coordinate with the key case examiner for the possible working of the issue(s).

  2. Investor returns and transcripts will be screened to identify any adjustment documents, amended returns, carryback, and carryover returns that will be needed to process the ILSC pass-through adjustment. If the investor is a minor child, the parent's return will need to be worked with it. These must be secured before the investor file is considered perfected.

Investor Returns Controlled Outside the Campus Pass-through Function (CPF)
  1. If an investor return is controlled outside the Campus Pass-through Function (CPF), the controlling area needs to be contacted immediately. The CPF either needs to get control of the investor return, or ensure that the controlling area does not issue a Statutory Notice of Deficiency (SNOD). Generally, only one SNOD may be issued to a ILSC investor. If the area in control of the investor return issues a SNOD for its issue, it may prevent the ILSC pass-through issue from being adjusted.

  2. Cases in status code 06 or 08 must also be secured, and these cases can sometimes take some time to locate.

Returns With TEFRA and NonTEFRA Issues (Dual Status)

  1. A case containing both nonTEFRA pass-through and TEFRA pass-through linkages will have a PICF code of 4. The CPF will monitor the statute on the nonTEFRA case and the one-year date on the TEFRA issue. A Form 3198, Special Handling Notice, will be prepared and attached to the case folder. The "Other" block will be checked and the following statement added: "Dual Status Case: NonTEFRA Pass-Through Issue EIN(s) and TEFRA Pass-Through Issue EIN(s)" . Applicable EIN(s) will be listed on the form.

    Note:

    If multiple linkages exist, a copy of a TSUMYI print can be attached in lieu of writing out all of the EINs on the form.

  2. When dual linkages exist, the key case campus must ensure that all campus controlled investors are in a NonTEFRA EGC even if the investor is in another CPF.

  3. Special care must be taken when protecting the statutes of investors linked to both a TEFRA and NonTEFRA key case. See IRM 4.31.6.2.12.1, Restricted Consents.

Statute Control

  1. The campus maintains the statute of limitations of each investor return controlled by the campus. The field is responsible for maintaining the statute control on pass-through entity returns and all investor returns controlled by the field.

    1. If the investor returns are not linked, the key case examiner assumes total responsibility for the statute control for all of the investor returns. The key case examiner is responsible for securing extensions of the statutory period of limitations on all investor returns, including tier shareholder returns (if applicable) and their related investors. Investors' returns will not be linked and controlled by the CPF on an ILSC key case if less than 7 months remain on the earliest campus controlled investor statute of limitations.

      Note:

      Agents can link investors' returns with less than 12 months on the statute, if those investors are all controlled by the agent examining the ILSC entity.

    2. The CPF is responsible for IRC 6501 statute control of returns controlled by the campus that are linked to an ILSC key case.

    3. A Form 895 is prepared for each investor return unless there is a Form 15041. One copy of the Form 895 is attached to the case file, the other will be maintained in a file for the monitoring of the statute of limitations date. A statute database may be used instead of the Form 895. Use of the statute database should be notated on the history sheet. (IRM 25.6.23, Examination Process - Assessment Statute of Limitations Controls.)

Substantial Understatement of Income, Six-Year Statute
  1. If it can be shown that a taxpayer understated his/her gross income by more than 25%, a special 6-year statute applies per IRC 6501(e). On a non-taxable, ILSC return, the computation of the substantial understatement will be made at the investor level.

  2. 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. Regs. 1.1366-1(c)(1) and 1.702-1(c). Trade or business gross income is the total amount of sales received or accrued prior to the reduction for cost of goods sold. Gross income in other cases is reduced by basis.

  3. 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.

    Note:

    Separately stated income from the pass-through entity should be included on the proper line of the 1040 – interest, dividends, capital gains, etc.

  4. 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),

    • Dividends,

    • 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

    • Other Income

  5. In establishing a 25% omission of income case, the burden may be 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.

  6. Due to the requirement to use the proportionate share of gross income, it may be difficult to trigger the 25% omission rule where the individual taxpayer reports the distributive share of income or loss of the ILSC key case ownership interests.

  7. 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.

  8. Based on Treas. Regs. 1.1366-1(c)(2) and 1.702-1(c), the amount of gross income reported by the investor depends on whether the investor reports all of his/her 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.

  9. 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 his/her entire share of ILSC pass-through income can result in a 25% omission of income.

Extension of Investor Statute

  1. The CPF, through local procedures, will determine if contacting the key case agent is necessary before requesting extensions. Generally, the Campus ILSC Coordinator will make the contact unless otherwise directed by the coordinator.

  2. When it is determined that the linked investor return has less than 210 days on the statute of limitations, an extension is needed to extend and protect the assessment period. (IRM 25.6, Statute of Limitations)

    Note:

    Remember, a no change at the key case level may not be a no change at the investor level. If the investor did not properly report their Schedule K-1 items, then that investor may be subject to an assessment.

    1. The CPF will prepare a Form 872 for each tax period and Letter 907 to send to the investor(s) at the most current address. On a joint return, a Form 872 must be prepared and mailed to each spouse. One copy is maintained in the case file, one copy will be mailed to each spouse separately.

    2. The Service must notify the taxpayer (or authorized representative executing a consent) as to the following rights as required by IRC 6501(c)(4)(B) on each occasion when the taxpayer is requested to extend the statute by consent:

      • The right to refuse to extend the limitations period.

      • The right to request the extension be limited to particular issues held open for further examination or appeal.

      • The right to request the limitations period be extended only to a particular period of time.



      The notification should be provided by sending or presenting Letter 907 and Publication 1035.
    3. The returned consent should be signed by the taxpayer, as it appears on the return, unless there was a name change. The consent should then be prepared as "Jane Smith, formerly Jane Brown" on the name line with the new name on the signature line.

    4. If the consent is not received in the allotted time, the examiner will prepare Letter 928 to send to the taxpayer.

      Note:

      An authorized Service official must sign the consent before the Assessment Statute Expiration Date (ASED) expires.

    5. The taxpayer or the taxpayer's representative may request, verbally or in writing, restrictive wording on the extension. The CPF ILSC Coordinator will review the return for other issues and verify the use of a restrictive paragraph. If the use of a restrictive paragraph is approved, refer to IRM 25.6.22.8, Restricted Consents, for instructions in preparing the restrictive paragraph consent.

  3. When the signed consent is received by the CPF, it will be reviewed for accuracy and to ensure that the appropriate number of copies have been received. The consent will be signed by one authorized to sign on behalf of the Commissioner.

    1. One executed original consent form will be mailed to the taxpayer with Letter 929(SC). One will be retained in the case file.

    2. The copy of the executed original consent and a copy of Letter 907 will be attached to the back of the front page of the return.

    3. The Letter 907 serves as documentation that the taxpayer was provided with their rights as required by IRC 6501(c)(4)(B).

    4. The AIMS database statute should be updated with the extended date. When this is done, a TC 560 is automatically generated to MF to reflect the new date.

    5. The Form 895 will be updated to the date extended or the appropriate database will be updated.

    Note:

    If the taxpayer only returned one original consent, it should be photocopied, and the original and photocopy must be signed with an original signature of the delegated Service official. The consent form with the taxpayer's original signature should be retained in the case file. The executed photocopy will be returned to the taxpayer.

  4. If a partner is a parent corporation or a subsidiary in a consolidated group, the common parent must sign the consent as the agent that is authorized to act in its own name with respect to all matters relating to the tax liability for that consolidated return year. IRM 25.6.22.6.2.2, Subsidiary as Partner and as Member of a Consolidated Return.

  5. One consent may be used to extend the statute for partners that are parent corporations and any or all its subsidiaries that filed separate returns provided that the procedures in IRM 25.6.22.6.2.3, Parent and Subsidiary Corporations, are followed.

Restricted Consents
  1. Restricted consents are quite uncommon with ILSC case investors. Care must be taken to ensure all restricted issues are covered.

    Note:

    It should be noted that using the standard language included in IRM 25.6.22.8.12, Basic Restrictive Statement, in effect removes the TEFRA language. A statement must be added that the applicable TEFRA paragraphs are still valid. Without that language, the TEFRA issues may be lost.

  2. Research the investor for other linkages. If other linkages exist, contact the examining agent to see if other restrictions exist.

  3. 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.

  4. Once the original IRC 6501 statute is gone, each existing restricted consent may be extended timely. No other restricted issues may be added after the IRC 6501 statute has passed.

    Note:

    The original statute may be, for example, the six-year period for a return with a substantial omission under IRC 6501(e).

  5. If a taxpayer is linked on PCS to both TEFRA and ILSC key cases, it is recommended that the TEFRA language not be removed.

Entity Extensions
  1. For nonTEFRA and BBA elect out (BEO) cases, the statute of limitations is not controlled at the entity level, but at the taxable investor level.

  2. Statute extensions should be secured for trusts and S-Corporations that are subject to tax. The tier level extension protects the entity level statute, but will not extend the period for beneficiaries or shareholders. The bottom line investor level extensions are still needed.

Related Return Suspense Files

  1. The CPF must maintain all campus controlled ILSC partner tax returns in suspense.

  2. Minimum requirements for returns held in suspense are:

    1. Protection of the statute of limitations.

    2. Contact the key case examiner for a pro forma report if an extension cannot be secured.

Receipt of Form 6657, Related Return Examination Report

  1. The CPF will receive the Form 6657, Related Return Examination Report, listing all investors and a copy of the completed examination reports and the key case file when the examination of the key case is completed. The CPF will update the status to 33 and the EGC to 5490 upon receipt of the key case file.

    Note:

    A TSUMYP print can be attached to the Form 6657 in lieu of listing all investors on the form.

    1. The Form 6657 will reflect the closing status (agreed, no-change, unagreed) of the pass-through entity.

    2. The examination report and the Form 6657 will be reproduced and a copy associated with each investor file when they are received.

Receipt of Amended Returns and Claims

  1. The CPF will screen all amended returns and claims received. Amended returns and claims include the following:

    1. An advance payment of deficiency and interest;

    2. An attempted removal from a TEFRA proceedings;

    3. An adjustment related to a TEFRA partnership;

    4. A Form 1045, Application for Tentative Refund, based on a carryback from or to a suspensed year;

    5. Protective claims, see IRM 4.31.4 of this IRM (under Protective Administrative Adjustment Requests (AARs)); and

    6. ILSC or BEO issues resulting in a claim for a refund or an additional balance due.

  2. Procedures to follow upon receipt of a Form 1040X, Amended U.S. Individual Income Tax Return, Form 1120X, Amended U.S. Corporation Income Tax Return, amended Form 1041, U.S. Income Tax Return for Estates and Trusts, and/or other taxable claim are:

    1. Secure the investor file from the suspense files and associate the document (timely) with a TSUMYI print and an IMFOLT/BMFOL print;

    2. Forward all taxable claims to a technical employee for screening, and update AIMS to EGC 5408 (local option);

    3. Screen the document(s) to see if the amended return or claim relates to a BBA or TEFRA return (AAR);

    4. Perform technical screening to determine whether the claim is allowable. Screening involves determining if (1) the taxpayer’s return is already open in the field, (2) the necessary assessments have been made, and if an assessment is required, ensure that it is made, (3) a formal claim disallowance is required, (4) the taxpayer needs to be advised that the claim filed is related to a TEFRA or BBA examination, if applicable, or (5) the amended return or claim (including protective claims) is worthy of examination and requires forwarding to the field for examination.

    If Then
    The amended return or claim is not worthy of examination and does not require forwarding to the area office. Make necessary assessments, and update the AIMS EGC to 5418 and refile in the CPF suspense file.
    The amended return or claim is worthy of examination or the taxpayer’s return is open for exam in the field. Update to the area Primary Business Code (PBC), Secondary Business Code (SBC) and EGC, make a copy of the document(s) for the CPF suspense file, and forward the original return and/or claim to the area office.
  3. Generally, investor claims will be processed unless they will result in a refund, or are related to a key case examination. Refund claims, not related to a key case exam, will be processed if the taxpayer requests the refund in writing and states they understand a future assessment may result in more interest. Send them Letter 5642, Refund Release Response. Taxable amended returns related to a key case examination will not be processed until the key case examination is completed.

  4. The individual shareholder’s 1040s should have timely filed amended returns relating to the amended S corporation or nonTEFRA or BEO partnership return. AIMS should be reviewed for each investor to see if the amended returns were filed and whether the claims were paid. If the entity level claim is not allowable and one (or more) of the investor’s claims were paid and the regular statute has expired, there is no statute with respect to those shareholders to recover the refunds. Claims should not be allowed if the claim is related to an amended Schedule K-1, but no entity level amended return was filed.

  5. Generally S corporations are non-taxable entities. If an entity 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.

Power of Attorney (POA) for Investor Level Statute Control (ILSC) Partners

  1. Only those representatives with a valid Power of Attorney (POA) on file for the taxable year(s) under discussion are permitted to receive information about the partnership examination.

    1. A new POA for an investor does not need to specifically name the partnership before the service can deal with the POA for the partnership issues. However, it does need to meet specific requirements.

    2. Under section 3, on one line, under the heading "Description of Matter" , the partner should insert "Income, Including pass-through Items" .

    3. Under the heading "Tax Form Number" , the investor should enter the form number of the investor's return and "Form 1065" or "Form 1120-S" .

    4. Under "Year(s) or Period(s)" the partner should enter the covered tax year(s).

      Note:

      Each tax period should be reflected on the POA form.

      Note:

      If the Form 2848 is not completed as above, it will be rejected by the CAF Unit in the campus.

    5. If an existing POA does not have the proper language, a new POA, with the above statement included in section 3, should be secured.

    6. Though not required, under Part 5 of Form 2848, it is a best practice to list each act the taxpayer authorizes the POA to perform. These would be acts other than the normal authorization to work with the examiner and exchange confidential information. Care should be taken to identify any restrictions to the POA’s authority to act for the taxpayer.

  2. A hard copy of the POA should be secured and maintained in the case file. The only way to determine if the POA was completed correctly for partnership issues is to have a copy. It is best not to rely on the Centralized Authorization File (CAF) due to the special language required.

ILSC Report Writing

  1. The following subsections cover the ILSC report writing procedures. Also refer to IRM 4.10.8, Examination of Returns - Report Writing, and Training Guide 10274 as needed.

Introduction

  1. In general, each linked investor return must have a report written disclosing the results of the examination of the pass-through return to which the investor is linked. Even though the pass-through entity may agree to the adjustments, the Service must still secure signed agreements from each investor. One or more of the investors may choose to dispute the proposed adjustments independent of the pass-through entity. The report provides the investor the opportunity to agree or appeal the adjustment.

  2. This subsection includes the procedures for processing the written reports.

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Preparing Case for Report Writing

  1. The receipt of the RAR by the investor campus will indicate a need for report writing activity.

  2. Prior to the assignment of an investor file to a report writer the following actions should be taken:

    1. Acknowledge the Form 3210 which transmitted the Key case and the RAR within 3 days;

    2. Verify the investors statute date or extended statute date;

    3. Associate documents with the investor file, and obtain IMFOLT (or BMFOLT) and TSUMYI prints, and;

    4. Note the investor case file, and if the CPF has control of the database, update to AIMS status code 33, exam group code 542X or 543X.

ILSC Key Cases With Investors Controlled Outside the CPF
  1. A copy of the partnership RAR must be sent to the examiners of investor returns controlled outside the CPF, other than the key case agent. Those outside the CPF will prepare a report for the investors they control and issue the appropriate notices.

  2. Generally, only one statutory notice of deficiency may be issued on ILSC cases. See IRC 6212(c). Allowing the area that controls the investor on AIMS to incorporate the pass-through adjustments along with their exam ensures that the campus does not issue a statutory notice prematurely.

Case File Requirements
  1. Upon assignment, the report writer should check the case file to ensure it includes the following items:

    1. The original tax return or copy;

    2. An Information Returns Processing (IRP) transcript (if available) if the investor is a non-filer;

    3. The RAR, or Appeals Case Memorandum with Form 4605, for the key case;

    4. Form 886-X, Form 886-S or Form 886-W showing the corrected ordinary income/loss and any other examined issues;

    5. Any penalty information;

    6. An IMFOLT (or TXMOD), TSUMY prints and CFINQ (for POA information);

    7. Schedule K-1;

    8. Form 895, Statute control or statute database control notated on history sheet (IRM 25.6.23, Examination Process - Assessment Statute of Limitation Controls);

    9. Examiners must perform IDRS research to check for validity of current AIMS and PCS data and to ensure that no activity has taken place on the taxpayer's account that may affect the case such as prior assessment information (a Form 1040X, partial assessments, or other changes to the investor's account). All research performed must be documented on Form 4700-T or Form 4318, Examination Work papers (IRM 4.10.9, Liability Determination, Campus Examination Operations); and

    10. Any related tax returns for a net operation loss, investment tax credit or foreign tax credit carryback and/or carryover, related tax returns for Passive loss, Alternative Minimum Tax Credit or Capital Loss carryover and any related tax returns for Tax for Children Under Age 14.

    11. If penalties are applicable, verify that appropriate penalty language was provided by the field.

  2. If any of these items are not present in the investor case file, the report writer must secure the information necessary for the preparation of the examination report. Depending on the statute, this may require returning the case file to another unit to secure the necessary information.

Referring Complex Issue to the Field
  1. If, due to the complexity of the case, an employee believes that he/she cannot adequately prepare an investor audit report, the employee should consult with the Campus ILSC Coordinator. The campus ILSC coordinator will provide the employee with assistance, or work with the appropriate Technical Services Pass-Through Coordinator in order to have the case worked in the field. Campus personnel should make every effort to work all campus controlled investors at the campus. However, there are times when the complexity of the case will require assistance from the field. It is the complexity of the issues, not the size of the case, that will dictate whether a case gets sent back to the field.

Report Writing Procedures

  1. The investor's return file with the key examination report will be assigned to a TE to prepare an adjustment report.

    Note:

    All investors in the same key case should be worked together to ensure that if they require a (SNOD), it is issued simultaneously. (See IRM 4.31.6.2.7, Statutory Notice of Deficiency.) Also refer to IRM 4.10.8, Examination Returns, Report Writing, and any other necessary IRM or Training Guides as needed.

  2. The report writer must verify the statute date (considering any statute extensions), and statute control using local procedures using Form 895 or statute database.

  3. The report writer must determine whether penalties were recommended for the key case.

  4. The report writer will complete Form 4700, Examination Workpaper, on all cases (see IRM 4.19.1, Liability Determination, Campus Examination Operations) to reflect the investor's applicable adjustment from the pass-through entity. The report writer will attach Form 886-X, Form 886-S or Form 886-W, RAR and any other documents received from the key case examination to the Form 4700 as part of the workpapers.

  5. The investor return will normally be adjusted to reflect the amount shown on the Form 886-X, Form 886-S or Form 886-W unless the adjustment document reflects an allowable loss and the investor did not report any activity from this pass-through return on the original return.

    1. In this situation, the report writer must consider the correspondence in the file, which explains the difference between the amounts shown on the Schedule K-1 and the return.

    2. If the investor did not respond to the inquiry or responded that the loss was not claimed because of a limited basis or previous execution of a Form 906, the examiner should allow no loss as a result of the examination of the pass-through return.

  6. If the key case examination resulted in a no change, the examiner will prepare a no change letter to issue to the taxpayer.

Preparation of Examination Report

  1. The report writer will input and generate three copies of Form 4549, Income Tax Examination Changes, for tax and any applicable penalties. The Form 4549 must include the name, telephone number and the unique identifying number of the person to contact.

  2. The Form 4549-A should list each issue and the EIN of the pass-through from where the adjustment came. The EIN provides a unique identifier to help the taxpayer understand where the changes came from. It also provides clarity when there are multiple pass-through adjustments with similar names.

Special Computation for Non-Oversheltered Returns (Munro Decision)
  1. In Munro v. Commissioner, 92 T.C. 71 (1989), the Court held that the partnership items (whether income, loss, deduction or credits) included on a taxpayer's return should be completely ignored in determining whether a deficiency exists that is attributable to nonpartnership items. Moreover, the Court ruled that the Service may not assume the correctness of its proposed adjustments to partnership items for computational purposes in determining a deficiency, and taxpayers may not offset net partnership losses against their taxable income for purposes of deficiency proceedings.

  2. Non-oversheltered returns (and oversheltered returns related to partnership returns with tax years ending before August 6, 1997) are returns that will have a tax deficiency after the proposed adjustments (for other than TEFRA partnership items).

  3. For non-oversheltered returns, Munro computations will continue to be used if there is an open, related TEFRA partnership proceeding.

    1. When adjusting a taxpayer’s return for ILSC pass-through issues and the Form 4549 results in a reduced deficiency because of large TEFRA partnership losses, the report writer will prepare a report without consideration of any TEFRA partnership income or losses.

    2. Prepare a report starting with the original return, or as amended, and remove all TEFRA issues from open TEFRA proceedings. Label this report as: "Information Only – Do Not Process" . Using this report as the starting point, prepare a report making the ILSC pass-through adjustment.

  4. When there is an open TEFRA proceeding, the following paragraph should be used on the SNOD:

    1. 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 (prior to amendment by the Bipartisan Budget Act of 2015 (BBA)), 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 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).

  5. The following sample paragraph should be included in the explanation of items:

    1. The following TEFRA partnerships are subject to partnership level proceedings pursuant to the partnership audit and litigation procedures of IRC 6221 through IRC 6234 (prior to amendment by the Bipartisan Budget Act of 2015 (BBA) 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:

      Entity Adjustments
      ABC Partnership $(30,000.00)
      XYZ Partnership (7,000.00)
      HIJ Partnership (27,700.00)
      Total $(64,700.00)
  6. 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.

Special Computations for Non-Filers
  1. Special computations exist for non-filer investors.

    1. Non-filer investors with an Information Returns Processing (IRP) transcript in the case file will have a substitute for return processed and the account will be controlled and adjusted on MF. The report writer should input a Form 4549 containing both the IRP adjustments and the ILSC pass-through adjustments. Continue processing per the ILSC procedures.

    2. Non-filer investors without an IRP transcript will be controlled and adjusted on NMF. The report writer will prepare a Form 4549 for the ILSC pass-through adjustment applying the highest tax bracket applicable for the tax period without the benefit of exemptions or deductions. Continue processing per the ILSC procedures.

IRC Section 6404(g), Suspension of Interest and Certain Penalties
  1. In general, the notice date for purposes of IRC 6404(g) is the date adequate notice is mailed or provided to the individual investor. For ILSC purposes it is the date a report is given to the investor. All other IRC 6404(g) rules apply.

  2. Notification for ILSC investors will be their initial audit report. Typically, this will be a 30 -day letter.

  3. 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.) period beginning on the later of:

    1. the date on which the return is filed; or

    2. the due date of the return without regard to extensions,

    in which to provide notice to the taxpayer specifically stating the taxpayer's liability.

  4. 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 period (18 months effective for tax years where the 18 month period ended on or before November 25, 2007.) are suspended.

    Note:

    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.

  5. The term suspension period means the period:

    1. beginning on the day after the close of the 36-month period under (3) above and

    2. ending on the date which is 21 days after the date on which notice is provided to the taxpayer.

  6. The exceptions to the general rule for suspension of interest and certain penalties where the Service fails to contact the taxpayer are:

    1. any penalty imposed by IRC 6651;

    2. any interest, penalty, addition to tax, or additional amount in a case involving fraud;

    3. any interest, penalty, addition to tax, or additional amount with respect to any tax liability shown on the return

    4. any interest, penalty, addition to tax, or additional amount with respect to any gross misstatement;

    5. any interest, penalty, addition to tax, or additional amount with respect to any reportable transaction with respect to which the requirement of IRC 6664(d)(2)(A) is not met and any listed transaction (as defined in IRC 6707A(c)); or

    6. any criminal penalty.

  7. The notice date must be annotated by the TE on the history sheet in the case file, and also annotated on the case file copy of the Examination report in the "Remarks" area with the following statement: "IRC 6404(g) does apply and notice was provided on (mail out date)" .

  8. TC 971 with Action Code 064 will be input on MF for the identified cases to record the notice date. MF will automatically compute the interest with only one notice date. Cases with additional notice dates will require manually computed restricted interest (TC 340).

  9. All IRC 6404(g) cases where an assessment is being made will require special instructions on Form 3198. If another assessment is necessary, it must again be stated whether IRC 6404(g) applies, and if it does, the notice date for the subsequent assessment must be entered in the "Special/Restricted Interest Features" section of the Form 3198.

Completion of Workpapers
  1. The report writer will complete Form 4700-T, Examination Workpapers, on all cases (see IRM 4.10.9, Examination of Returns, Workpapers and IRM 4.19.13, General Case Development and Resolution) to reflect the partner's applicable adjustment from the pass-through return. The report writer will attach Form 886-S, Form 886-W, or Form 886-Z (or equivalent spreadsheet), and other documents received from the key case CPF, to the Form 4700-T as part of the workpapers.

Report Generation System (RGS)
  1. In general, Report Generation System (RGS) is used in the CPF when preparing IMF reports. There are times when pass-through adjustments result in no change to the underlying investors. Since the pass-through adjustments are not an examination, capturing the EOAD data is not required if those adjustments will result in a no change and no report was prepared.

  2. Reason codes should be input on RGS for each item adjusted in order to capture Examination Operational Automation Database (EOAD) data per IRM 4.10.16. The list of reason codes can be found in IRM 4.10.16-1.

  3. Most, if not all, ILSC adjustments will originate from a partnership or S-corporation examination. Therefore, the reason codes from the pass-through section should be used. An exception would be an adjustment specific to the investor’s return. For example, if the investor filed an amended return where the issues are not related to the entity examination. Those amended return adjustments should use non pass-through related reason codes.

  4. Generally, ILSC cases will fall under non-NRP. The use of NRP issue codes would only be applicable if the entity that was examined was part of an NRP sample. In such an instance, the case file will be clearly marked to identify it as an NRP related investor.

Passive Activity Losses (PAL)
  1. Examiners need to ensure that all applicable forms are completed when computing the Passive Activity Losses (PAL) adjustments. The Form 8582 worksheets do not need to be completed for all cases, but should be completed when needed. For example, they should be completed to communicate changes to the taxpayer in the case of dispositions or PAL carryovers.

Carryover/Carryback Adjustments
  1. Case files for carryback and carryover years need to have copies of the workpapers from the source year supporting the adjustments. Adjustments such as Schedule A (contributions), NOL, possibly credits and PAL Credits would also require the closing documentation from the source year and computations for any carryback or carryover.

  2. When there are PAL carryovers, for example, the case files for those years need to have all of the necessary work papers to support the PAL adjustment. The carryover case file should have the closing documents from the source year as well as the Form 8582 reflecting the PAL carryover changes. Without the source documentation, there is nothing in the carryover year file to support the changes. This information is necessary in the event a subsequent taxpayer inquiry is made.

Capital Loss Carryforward Adjustments
  1. 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.

30-Day Letter Procedures

  1. The report writer will send a 30-day letter and two copies of Form 4549 to the investor to secure agreement to the pass-through issue(s). Report writers should always consider IRC 6404(g) and input a TC 971 with Action Code 064 whenever applicable.

  2. The case file will be suspensed for 45 days awaiting response from the taxpayer.

  3. Generally, the 30 day letter will act as notification for purposes of IRC 6404(g).

Agreement Received
  1. The assessments must be made as soon as possible after the agreement is received.

    1. Prepare and input Form 8339, PCS Change, to enter the amount of the assessment. Box 11, Change(s), will be completed with Item 5, (the investor one-year date field) with 22222222, assessment amount and time. The investor case will not be allowed to close without this entered on the investor linkage.

      Note:

      The PCS will not allow anything other than 22222222 to be entered in the one year date field. An attempt to enter a real date will result in an error message.

    2. If the case is to be full closed (no other TEFRA or ILSC linkages), the case is prepared for final closure. If there are open linkages (either TEFRA or ILSC), a partial assessment will be made and the case will be sent to suspense to await additional packages. (See the Form 5344 procedures at IRM 4.31.6.2.3, Form 5344, Closing Procedures.)

Acceptance of Faxed Agreements
  1. Consents to assess additional tax (Form 4549, Form 870, and others) of $250,000 or less can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent by fax. Consents to assess tax in excess of $250,000 should be secured with original signatures and delivered in person or by mail.

  2. For purposes of estimating tax for pass-through adjustments, the tax is figured by multiplying the partner's share of the adjustment by the highest tax bracket percentage. The estimated tax figure will be used for figuring the $250,000 limit for the acceptance of faxed agreements.

Request for Appeals
  1. If an investor does not agree to the proposed key case adjustments and files a protest, both the key case and the investor return will be sent to the Appeals office named in the closing package sent to the CPF. This will usually be the Appeals office that services the operation unit that examined the key case return. The campus will forward the perfected protest to Appeals within 15 days. There must be at least 365 days remaining on the statute of limitations of any investor return sent to Appeals. See Appeals IRM 8.21.2.3, Cases Not Accepted by Appeals. Only those investors that file a protest should be sent to Appeals. All other investor returns should be held in suspense, even if the investor does not respond to the 30-day letter. To conserve the Service’s overall resources, only a principal investor case(s) should be sent to Appeals for review of protested issues. Other investor(s) cases should be kept in suspense. As a general rule, the key case and one protested case will be sent to Appeals. Exceptions are:

    1. If investors have different representatives, one case from each representative should be sent to Appeals.

    2. If an investor has no representative and files a protest, the investor case should be sent to Appeals.

    3. If there are unagreed non pass-through issues.

    All other investor returns should be held in suspense, even if the investor does not respond to the 30-day letter as long as there is sufficient time on the investor statute.

  2. Form 8339, PCS Change, will be input updating item 22 to the literal "A" on all investors. This will identify that the investor is suspensed awaiting Appeals determination.

  3. Only issue a statutory notice of deficiency when all of the investors decline the opportunity to file a protest, and there is a statute problem. It is difficult to successfully resolve disputed issues when some investors are nondocketed and others are docketed.

Protest Rebuttal
  1. If the taxpayer files a protest, the key case agent will be contacted and provided a copy of the protest in order to give the agent the opportunity to submit a rebuttal. The agent will mail the rebuttal to the taxpayer and/or their representative and provide the campus with a copy of the rebuttal letter to associate with the case going to Appeals. A copy of the rebuttal letter may be sent electronically to the campus. A copy of the letter should also be kept in the key case administrative file. The campus will include the protest and a rebuttal, if applicable, in the case file being sent to Appeals.

Statutory Notice of Deficiency

  1. If there is no response to the 30-day letter, and all investors have declined the opportunity to file a protest, the report writer will research for other open ILSC linkages. Generally, only one stat notice may be issued to a taxpayer for a given tax year. See IRC 6212(c) . If no other linkages exist, issue a statutory notice of deficiency for all investors. (See IRM 4.8.9, Statutory Notice of Deficiency.) If other ILSC linkages exist, then that examiner will have to be contacted in order to include their adjustments in the statutory notice of deficiency.

    Note:

    If an agreement to the 30-day letter is received shortly after issuance of the 90-day letter (Letter 3219), the agreed case can be processed and closed. Do not wait for the 90 day period to default. Even though the 90 day letter is issued, the agreed assessment must still be made within 60 days of receiving the agreement.

  2. Once the statutory notice of deficiency is issued, the case file will be suspensed for 90 days awaiting a response from the taxpayer.

    1. If an agreement to pass-through issues is received, assessments must be made as soon as possible after the agreement is received. The statute expiration date must be recalculated based on the Statutory Notice of Deficiency.

    2. Prepare and input Form 8339, PCS Change, to enter the amount of the assessment. Box 11, Change(s), will be completed with Item 5, (the investor one-year date field) with 22222222, assessment amount and time. The investor case will not be allowed to close without this.

      Note:

      The PCS will not allow anything other than 22222222 to be entered in the one year date field. An attempt to enter a real date will result in an error message.

    3. If the case is to be full closed (no other TEFRA or ILSC linkages), the case is prepared for final closure. If there are open TEFRA linkages, a partial assessment will be made and the case will be sent to suspense to await additional packages. (See Form 5344 procedures at IRM 4.31.6.2.3, Form 5344, Closing Procedures.)

Petition Filed
  1. If a petition is filed with the Tax Court, both the key case and the investor case will be sent to the requesting area. Other investors should be held in suspense awaiting the Tax Court decision (taking into consideration any statute problems). When the petitioned case is settled or decided, the non-petitioning investors will be sent notices consistent with the court decision. Appeals will provide the campus with the Tax Court decision to be applied to the investors.

  2. Prepare and input Form 8339, PCS Change, to enter the amount of the assessment. Box 11, Change(s), will be completed with Item 5, (the investor one-year date field) with 22222222, assessment amount and time. The investor case will not be allowed to close without this.

    Note:

    The PCS will not allow anything other than 22222222 to be entered in the one year date field. An attempt to enter a real date will result in an error message.

  3. If the investor case is to be full closed (no other TEFRA or ILSC linkages), the case is prepared for final closure. If there are open linkages (either TEFRA or ILSC), a partial assessment will be made and the case will be sent to suspense to await additional packages. (See Form 5344 procedures at IRM 4.31.6.2.3, Form 5344, Closing Procedures.)

No Response
  1. If no response is received from the investor, and no petition to the Tax Court is filed, the SNOD will be defaulted and the tax assessed per the SNOD. The statute expiration date will need to be recalculated based on the defaulted SNOD.

  2. Prepare and input Form 8339, PCS Change, to enter the amount of the assessment. Box 11, Change(s), will be completed with Item 5, (the investor one-year date field) with 22222222, assessment amount and time. The investor case will not be allowed to close without this.

    Note:

    The PCS will not allow anything other than 22222222 to be entered in the one year date field. An attempt to enter a real date will result in an error message.

  3. If the case is to be full closed (no other TEFRA or ILSC linkages), the case is prepared for final closure. If there are open linkages (either TEFRA or ILSC), a partial assessment will be made and the case will be sent to suspense to await additional packages. (See Form 5344 procedures at IRM 4.31.6.2.3, Form 5344, Closing Procedures.)

Closing Employee Returns with TEFRA Links
  1. Employee Accounts are indicated by the flashing "E" Employee indicator on AIMS specifics.

  2. Prior to closing the case will be forwarded to the CPF PCS Coordinator.

  3. The PCS Coordinator needs to provide Exam Planning and Delivery/ Examination Return Selection (EPD/ERC) with the TIN, Tax Year and a brief explanation of the adjustment. A contact person can be found at http://mysbse.web.irs.gov/exam/tip/emplaudit/contacts/11076.aspx.

  4. EPD/ERC will give written permission to change the audit code. This will allow the case to be closed as normal.

Form 5344, Closing Procedures

  1. Form 5344, Examination Closing Record, is prepared by the investor CPF to process ILSC pass-through adjustments each time an agreement is received by the investor CPF.

    1. A copy of the Form 5344 will remain in the file until all pass-through issues have been resolved.

    2. The closing function will input the PCS CC TSCLS as part of the final AMCLSE procedure.

Proper Completion of Form 5344

  1. Special attention must be given to certain entry items on Form 5344.

    1. Notate in RED, on the top of the Form 5344, "ILSC" .

    2. CC TSCLS - this block should be checked when an investor return is linked on PCS.

      Note:

      This portion will only be completed at the time of final closing.

    3. Item 8 - Agreement Date (partial or final closings). This entry will be completed for tax years ending after August 5, 1997 (IRC 6601(c)). Enter the date as reflected on the signed Form 4549. The date the agreement was received is required to be entered on agreed deficiency cases if the disposal code is 03, 04, or 09 and Item 12 contains an increase in tax and the MFT is 02, 05, 30, 51 or 52. If no agreement is signed, but the taxpayer full pays the deficiency prior to the issuance of a Statutory Notice, the case will be considered agreed and closed DC 04 as of the date of payment. See IRM 4.4.12.5.18 and IRM 4.19.13.27, Campus Exam Closing Actions. For partnership tax years ending before August 6, 1997, cases will be closed using disposal code 08 and no agreement date.

    4. Item 13 - Disposal Code. Cases closed no change should use disposal code 01 or 02. The adjustment amount on the Form 5344, Examination Closing Record, should be blank. Cases closed agreed or unagreed will generally use disposal codes 03, 04, or 08 (1997 and prior). The adjustment amount on the Form 5344, Examination Closing Record, requires an entry other than zero. If you have a situation where the adjustments made to the entity net to zero, enter $1. After issuance of a 90-day letter, use disposal codes 09 or 10.

      Disposal Code When to use the disposal code.
      01 - No Change with Adjustments This code should be used when changes are made to the entity's ordinary income, loss, or separately stated items reflected on the return or Schedule K-1, and an investor's return is adjusted as a result of the pass-through examination. This would include adjustments to basis, at-risk, passive loss rules, taxable loan repayments, or adjusting the investor's return to match the Schedule K-1 pass-through amounts.

      Note:

      An audit report is not required for most cases closed below the tax tolerance in the CPF. An exception will be when the tax changes impact a prior or subsequent tax year (NOL, PAL, etc).

      02- No Change This code should be utilized when the examination results in no changes to the entity or any investor. This would also be appropriate if you make adjustments to one of the investor's returns as a result of compliance checks which are not related to the pass-through examination.
      03 - Agreed Prior to 30-Day Letter
      04 - Agreed After the 30-Day Letter
      Pass-through examinations that are closed agreed should use 03, or 04 as the disposal code. An agreed case is one where an agreement is obtained from all owners. If all signatures are received from the owners, you can close the case by indicating on the pass-through report that an agreement was obtained from the investors.
      Form 4605 can be used to obtain an agreement at the pass-through level, but it is non-binding. If the case is linked and agreement is obtained at the entity level and there is no indication of an owner not in agreement, one of the agreed disposal codes can be used.
      07 - Non-docketed Appeals Disposal code 07 is used for returns closed to Appeals before issuance of a statutory notice of deficiency.
      08 - Unagreed - Does not Agree or Requested an Appeal Disposal codes 08 is used for pass-through cases that have one or more owners who do not agree. This disposal code is also used for unagreed refund cases.
      09 - Agreed - Notice of Deficiency Disposal code 09 is used when a taxpayer agrees to the statutory notice of deficiency.
      10 - Default - Notice of Deficiency Applies only to returns if the taxpayer fails to file a petition or sign an agreement after the issuance of a 90-day letter or the notice goes unclaimed by the taxpayer.
      13 - Undeliverable - Notice of Deficiency Used when a Notice of Deficiency or FPAA is returned as undeliverable.
    5. Item 14 - Statute Extended to Date (partial or final closings). Because of extensions on ILSC cases, care should be used to ensure that the correct information is shown on the database. If the IRC 6501 statute date has sufficient time remaining to make the necessary adjustment, no entry will be required. If the IRC 6501 statute has insufficient time remaining to allow an adjustment to be made, or the IRC 6501 statute, without regard to any consents, has expired, the Statute Extended to Date should reflect the extended date. On partial assessments, after the partial closure has been completed, the statute date on AIMS must be corrected to the original date.

    6. Item 28 - Examiner's Time (final closing only). Enter the technical time spent processing the return. This will include the report writing time. If prior partial closures were processed, the entry will be the total of all technical time spent on the case by the area and/or the CPF. Local procedures must be developed to record the cumulative time applied to each return by the CPF technical employees so Form 5344 will record all time applied (except the 631 or 632 "below the line" time) by technical employees, whether in the area or in the CPF.

    7. Item 30 - Examination Technique (final closing only). See IRM 4.4, AIMS/Processing Handbook.

    8. Item 31 - Examiners Grade (final closing only). Enter the grade of the examiner that corresponds to the employee group code entered in item 29.

    9. Item 408 - Related Return Alpha Code. Enter P if Primary Return (If Entered, Leave 405-407 Blank). Enter S if Secondary (Related) return.

    10. Item 411 - Payment Code (final closing only). The payment code indicates if there is a payment or partial payment on the account. The codes are as follows:

      Payment Code Definition
      F Full Paid
      P Part Paid
      N No Payment
      O Total Offset
    11. Item 412 - Collectibility Code (final closing only). Indicates if the taxpayer has an installment agreement.

      Collectibility Code Definition
      I Installment Agreement Received
      C Installment Agreement requires coordination with Collection.
      N No Installment Agreement was received.
Case File Assembly
  1. After completion of the required reports, Form 4549 and closing documents, Form 5344 and Form 8339 (if return is linked on PCS), the report writer should prepare the case for processing by clerical personnel. The case file should contain the following documents:

    1. A Form 5344; (required)

    2. Original Return or RTVUE, 6020(b); (required)

    3. Amended Return (if one is in the case);

    4. Form 5546 (Charge out) or AMDIS print; (required)

    5. An Examination Report (Form 4549, a PC Report, or computer report input documents) or No-Change Letter; (required)

    6. The closing document with the Agreement Date; (required if applicable)

    7. Correspondence and Telephone Communications (in date order with most current date first); (if present)

    8. Form 4700, Work papers, closing package with Current TSUMY attached to the top, and Schedule K-1, in descending date order of OYD’s(required);

    9. Misc. papers; (if present)

    10. A Form 8339 for each key case adjustment impacting the assessment; or in lieu of the Form 8339 a TSCHG print notated with the name of the person who did the input; (required)

    11. Form 3198; (if present)

    12. Form 5600; (if present)

    13. History Sheet (Form 12616). Place the RGS case history to the back of the Form 12616; (required) and

    14. Form 895. (if present)

  2. The report writer will indicate on the history sheet what letters should be issued or any additional actions that may be required. The history sheet will also indicate the appropriate closing action. The report writer is responsible for instructing clerical and closing operators of the appropriate actions required based on the type of closure.

  3. For cases closed no change (DC 02) through the GII, cases will include the following:

    1. Form 5344 on top of the file, and in any order;

    2. Return or electronic copy;

    3. Original Schedules K-1; (if present)

    4. Amended return stapled to the back no DLN;

    5. History Sheet;

    6. Form 5546 or AIMS print;

    7. Form 8339 or TSCHG print;

    8. Closing Package, unless stored electronically on RGS/CEAS. If electronic, that fact must be noted on history sheet;

    9. TSUMYI Print;

    10. Efforts should be made to discard of any unneeded prints in the folder.

Reports and Accomplishment

  1. The PCS generates the administrative reports used to monitor the suspensed returns and the related key cases.

  2. The level to which unit and dollar accomplishments are distributed is now restricted to the National Headquarters and the Area.

Reports
  1. Each CPF will use PCS reports to monitor linked returns. Specific information is provided on PCS reports in IRM 4.29, Pass-through Control System (PCS) Handbook. The CPF personnel should use the Handbook if they have questions about PCS generated reports.

  2. Cases in status code 33, Employee Group Code 54XX, will be included on the CPF PCS reports. These criteria, although not all will be used for every report, are also used to determine CPF staffing levels and for specific measurements.

    1. ILSC related partner or shareholder returns that are in area office possession for examination issues will not be in the CPF physical inventory.

    2. However, these returns (not Joint Committee, Coordinated Industry Case (CIC) corporate, or other corporate specialty cases) are sent to the CPF for suspense if the ILSC examination is completed before a TEFRA entity examination, if any.

    3. Centralized Case Processing will update the case to Employee Group Code 5417, Status Code 33, and the Primary and Secondary Business Codes of the CPF before shipping the case.

    4. When a return is received, the Employee Group Code should be updated to any other valid 54XX employee group code. The CPF will review the return to ensure it doesn’t meet the criteria in IRM 4.31.3.5.8.1, TEFRA Partnership Exam With Unresovled ILSC Partner Exam, or IRM 4.31.3.5.8.2, ILSC Partnership Exam With Unresovled TEFRA Partner Exam. If the return should be held in the field, the case will be returned the field for suspense. Review IRM 4.4.33 before accepting the return into inventory. AIMS should also be monitored for records in EGC 5417 where a return was not received. In such instances, the return either needs to be located, or the AIMS updated back to the prior EGC.

Accomplishments and Inventory
  1. Accomplishments for CPF closures where the report writing was done in the campus (TEFRA and ILSC) will be closed in employee group code 54XX according to the designated breakouts.

  2. The results for returns are found on AIMS Table 38 which is used by Headquarters.

    1. PCS Report 8-3(N) reflects CPF ILSC results by links closed; it also reflects inventory as of the report period for report writing and Suspense.

    2. PCS Report 2-3(N) is the weekly Report Writing ILSC inventory; the inventory differs from the PCS Report 8-3(N) in that returns with a package indicator are not included in the 2-3(N) Report.

    3. Report 8-3(N) is a weekly report, and Table 38 is a monthly report.

    Note:

    Remember: PCS reports deal with linkages; AIMS Tables deal with returns.