4.37.1 Financial Products Specialty


  1. This handbook covers the Financial Products (FP) Specialty. Topics include:

    • Introduction

    • Background

    • Objectives

    • Organization

    • Responsibilities

    • Case/Issue Referral Criteria/Procedures & FP Report

    • Financial Product Issues and Examination Techniques


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

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

    • Individuals

    • Partnerships

    • Corporations

    • Exempt Organizations

    • Employee Plans

    • Estates/Trusts

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

    • Stocks

    • Bonds

    • Mortgages

    • Foreign Currency

    • Physical Commodities

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

    • Forward Contracts

    • Option Contracts

    • Futures Contracts

    • Notional Principal Contracts

    • Stripped Mortgage-Backed Securities

    • Structured Notes

    • 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. Financial products 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:

    • Character

    • Amount

    • Timing

    • Source

    • 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?

    • Off exchange?

    • Traded at all?

    • Why was the transaction done?

    • Who is the taxpayer?


  1. The FP Specialty 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 FP Specialty seeks to identify, develop and resolve financial product tax issues which are:

    • National in scope

    • Significant in dollars

    • Important to tax administration

    • Important for uniform and consistent treatment

  3. The FP Specialty 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.

  4. The FP Specialty accumulates and disseminates to the field examination techniques, information about tax avoidance and evasion schemes, and other information useful in planning and conducting examinations.

  5. The FP Specialty monitors the progress and results of issues through various information management systems.

  6. The FP Specialty works closely with domestic and international examiners, Technical Advisors in the Office of Pre-Filing and Technical Guidance, and the Office of Chief Counsel in order to achieve FP Speciality objectives and goals.


  1. This sub-section discusses the organization of the FP Specialty.


  1. The FP Speciality is organizationally located in the Field Specialists Industry of the Large Business & International (LB&I) Operating Division. However, the FP Specialty is responsible for providing technical expertise across all operating divisions. In order to accomplish this charge, the FP Specialty has a decentralized footprint; it is supported by Directors of Field Operations (DFOs), Territory Managers (TTM,) Team Managers (TM), and Financial Products Specialists located throughout the country.

  2. Financial Products 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. (See IRM for detail about the role of Financial Products Specialists as examination team members.)


  1. This sub-section describes functional responsibilities across the board.

Director of Field Operations (DFO)
  1. The Field Specialists Directors of Field Operations (DFOs) provide management oversight of the FP Specialty and of the other Field Specialties.

  2. The DFOs ensure that the FP Specialty provides:

    1. Recommendations for policy and legislative changes;

    2. Uniform and consistent treatment of industry issues;

    3. Timely technical assistance to the field; and

    4. Financial marketplace research and analysis.

  3. DFO Management of the FP Specialty includes:

    1. Planning budgeting, staffing and training ;

    2. Developing measures to gauge and monitor Specialty 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; and

    8. Maintaining a directory of FP Specialty personnel.

  4. The DFOs also oversee design and delivery of FP Specialty training programs, in coordination with the Learning and Development office.

  5. The DFOs also provide FP Specialty oversight by:

    1. Issuing guidelines and procedures;

    2. Assisting territories to achieve uniform Specialty direction;

    3. Providing technical and administrative assistance when necessary;

    4. Resolving differences between territories/operating divisions; and

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

  6. The DFOs communicate directly with the Financial Products Territory Managers and Financial Products Team Managers when warranted.

  7. Additional DFO responsibilities include:

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

    2. Ensuring matters of importance related to the FP Specialty are timely brought to the attention of the Director of Field Specialists including recommendations for improvement; and

    3. Promoting effective communication within the FP Specialty regarding financial product tax issues .

Territory Manager (TTM)
  1. The Financial Products Territory Managers (TTMs) are responsible for monitoring their respective territories to achieve maximum utilization of specialist staff days and case coverage.

  2. The Financial Products TTMs periodically conduct workload studies to determine the number and location of Financial Products Specialists needed for their territories.

  3. The Financial Products TTMs support the FP Specialty within their territories. This includes:

    1. Issuing written FP Specialty procedures;

    2. Providing for adequate training, both internal and external;

    3. Conducting periodic group and case visits to evaluate the effectiveness of the FP Specialty;

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

    5. Ensuring Financial Products Team Managers and Specialists are actively engaged in the examination process;

    6. Ensuring that the DFOs are timely informed of the status of all FP Specialty projects including those crossing territory lines;

    7. Ensuring that FP Specialty data contained in various information systems is complete, accurate and updated timely;

    8. Providing new Financial Products Team Managers and Specialists with managerial and technical assistance, as applicable, including on-the-job training;

    9. Ensuring that Financial Products Team Managers timely evaluate their Financial Products Specialists; and

    10. Adhering to IRM 4.51.1, Rules of Engagement.

Team Manager (TM)
  1. Duties and responsibilities of the Financial Products Team Manager include but are not limited to:

    1. Advising the Financial Products TTM of staffing, funding, and training needs;.

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

    3. Ensuring that FP referrals are addressed as early as possible and that Financial Products Specialist participation does not delay completion of the examination;

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

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

    6. Ensuring that LQMS auditing standards are followed and measurements are monitored;

    7. Supporting local Appeals and Counsel offices with Financial Products Specialists when required, for example for litigation support;

    8. Evaluating Financial Products Specialists timely;

    9. Encouraging regular written feedback from the referring team or group manager regarding the performance of the Financial Products Specialists assigned to a case;

    10. Being involved in the Financial Products 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;

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

    12. Ensuring that Financial Products Specialists complete all required examination steps and forms, including audit plans, risk analyses, examination reports, and post audit critiques. Further, the team manager reviews and approves all required forms and reports to be issued;

    13. Ensuring that Financial Products Specialists correctly report all time related to their assigned cases;

    14. Providing knowledgeable Financial Products Specialists to teach training classes for FP Specialty training and for awareness training for other IRS personnel;

    15. Ensuring that key Financial Products issues are coordinated with the Office of Pre-Filing and Technical Guidance; and

    16. Adhering to IRM 4.46, LMSB Guide for Quality Examinations.

  2. Management of differences will be resolved according to IRM, Management of Differences.

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

    1. Providing specialized technical expertise to all business units within the Internal Revenue Service;

    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 Financial Products Team Manager;

    9. Coordinating with the Office of Pre-Filing and Technical Guidance, Office of Chief Counsel and Office of Appeals, as needed; and

    10. Adhering to IRM 4.46, LMSB Guide for Quality Examinations

The Office of Pre-Filing and Technical Guidance (PFTG)
  1. PFTG provides field assistance by:

    1. Providing Technical Advisors for financial products and transactions;

    2. Providing technical guidance and assistance through postings on the Financial Products Technical Guidance website located on the LB&I intranet website;

    3. Providing technical assistance to field personnel, including on-site assistance when necessary;

    4. Determining and developing emerging issues, including the creation of emerging issue alerts and papers;

    5. Maintaining and updating, where necessary, issues designated as controlled or coordinated;

    6. Coordinating issues identified as Listed Transactions, including coordinating disclosures received by the Office of Tax Shelter Analysis; and

    7. Providing assistance on alternative issue strategies, for example advance pricing agreements (APA), and Compliance Assurance Process (CAP), etc.

  2. Coordination by the PFTG includes:

    1. Interacting with industry examination teams;

    2. Coordinating technical issues with Counsel/Appeals;

    3. Coordinating with related Technical Advisors; and

    4. Reviewing new forms and publications.

Case/Issue Referral Criteria/Procedures and FP Report

  1. This sub-section discusses case/issue referral criteria and procedures as well as the Financial Products Specialist's Report.


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

Mandatory Financial Products Specialist Referrals

  1. All cases shown below are mandatory Financial Products Specialist referrals at the beginning of the examination to allow the Financial Products Specialist to participate during the planning phases:

    1. All Coordinated Industry Cases (CIC);

    2. Cases with activity codes 221,223,226-230 and 290; and

    3. Cases with activity code 483 that have gross receipts or deductions of $1,000,000 or more.

Voluntary Financial Products Specialist Referrals

  1. The Financial Products Specialty encourages referrals. Returns not requiring mandatory referrals may be referred if Financial Products 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. Examiners may not cite informal assistance as authority for adjustments. Financial Products Specialists may spend up to eight hours for consultation on a specific case.

  2. Although not identified as mandatory referrals on SRS, the Financial Products Specialty recommends that referrals be made for Form 1065 partnerships and joint ventures with assets greater than $10 million.

Preparation of Financial Products Specialist Referrals

  1. All requests for Financial Product Specialist involvement must be made on the SRS.

    1. Upon receipt of the referral on the SRS, the Financial Products team manager will promptly review and initiate appropriate action, including necessary updates to various information systems.

    2. If the referral is accepted, the referral will be assigned on the SRS.

    3. If the referral is rejected, the reason will be indicated on the SRS.

    4. For an accepted referral, the Financial Products Specialist will prepare an audit plan. The Financial Products Team Manager will review and approve the audit plan before forwarding it to the referring manager.

Preparation of Financial Products Specialist's Report

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

  2. The Financial Products Specialist's Report will use the proper form(s) required in IRM 4.46, LMSB Guide for Quality Examinations and Section 8, Report Writing of IRM 4.10, Examination of Returns, 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 4.37.1-1 for a sample Financial Products Specialist's Report cover sheet. Please note that there are a variety of formats for this cover sheet that may be in use. The Exhibit in 4.37.1-1 is just one example.

Review and Routing of Financial Products Specialist's Report

  1. The Financial Products Specialist's Report will be routed to the Financial Products Team Manager for review and approval.

  2. The Financial Products Team Manager, or designee, will review and approve the Financial Products Specialist's Report promptly to avoid any delay in disposition and closure of the case.

  3. The final Financial Products Specialist Report's will be forwarded to the referring manager.

Financial Products Issues and Examination Techniques

  1. See the Financial Products Technical Guidance website on the LB&I intranet website for current and emerging issues and audit techniques.

  2. See also IRM 4.46, LMSB Guide for Quality Examinations and IRM 4.10, Examination of Returns for auditing techniques.

Sample Financial Products Specialist’s Report Cover Sheet

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