4.37.1 Financial Products Specialty

Manual Transmittal

August 12, 2019

Purpose

(1) This transmits revised IRM 4.37.1, Financial Products and Transactions, Financial Products Specialty.

Background

This material was revised to reflect changes in the Large Business and International (LB&I) organization, the LB&I Examination Process, and the Enterprise Activities Practice Area.

Material Changes

(1) Added internal controls subsection per the requirements in IRM 1.11.2, Internal Management Documents System, Internal Revenue Manual (IRM) Process. Subsequent subsections were reorganized and renumbered.

(2) Referenced to changes in LB&I Examination Process in IRM Section 4.46.1, LB&I Examination Process, General Information and Definitions.

(3) The Financial Products Specialty is included under the Enterprise Activities Practice Area.

(4) Director of Field Operations was changed to director of Financial Institutions and Products (FIP). The FIP director oversees the Financial Products specialists and the FIP practice networks.

(5) Minor changes were made to the roles of the territory manager, team manager, and financial products specialist.

(6) The instructions related to requesting financial products specialist assistance via the Specialist Referral System (SRS) were updated.

(7) IRM 4.37.1.2.1 was revised to add the Financial Products responsibilities under the LB&I Examination Issue Selection and Collaboration Process under IRM 4.46.3.2.1.

(8) References to the Pre-Filing and Technical Guidance (PFTG) office were deleted.

(9) Technical advisors in PFTG was changed to subject matter experts in the LB&I practice networks.

(10) Added new Exhibit 4.37.1-1, Manager’s Initial Risk Assessment (MIRA) and renumbered former Exhibit 4.37.1-1 as Exhibit 4.37.1-2, Sample Financial Products Specialist’s Report Cover Sheet.

(11) Various minor editorial, typographical and grammatical changes were made throughout this IRM.

Effect on Other Documents

IRM 4.37.1 dated October 29, 2010 is superseded.

Audience

All operating divisions and functions.

Effective Date

(08-12-2019)

Peter M. Puzakulics
Director, Financial Institutions and Products
Enterprise Activities Practice Area
Large Business and International Division

Program Scope and Objectives

  1. Purpose: This IRM section defines the Financial Products Specialty (FPS) program including the organization of the specialty area, roles and responsibilities, coordination with the LB&I Examination Process (LEP) including issue management and related definitions.

  2. Audience: Financial products specialists and any IRS employee who needs to make a referral to an FP specialist.

  3. Policy Owner: Director, Enterprise Activities Practice Area.

  4. Program Owner: Director, Financial Institutions and Products (FIP), Enterprise Activities Practice Area.

  5. Primary Stakeholders: LB&I executives, senior managers, frontline managers, program analysts and FPS employees and other IRS employees who may request the services of an FP specialist.

Background

  1. The FPS Program evolved from tax shelters involving commodity, option and government security straddles into a vast array of complex tax issues.

  2. FPS can impact all types of tax examinations, including examinations of:

    1. Individuals

    2. Partnerships

    3. Corporations

    4. Exempt Organizations

    5. Employee Plans

    6. Estates/Trusts

    7. Real Estate Investment Trusts (REITs)

    8. Real Estate Mortgage Investment Conduits (REMICs)

    9. Regulated Investment Companies (RICs)

  3. Financial products are instruments utilized in the global marketplace. They include, but are not limited to, conventional financial instruments such as:

    1. Stocks

    2. Bonds

    3. Mortgages

    4. Foreign Currency

    5. Physical Commodities

  4. Financial products also include derivatives of conventional financial instruments, such as:

    1. Forward Contracts

    2. Option Contracts

    3. Futures Contracts

    4. Notional Principal Contracts (swaps)

    5. Stripped Mortgage-Backed Securities

    6. Structured Notes

    7. Hybrid and/or Synthetic Securities

  5. Derivative securities markets have revolutionized how capital is raised and risk is managed. Financial products are primarily marketed by investment bankers and securities firms. Inter-bank lending and borrowing, foreign exchange trading and security sales occur in global markets, twenty-four hours a day.

  6. Financial arrangements include re-packaging new products or hedging with existing products. Transactions often arbitrage different tax laws that exist between the U.S. and foreign markets and occur in U.S. and foreign subsidiaries and/or branches.

  7. Financial products often involve the financing of business or the direct products or services rendered by a business. FPS may also be used to manage direct product risk, for example, the hedging of price changes.

  8. Generally, issues center around functions handled by the Chief Financial Officer, Treasurer, Comptroller or any other department responsible for worldwide funding, risk management, investing or refinancing in corporations, rather than the tax department.

  9. Financial products tax issues exist for not only the dealer who creates and markets transactions, but also for the customer/end user of the product/transaction. Issues can be geographic. For example, there may be many dealer issues in locations with major financial centers and few or no dealer issues in locations where there are no major financial markets.

  10. Financial product tax issues involve:

    1. Character

    2. Amount

    3. Timing

    4. Source

    5. Debt or equity determinations on hybrid financial instruments

  11. Approaching a financial products issue begins with a series of questions such as:

    • What is the financial product?

    • Where is it traded?

    • On an exchange?

    • Traded at all?

    • Why was the transaction done?

    • Who is the taxpayer?

Program Objectives

  1. The FPS program seeks to identify, develop and resolve financial products tax issues that are:

    1. National in scope

    2. Significant in dollars

    3. Important to tax administration

    4. Important for uniform and consistent treatment

  2. FPS participates in the LB&I Examination Process (LEP), generally as issue team members and issue team managers. FPS works collaboratively with the geographic practice area managers in review of potential tax risks and performs timely, effectively planned and managed examinations of financial products and transactions providing for quality results and minimization of burden to the Internal Revenue Service and to taxpayers.

  3. FPS accumulates and disseminates to the field examination techniques, information about tax avoidance and evasion schemes, and other information useful in planning and conducting examinations.

  4. FPS monitors the progress and results of issues through various information management systems.

  5. FPS works closely with geographic practice area exam teams, international examiners, subject matter experts within the practice networks, and the Office of Chief Counsel in order to achieve FPS objectives and goals.

Acronyms

  1. See Exhibit 4.37.1-3, Acronyms, for a list of commonly used acronyms.

Responsibilities and Organization

  1. The FPS program provides an organizational structure that is flexible and allows for the timely identification and dissemination of information in a uniform and consistent manner.

  2. The FPS program is organized under the Enterprise Activities Practice Area of the LB&I Division. However, FPS is responsible for providing technical expertise across all operating divisions. FPS is supported by the Director of Financial Institutions and Products, territory managers (TTM), team managers (TM) and FP specialists located throughout the country.

  3. FP specialists are revenue agents who possess broad expertise in tax law and who have been given special training in financial instruments and terminology, financial industry practices and the taxation of financial instruments and markets. FP specialists serve as issue team members within the LEP. See IRM 4.46.1.1.3.5, Issue Team Member Roles and Responsibilities.

Director of Financial Institutions and Products
  1. The director of Financial Institutions and Products (FIP) provides management oversight of the FPS program and of the FIP practice networks.

  2. The FIP director ensures that the FPS program provides:

    1. Recommendations for policy and legislative changes

    2. Uniform and consistent treatment of industry issues

    3. Timely technical assistance to the field

    4. Financial marketplace research and analysis

  3. FIP director management of the FPS program includes:

    1. Planning budgeting, staffing and training

    2. Developing measures to gauge and monitor program effectiveness

    3. Developing and monitoring management information systems

    4. Coordinating and conducting visits to territories and teams

    5. Controlling nationally coordinated projects

    6. Developing and recommending referral criteria

    7. Developing of position descriptions

    8. Maintaining a directory of FPS program personnel

  4. The FIP director also oversees design and delivery of FPS training programs, in coordination with the Human Capital and Learning office.

  5. The FIP director also provides FPS program oversight by:

    1. Issuing guidelines and procedures

    2. Assisting territories to achieve uniform direction

    3. Providing technical and administrative assistance when necessary

    4. Resolving differences between territories/operating divisions

    5. Acting as liaison between the field and other national functions

  6. The FIP director communicates directly with the Financial Products TTMs and TMs when warranted.

  7. Additional FIP director responsibilities include:

    1. Planning the expansion of FPS, as necessary, to improve efficiency

    2. Ensuring matters of importance related to the FPS program are timely brought to the attention of the FIP director, including recommendations for improvement

    3. Promoting effective communication within the FPS program regarding financial product tax issues

Territory Manager
  1. The FP territory managers (TTMs) are responsible for their respective territories to achieve maximum utilization of specialist staff days and case coverage.

  2. The TTMs periodically conduct workload studies to determine the number and location of FP specialists needed for their territories.

  3. The TTMs support the FPS program within their territories. This includes:

    1. Issuing written FPS program procedures

    2. Providing for adequate training, both internal and external

    3. Conducting periodic group and case visits to evaluate the effectiveness of the FPS program

    4. Ensuring that teams within the territory are responding timely to mandatory and voluntary case referrals

    5. Ensuring FPS team managers and specialists are actively engaged in the examination process

    6. Ensuring that the director is timely informed of the status of all FPS program projects including those crossing territory lines;

    7. Ensuring that FPS program data contained in various information systems is complete, accurate and updated timely

    8. Providing new FPS team managers and specialists with managerial and technical assistance, as applicable, including on-the-job training

    9. Ensuring that FPS team managers timely evaluate their FP specialists

    10. Adhering to IRM 4.46.1.3, Principles of Collaboration

Team Manager
  1. Duties and responsibilities of the FP team manager (TM) include but are not limited to:

    1. Advising the FP TTM of staffing, funding, and training needs

    2. Supporting the LB&I issue selection and collaboration process (ISCP) with case managers, see IRM 4.37.1.2.4, Issue Selection and Collaboration Process.

    3. Timely assigning or rejecting referrals on the Specialist Referral System (SRS) based upon the case/issue and available resources

    4. Ensuring that FP referrals are addressed as early as possible and that FP specialist participation does not delay completion of the examination

    5. Timely updating and verifying the accuracy of data in information reporting systems used

    6. Communicating to the director through the TTM any new or unusual tax issues, examination techniques and tax avoidance schemes as soon as they are discovered or developed

    7. Ensuring that LQMS auditing standards are followed and measurements are monitored

    8. Supporting local Appeals and Counsel offices with FP specialists when required, for example for litigation support

    9. Evaluating FP specialists timely

    10. Encouraging regular written feedback from the referring team or group manager regarding the performance of the FP specialists assigned to a case

    11. Being involved in the FP portion of cases including, where possible and if schedule permits, case visits, exam planning meetings, mid-cycle reviews, issue resolution meetings with the taxpayer, and post audit critique meetings

    12. Ensuring that the requirements of Policy Statement P-4-5, Rotation of Examination Personnel, are met

    13. Ensuring that FP specialists complete all required examination steps and forms, including audit plans, risk analyses, examination reports, and post audit critiques

    14. Reviewing and approving all required forms and reports to be issued

    15. Ensuring that FP specialists correctly report all time related to their assigned cases

    16. Providing knowledgeable FP specialists to teach training classes for FP program training and for awareness training for other IRS personnel

    17. Ensuring that key FP issues are coordinated with the subject matter practice networks

    18. Adhering to IRM 4.46.1.1.3.2, Issue Manager Roles and Responsibilities

Financial Products (FP) Specialists
  1. Duties and responsibilities of the FP specialist include, but are not limited to:

    1. Providing specialized technical expertise to all business units within the IRS

    2. Providing accountability for efficient, objective and professional expertise leading to the timely completion and resolution of financial product tax issues

    3. Participating as a team member in the examination process, which includes planning the examination, performing risk analyses, prioritizing issues, and determining the time required

    4. Attending meetings with the examination team and taxpayer, as necessary

    5. Preparing and discussing information document requests with the taxpayer

    6. Working with the team manager, team coordinator, and other team members or revenue agents to develop and resolve financial product tax issues

    7. Working to resolve conflicts within the team and elevating conflicts, as necessary, to the FP team manager

    8. Providing feedback about the examination to the FP team manager

    9. Coordinating with the subject matter practice networks, Office of Chief Counsel and Office of Appeals, as needed

    10. Adhering to IRM 4.46, LB&I Examination Process

Related Resources

  1. The FPS website is https://irssource.web.irs.gov/LBI/SitePages/FP.aspx.

Case/Issue Referral Criteria/Procedures

  1. Financial Products Specialty workload is identified through the Specialist Referral System (SRS) located on the LB&I SharePoint Site Page for Specialists. Instructions and criteria for mandatory referrals are located on the SRS website.

Referrals

  1. Financial Products Specialty workload is identified through various processes.

    1. Cases are identified through case managers or their delegates assigning IC returns to FP team managers in the Case-Built File (CBF) inventory system. Any return received by a case manager can be assigned to an FP manager for a Specialist Initial Risk Assessment (SIRA). FPS encourages case managers to use the Manager Initial Risk Assessment (MIRA) document to assist them in identifying criteria that should be considered when deciding whether to assign a return to FPS in CBF for the initial risk assessment. See Exhibit 4.37.1-1, Manager’s Initial Risk Assessment (MIRA). See also IRM 4.46.3.2.1, LB&I Examination Issue Selection and Collaboration Process (ISCP).

    2. Case managers should forward a copy of the Form 3210 list of returns received from PSP to the FP manager. This will allow the FP manager to ask for any return to be assigned to them in CBF for initial risk assessment and it allows the FP manager to be aware of the returns that the case manager is considering to be put under audit.

    3. If a revenue agent starts a case without an FP specialist already assigned, the revenue agent can make a referral to FP in the SRS.

    4. For workload identified through the campaign selection process, the FP specialist will be involved in various campaigns on an as needed basis.

    5. For preparation of referrals, see IRM 4.37.1.2.4 for information about assigning cases to FP specialist in CBF inventory and completion of FP SIRA documentation

Mandatory FP Specialist Referrals

  1. All Large Corporate Compliance (LCC) cases are mandatory FPS referrals at the beginning of the examination to allow the Financial Products specialist to participate during the planning phases.

Voluntary FP Specialist Referrals

  1. The FPS program encourages referrals. Returns not requiring mandatory referrals may be referred if FP specialist assistance is appropriate. Examiners should make referrals as early as possible upon identification of a financial products issue. Informal assistance is available to determine if a referral should be made. Informal assistance may not be used in lieu of mandatory referral requirements.

  2. Although not identified as mandatory referrals on SRS, the FPS program recommends that CBF assignments be made for Form 1065 partnerships and joint ventures with assets greater than $10 million in order for an initial risk assessment to be conducted.

Issue Selection and Collaboration Process

  1. All returns received by case managers from PSP via a Form 3210 must be considered for assignment to an FP manager for an FP SIRA.

    1. Upon receipt of the return assignment in CBF inventory, the FP TM will promptly review (generally within 5 business days) and initiate appropriate action, including necessary updates to various information systems.

    2. The FP TM or delegate will conduct an initial risk assessment of the return. Risk assessments will consist of an evaluation of the return and its attached schedules and statements via either LIN link or EUP. In addition, the FP TM should consider whether external information should be researched for additional information to determine the level of risk associated with the return as a whole or with a particular issue.

    3. Upon completion of the FP SIRA, the assessor in consultation with the FP TM will grade the issue/return either A=High Risk, B=Medium Risk or C=Low Risk.

    4. The assessor will input the SIRA into the SIRA document located in the LB&I Taxpayer Registry column of the CBF inventory page.

    5. The SIRA document contains a description of what information was evaluated in making the grade determination, a description of the taxpayer and a description of the issue. In addition, the SIRA document requires an initial UIL and SAIN codes.

    6. The SIRA document requires either the name of the FP specialist who will be assigned to the case, or if it is not known at the time the SIRA is completed, To Be Determined (TBD) should be entered. If the return does not have an issue or has an issue graded C, a comment should be inserted in name section saying no referral required.

    7. Upon completion of the SIRA document, it shall be submitted, and the system will transfer the document to the CBF for the revenue agent and case manager to see.

    8. Upon notice of the completed FP SIRA, the case manager should contact the FP TM to arrange a manager collaboration meeting for all A and B graded cases.

    9. The manager collaboration meeting will cover the logistics of who will work audit, what the issue is, and when the audit will start.

    10. The revenue agent, upon assignment of the case, will input the information from the SIRA document into SRS which notifies the FP TM of audit start.

    11. The case will be assigned to FP specialist upon receipt of an SRS notification.

    12. If the FP team does not have resources to work the A or B graded case/issue, the FP TM will transfer the case to the FP overflow pool.

    13. The FP program will assign an overflow pool monitor who will be responsible for transferring A and B graded cases to FP teams who have the resources to apply to the case.

    14. The FP specialist will conduct a collaboration meeting with the revenue agent and other team members as required to determine the FP specialist’s level of participation in the audit. The collaboration meeting will follow the guidelines outlined in the Collaboration Assessment Matrix.

    15. The FP manager will review the audit plan and risk analysis prepared by the FP specialist. FP team manager approval is necessary before it is submitted to the case manager and taxpayer.

Collaboration Assessment Matrix
  1. The Collaboration Assessment Matrix (CAM) was designed for two purposes:

    1. To help assess the level of involvement the FP specialist may need in collaboration the revenue agent assigned to the case or issue

    2. To facilitate knowledge and skills sharing and transfer

    See IRM Exhibit 4.46.3-4, Collaboration Assessment Matrix (CAM), for the CAM.

FP Specialist’s Report

  1. This subsection covers the preparation, review and routing of the FP specialist’s report.

Preparation of FP Specialist's Report

  1. The FP specialist will prepare an FP specialist's report immediately upon completion of the assignment. The report will be prepared for all referrals, including no change cases/issues.

  2. The FP specialist's report will use the proper form(s) required in IRM 4.46.6, LB&I Examination Process, Workpaper and Report Resources, IRM 4.10.8, Examination of Returns, Report Writing, depending on the nature of the referral. The FP report must also include a cover sheet, listing administrative data such as date started, date completed, time charged and proposed adjustments by UIL code and disposition. See Exhibit 4.37.1-2 for a sample FP specialist's report cover sheet. Please note that there are a variety of formats for this cover sheet that may be in use. The cover sheet in Exhibit 4.37.1-2 is just one example.

Review and Routing of FP Specialist's Report

  1. The FP specialist's report will be routed to the FP team manager for review and approval.

  2. The FP team manager, or designee, will review and approve the FP specialist's report promptly (generally within five business days) to avoid any delay in disposition and closure of the case.

  3. The final FP specialist’s report will be forwarded to the referring manager.

Financial Products Issues and Examination Techniques

  1. See the Financial Products website at https://irssource.web.irs.gov/LBI/SitePages/FP.aspx for current and emerging issues and audit techniques.

  2. See also IRM 4.46, LB&I Examination Process and IRM 4.10, Examination of Returns for auditing techniques.

Managers Initial Risk Assessment (MIRA)

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Specialist Issue Identified: Financial Products

  1. Cases falling within the NAICS codes listed below should be reviewed
    Yes / No

  2. Is there a straddle Form 6781 attached to return?
    Yes / No

  3. Are there disclosure Forms 8886, 8275, 8275-R, 8918 attached to the return?
    Yes / No

  4. Is there anything on Schedule M-3, Part II, Mark to Market, Line # 14a to 14d?
    Yes / No

  5. Is there a forex (foreign currency) item on the return?
    Yes / No

  6. Other issues requiring financial products support?
    Yes / No

Sample Financial Products Specialist’s Report Cover Sheet

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Acronyms

The table below defines commonly used acronyms:

Acronym Definition
CBF Case-Built File
EUP Employee User Portal
FIP Financial Institutions and Products
FP Financial Products
FPS Financial Products Specialty
LEP LB&I Examination Process
LIN LB&I Imaging Network
MIRA Manager Initial Risk Assessment
SIRA Specialist Initial Risk Assessment
SRS Specialist Referral System
TM Team Manager
TTM Territory Manager
UIL Uniform Issue List