- 4.46.3 Planning the Examination
- 184.108.40.206 Overview of the Planning Phase
- 220.127.116.11.1 Initial Risk Assessment of the Return
- 18.104.22.168.2 Decision to Survey a Return
- 22.214.171.124.3 Planning - Return Assignment
- 126.96.36.199.4 Planning - Review of Return
- 188.8.131.52.4.1 Conflict of Interest
- 184.108.40.206.5 Specialist Referrals
- 220.127.116.11.5.1 Specialist Referral System (SRS)
- 18.104.22.168.6 Contacting the Taxpayer
- 22.214.171.124 Risk Analysis Process
- 126.96.36.199.1 Examiner's Preliminary Risk Analysis - Information Resources
- 188.8.131.52.1.1 Federal, State and Local Agencies
- 184.108.40.206.2 Counsel and/or Technical Specialists
- 220.127.116.11.3 Risk Analysis Decision Points
- 18.104.22.168.4 Risk Analysis Collaboration
- 22.214.171.124.5 Risk Analysis Factors to Consider
- 126.96.36.199.5.1 Overall Tax Impact
- 188.8.131.52.5.2 Analyzing Schedules M-2 and M-3
- 184.108.40.206.5.3 Materiality
- 220.127.116.11.5.4 Outside Expert Program (OEP)
- 18.104.22.168.6 Documenting the Risk Analysis
- 22.214.171.124 Internal Planning and Internal Planning Discussions
- 126.96.36.199.1 Third Party Contacts
- 188.8.131.52.2 Correspondence
- 184.108.40.206.3 Financial Interests or Other Conflicts of Interest and Disclosure
- 220.127.116.11.4 Internal Planning Preparation
- 18.104.22.168.5 Review of Taxpayer Information
- 22.214.171.124.6 Internal Planning Discussion(s)
- 126.96.36.199.7 Preparation Before Internal Planning Discussions
- 188.8.131.52.8 Internal Planning Discussion Agenda
- 184.108.40.206.9 Notification of Planning Discussion(s)
- 220.127.116.11.10 Holding the Internal Planning Discussions
- 18.104.22.168.10.1 Team Member Briefing
- 22.214.171.124.10.2 Issue Identification/Risk Assessment
- 126.96.36.199.10.3 Resource Allocation and Utilization (Issue Teams)
- 188.8.131.52.10.4 Setting Tentative Timelines for the Case and Issues
- 184.108.40.206.10.5 Review and Documentation of Preliminary Examination Procedures
- 220.127.116.11.10.6 Consolidation of Common Examination Procedures
- 18.104.22.168.10.7 Preparation for Meeting with Taxpayer
- 22.214.171.124.10.8 Time Schedule Coordination
- 126.96.36.199.10.9 Communication Methods
- 188.8.131.52.10.10 Administrative Procedures
- 184.108.40.206.11 Documenting the Internal Planning Discussion(s)
- 220.127.116.11 Compliance Checks Summary
- 18.104.22.168 Opening Conference (Meeting)
- 22.214.171.124.1 Opening Conference (Meeting) Agenda
- 126.96.36.199.1.1 Sample Agenda
- 188.8.131.52.1.2 Publicly Held Entity
- 184.108.40.206.1.3 Privately Held Entity
- 220.127.116.11.1.4 Suggested Inquiries
- 18.104.22.168.2 Timing of Opening Conference (Meeting)
- 22.214.171.124.3 Administrative-Only Opening Conference (Meeting)
- 126.96.36.199.4 Combined Administrative and Preliminary Risk Analysis Opening Conference (Meeting)
- 188.8.131.52.5 Discussion of Preliminary Risk Analysis
- 184.108.40.206.6 Opening Conference (Meeting) Participants
- 220.127.116.11.7 Materiality Threshold Discussions
- 18.104.22.168.8 Claims Discussion
- 22.214.171.124.9 Concluding the Opening Conference (Meeting)
- 126.96.36.199 LB&I Claims Process
- 188.8.131.52.1 Expectations with Respect to Claims
- 184.108.40.206.1.1 The 30-day Window Expectation
- 220.127.116.11.1.2 Fully Documented Claim(s)
- 18.104.22.168.1.3 Timely Notification
- 22.214.171.124.2 Guidelines for Reviewing LB&I Claims
- 126.96.36.199.2.1 Claims Meeting the Standards of Treas. Reg. 301.6402-2
- 188.8.131.52.2.2 Claims Not Meeting the Standards of Treas. Reg. 301.6402-2
- 184.108.40.206.2.3 Declining to Act on a Claim
- 220.127.116.11.2.4 Claims Meeting the Standards of Treasury Regulation 301.6402-3
- 18.104.22.168.2.5 Claims Not Meeting the Standards of Treasury Regulation 301.6402-3
- 22.214.171.124.3 Risk Assessing Claims Issue(s)
- 126.96.36.199.4 Alpha-Prefix to Identify Form 5701 Claim Issue(s)
- 188.8.131.52.5 Grouping of Claims and Affirmative Issue(s)
- 184.108.40.206.6 Netting of Claim Issue(s) After the 30-day Window
- 220.127.116.11.7 Claims Received Late in the Examination Adversely Impacting the ECD
- 18.104.22.168.8 IMS Time Codes for Examining Claims
- 22.214.171.124 Issue Discussion Meetings
- 126.96.36.199.1 Issue Discussion Objectives
- 188.8.131.52 Examination Plan
- 184.108.40.206.1 Elements of an Examination Plan
- 220.127.116.11.2 Taxpayer Review of the Examination Plan
- 18.104.22.168.3 Signing the Examination Plan
- 22.214.171.124.4 Revising the Examination Plan
- 126.96.36.199.5 Issue-Based Examination Plan
- 188.8.131.52.6 IC Examination Plan
- 184.108.40.206 Coordinated Industry Case (CIC) Information
- 220.127.116.11.1 CIC Examination Plan
- 18.104.22.168.2 Timing (CIC cases)
- 22.214.171.124.3 Sections of the CIC Examination Plan
- 126.96.36.199.3.1 Part I - Taxpayer Information Section (Examination Arrangements CIC cases)
- 188.8.131.52.3.2 Part II - Service Management Information Section (Examination Program CIC cases)
- 184.108.40.206.3.2.1 Items Included in Part II of the CIC Examination Plan
- 220.127.116.11.3.2.2 Modification of Part II of the CIC Examination Plan
- 18.104.22.168.3.3 Part III, CIC Examination Procedure Section (Examination Assignments)
- 22.214.171.124.3.4 Distribution of CIC Examination Plan
- 126.96.36.199.3.5 Significant Modifications to the CIC Plan
- 188.8.131.52.3.6 Taxpayer Acknowledgement of CIC Plan
- 184.108.40.206.4 Administrative and Processing Details (CIC cases)
- 220.127.116.11.5 Role of the CIC Case Manager (team manager)
- 18.104.22.168.6 Role of the CIC Team Coordinator
- 22.214.171.124.7 Scope of CIC Examination
- 126.96.36.199.8 Special CIC Instructions and Summary of Assignment
- 188.8.131.52.9 Outline of CIC Examination Procedures
- 184.108.40.206.10 CIC Time Planning
- Exhibit 4.46.3-1 LB&I Planning File
- Exhibit 4.46.3-2 Sample Agenda Topics for Internal Planning Meeting(s)
- Exhibit 4.46.3-3 Sample Agenda for Opening Conference (Meeting)
- Exhibit 4.46.3-4 Transfer Pricing Compliance Processes
- Exhibit 4.46.3-5 Compliance Checks Tool
- Exhibit 4.46.3-6 Inspection of Corporate Officers and "Key" Executive Returns
- Exhibit 4.46.3-7 LB&I Guidelines for Reviewing Claims
- Exhibit 4.46.3-8 Risk Assessing Claim Issue(s)
Part 4. Examining Process
Chapter 46. LB&I Examination Process
Section 3. Planning the Examination
March 14, 2016
(1) This transmits revised IRM 4.46.3, LB&I Examination Process, Planning the Examination.
Not all examinations are the same in scope, size, and complexity; therefore, portions of this IRM may be more applicable to some cases than others.
(1) Substantial revisions have been made to 4.46.3, Planning the Examination, to incorporate the issue-driven examination as described in Publication 5125, LB&I Examination Process.
(2) Expanded IRM 220.127.116.11.2 on survey procedures and added IRM 18.104.22.168.2.1 on paperless surveys.
(3) Streamlined IRM 22.214.171.124.5.4, Outside Expert Program, (previously IRM 126.96.36.199.11.1 through IRM 188.8.131.52.11.19), and added website reference.
(4) Replaced Exhibit 4.46.3-4, Compliance Checks Audit Tool, with Exhibit 4.46.3-5, Compliance Checks Tool.
(5) Added IRM 184.108.40.206, LB&I Claims Process, which provides claims expectations as described in the Publication 5125, LB&I Examination Process, and sets a deadline for LB&I taxpayers to file informal claims.
(6) Added IRM 220.127.116.11, Examination Plan, which describes the elements of an examination plan and provides guidelines for taxpayer review, signing and revising the examination plan. Two of the three examination plan options are described in IRM 18.104.22.168.5, Issue Based Examination Plan and IRM 22.214.171.124.6, IC Examination Plan.
(7) Moved Coordinated Industry Case (CIC) Information (previously 126.96.36.199, The Examination Plan) to IRM 188.8.131.52. This is the third examination plan option. This material was not changed.
(8) Removed all references to LIFE examinations.
(9) Removed IRM 184.108.40.206.10, Specialists and Specialists’ Managers, to streamline 4.46.3. The roles and responsibilities for each specialist and specialist managers are provided in other sections of the IRM.
(10) Added Exhibit 4.46.3-6, Inspection of Corporate Officers and "Key" Executive Returns. This exhibit adds information from the LB&I (formerly LMSB) Commissioner memo with the same title dated 8/23/2004.
(11) Added Exhibit 4.46.3-7, LB&I Guidelines for Reviewing Claims, and Exhibit 4.46.3-8, Risk Assessing Claim Issue(s).
(12) As part of the restructuring of IRM 4.46, the following topics, while still relevant, no longer fit in this IRM section. These topics will either be added to other sections of IRM 4.46 or the appropriate IRM section based on the subject matter.
|220.127.116.11.3.3.1||Taxpayer Advocate Service Referrals|
|18.104.22.168.9||Instances when Separate Examinations May Be Warranted|
|22.214.171.124.10||Removing an Entity from Control|
|126.96.36.199.11||Transfer of Primary Group Jurisdiction|
|188.8.131.52.12||Dual Control Resulting from Transfer|
|184.108.40.206.13||Decontrol of Coordinated Industry Cases|
|220.127.116.11.8||Conflict Resolution Resources Available to the Team Manager|
|18.104.22.168.12 and subsections||Assistance and Support|
|22.214.171.124.14 and subsections||Criminal Investigation Participation in LB&I Examinations|
|126.96.36.199.15||Special Examination Features and In-Depth Probes|
|188.8.131.52.16 and subsections||Procedures when Fraud is Indicated|
|184.108.40.206 and subsections||Use of LB&I International|
Susan L. Latham
Director, Program and Business Solutions
Large Business and International Division
Planning the examination is crucial for an efficient examination. In order to use resources efficiently, examinations must be effectively planned using an issue-driven strategy. A successfully executed plan requires active engagement by LB&I and the taxpayer, starting in the planning phase and continuing throughout the entire examination process.
The planning phase begins with an assessment of the tax return for examination potential. Once a return has been selected for examination, there are multiple planning considerations the case manager and agent should address. These considerations include familiarizing themselves with the taxpayer and/or their industry, potential issues requiring specialist’s involvement, pending statute dates along with distribution of case file/taxpayer information to those involved with the issue assessment of the return.
Initial planning discussions lay the groundwork for a mutual exchange of information and understanding that will assist both the exam team and the taxpayer in defining and carrying out an issue-driven examination. Depending on the scope of the examination and the type of taxpayer’s enterprise, the number and type of meetings may vary.
Collaborating internally as well as with the taxpayer will allow the development of a well-defined issue-driven examination plan that can effectively serve as the road map for conducting an examination. Success will largely depend on the transparency, cooperation, and responsiveness of everyone involved in the examination.
An initial assessment to determine if the tax return warrants examination should be completed upon receipt of the case. If you receive inventory that contains instructions, review the instructions and follow the guidance provided. The examiner and case manager should consult and collaborate with specialist managers and examiners for a comprehensive initial assessment. If the return is not selected for examination, procedures to survey the return should be followed. See IRM 220.127.116.11 for Survey Procedures.
Returns can be surveyed either before or after assignment. To survey a return an analysis and evaluation of audit potential and resources must be completed.
A return may be surveyed after assignment if, after conducting the in-depth analysis and evaluating the audit potential, the following conditions are met:
The taxpayer (or representative) has not been contacted.
Taxpayer records have not been inspected.
The examiner determined an examination will most likely not result in a material change in the taxpayer's tax liability.
A Survey Reason Code is required for all LB&I returns that are surveyed either before or after assignment (Disposal Code 31 or 32). The Survey Reason Code (SRC) values and definitions are as follows:
Survey Reason Code A: No Large, Unusual or Questionable (LUQ) Items– This code should be used if the primary reason for the survey is because there are no LUQ items on the return.
Survey Reason Code B: No Change in Prior Year– Use this code if the primary reason for the survey is that the same issues identified on the current year return were just as significant in either of the two preceding years and were no-changed or had a small tax change.
Survey Reason Code C: Beyond Cycle (includes statute issue) – should be used if the primary reason for the survey is based upon currency and/or statute considerations.
Survey Reason Code D: Lack of Resources– should be used if the primary reason for the survey is due to a lack of resources.
Survey Reason Code E: Other – This code should be used if the primary reason for the survey is other than those indicated in Survey Reason Codes A through D.
When preparing a case file for survey, one of the SRC values must be entered on the closing form (i.e. Form 4251, Form 5351, or Form 5546) to the right of the Disposal Code. The SRC must also be entered on ERCS when closing the return from the group. Only one reason code can be entered. If more than one reason code applies, only use the code that reflects the primary reason for the survey.
For returns using SRC E, "Other" , managers must include a separate form in the administrative case file that clearly explains the reason for the survey. Either the LB&I Survey Form 14235 or Form 1900, Income Tax Survey After Assignment, can be used for this purpose. The form will remain in the case file when it is closed. For paperless surveys, this form is maintained in CCP with the respective closing document for three years.
Survey Claims After Assignment - IRM 18.104.22.168.5, Surveying Claims, provides guidance on surveying claims after assignment.
IMS inventory is automatically populated for ERCS status 10 and 12 and is based on assigned ERCS ID. Other ERCS statuses are not added to the IMS Inventory. If the return does not display in the IMS Inventory window, it is possible to manually add returns to IMS from the Entities window of an existing case or when creating a new case. If the ERCS data comes through later, IMS will automatically merge ERCS data with any manual case data for cases with the same TIN, TIN type, MFT, and Tax Year. The ERCS data will replace manually entered data. IMS provides for the LB&I Survey form from the ERCS inventory and agents can create the Form 5351 in IMS. The Disposal Code on the ERCS Data tab of the Edit Entity window in IMS needs to be 31 or 32 (if it is not the ERCS Status code on the ERCS Data Tab).
Certain non-examined cases surveyed before (DC 31) and after assignment (DC 32) may be closed virtually paperless if the original return was never requested and no documentation needs to go to Files. Generally, this process is used when the return was established on AIMS using an electronic print and the original return was never requested. For purpose of this section electronic prints are:
IDRS prints (BRTVUE, CDE, TRDBV, TRPRT, TRDBB, IMFOLT, TXMOD)
If the return was requested when the record was established on ERCS/AIMS the paperless procedures do not apply. Before requesting a paperless closure, pull an AMDISA and if the words "RETURN REQUESTED" appear on page 2 - line 8 then a paperless closure CANNOT be requested.
Only survey cases closed at the group level with disposal code 31 or 32 can use the paperless survey process.
Only a Form 5351, Examination Non Examined Closings, and a Form 3210, Document Transmittal, are needed for a paperless survey. If the SRC is “E” (Other), then a Form 14235, LB&I Survey Form or Form 1900, Income Tax Survey After Assignment is also required. Send the required documents to Centralized Case Processing (CCP).
Complete Form 5351 as follows:
Use only one MFT per Form 5351.
List only one tax period per label block.
More than one disposal code may be used.
The manager should sign their name in the "Approved By" box at the top of Form 5351 and enter the current date.
Enter the taxpayer’s name, TIN, MFT, and tax year. If a label is available, affix the label.
Enter the disposal code in the lower left corner of the block. If a label is available, list the disposal code on the label below "STATUS" .
Do not send electronic prints, asset locator research, or charge-out documents to CCP. These documents should be shredded. If you have information that must be retained, you cannot use the paperless survey closure.
Certain factors should be considered when assigning a return for examination. These factors are listed below:
Statute of Limitations – The first responsibility when a return is assigned is to determine when the statute of limitations for assessments will expire. Careful consideration should be given to the earliest statute of the tax year or years when creating the examination plan. See the LB&I Statute web site for additional information.
LB&I Business Goals –Returns selected for examination will be in line with LB&I strategic goals. Case managers will collaborate with specialist managers when reviewing inventory and consider any deviations from the goals. Deviations require approval of the territory manager. LB&I has several program initiatives that pre-classify returns along with certain mandatory cases. Examiners are expected to follow the guidance and instructions issued with respect to that initiative when receiving those cases.
Case Built File (CBF) Information - The CBF serves as a repository for case related information that is available to an employee assigned to examine a return. Types of items included are Classification Sheets, Taxpayer Information Gateway (TIG) reports, Selection, Workload and Classification (SWC-C2) reports, YK1 reports, Financial Data and Risk Assessment Reports, Schedule UTP information, Office Tax Shelter Analysis Disclosure documents and risk assessment documentation assembled by the Compliance Management Operations team. Primary and subsequent returns delivered through LWIS will have a CBF. The case manager will forward the CBF information to the appropriate managers to ensure comprehensive risk assessment.
Resources Available - Planning an examination is a collaborative effort between case and specialist managers leveraging all available resources. Consultations with technical specialists such as subject matter experts and local counsel are valuable resources that should also be leveraged.
Auditor’s Workbench - This program displays and analyzes data from Forms 1065, 1118, 1120, 5471, 5472, 8858 and 8865. The source of data for the use of the program is the XML files that can be downloaded from the LIN system. See http://lmsb.irs.gov/hq/fs/cas/IIR.asp.
IMS Input Requirements – IMS information is a tool used for planning, execution and resolution. Accurate and up-to-date information allows for appropriate decision making regarding case development and resource allocations. See IMS Website: IMS Requirements.
After a case is assigned to the examiners, they will review and update the initial assessment/classification information and familiarize themselves with the taxpayer’s business operations. This research will assist setting a preliminary examination scope and determining the potential for issue team members.
For each potential issue identified requiring specialists, a referral should be submitted as early as possible to initiate the collaborative risk assessment process. The referral submitted should include the information relied upon during the initial return assessment to ensure proper resources are assigned. The case manager should collaborate with specialist peers to ensure that resources are available for the planned span as well as total time.
The case manager should project the examination starting date so resources can be identified in a timely manner. Priorities should be established through an issue-driven risk process, which compares the potential benefits to be derived from examining an issue to the resources required to perform the examination. The risk assessment should document any considerations regarding selection and control of any related returns.
Review and consider both Policy Statement 4-5 (P-4-5) and Policy Statement 4-6 (P-4-6). Also see IRM 22.214.171.124.3, Financial Interests or Other Conflicts of Interest and Disclosure.
P-4-5 states that an examiner or specialist may not examine or survey a tax return of a taxpayer for more than 5 consecutive years (60 months) from date of assignment. If the examination is in process at the 5 consecutive year point, the examiner or specialist is allowed to complete the examination under certain provisions. For details on what constitutes a consecutive year and/or exceptions review IRM 126.96.36.199.3, Policy Statement 4–5, (P-4-5) and IRM 188.8.131.52.4, Repeat Audits by the Same Examiner.
Policy Statement 4–6 (P-4-6), IRM 184.108.40.206.4, prohibits examiners from examining or surveying a tax return if a relationship impairs impartiality. A conflict of interest exists if an examiner’s personal relationship(s) or private interest (usually of a financial or economic nature) conflict, or raise a reasonable question of conflict, with the examiner’s public duties and responsibilities. (See also IRM 220.127.116.11.3, Conflict of Interest.) The intent of the conflict of interest policy is to avoid any appearance of impropriety on the part of an examiner.
Personal relationships can include family members, friends and associates.
A financial interest may be one involving the examiner’s spouse, minor child, partner, or organization in which the examiner is serving as an officer, director, trustee, partner or employee, or any person or organization with whom the examiner is negotiating or has any arrangement concerning prospective employment.
Team members/specialist assignment – Before specialists are requested through the Specialist Referral System (SRS), the case manager may want to collaborate with specialist managers to discuss potential issues identified.
Computer Audit Specialists (CAS) should be one of the first specialists considered for the examination team. The CAS will assess the availability and quality of machine-sensible records and obtain access to appropriate records and documentation for analysis. The case manager and CAS manager should discuss the lead time and resources needed to provide tools used in the planning and risk analysis process. The case manager will ensure the case is placed in status 12 so that the CAS can perform these tasks.
Based on the potential issue(s) identified, each specialist manager will determine the specialist team member(s) needed to examine the issue(s). To gain efficiencies, the case manager should collaborate with other manager(s) to discuss the availability of examiners having knowledge about each issue identified.
Automated System for Requesting Specialist Assistance – The Specialist Referral System (SRS) automates the referral process requesting specialist assistance. Agents generate referral requests online and SRS automatically notifies the appropriate specialist managers of the request.
Specialists covered by the SRS – The following specialist services must be requested using SRS:
Specialist Service Corresponding IRM Art Appraisal Group IRM 4.48.2 Computer Audit Specialists IRM 4.47 Computer Audit Specialists - Stat. Sampling (CAS use only) IRM 4.47.3 Economists IRM 4.49 Employee Plans (TEGE) IRM 4.71 Employment Tax (SBSE) IRM 4.23 Engineering Group IRM 4.48 Estate and Gift IRM 4.25 Excise – Fuel IRM 4.24 Excise – General IRM 4.24 Exempt Organizations (TEGE) IRM 4.75 Federal, State & Local Government (TEGE) IRM 4.90 Financial Products IRM 4.37 IBC - Withholding IRM 4.10.21 Indian Tribal Government (TEGE) IRM 4.86 International IRM 4.60, IRM 4.61 LB&I Actuary n/a Outside Expert – COTR IRM 18.104.22.168.5.4 Referrals to Collection IRM 4.20 Tax Computation Specialists (LB&I) IRM 4.46.6 Tax-exempt Bonds (TEGE) IRM 4.81 TEFRA IRM 4.31
The SRS is accessible through the LB&I intranet at https://srs.web.irs.gov/.
After the case has been selected for examination and assigned, contact with the taxpayer should be timely initiated.
Generally, examiners should make initial contact with corporate taxpayers by telephone to schedule the initial appointment. IRM 22.214.171.124.2, Contacting the Taxpayer by Telephone, lists the advantages of contacting the taxpayer by telephone to schedule the initial appointment. To confirm an appointment made by telephone of an LB&I examination of a corporation, partnership, or other business return types, Letter 3253-L, Taxpayer Appointment Confirmation Letter, will be used. In the few cases where initial contact and audit appointments are made via mail, Letter 2205-L, LB&I Initial Contact Letter, should be used. Letters 2205-L and 3253-L are only applicable to business returns and include a reference to a web link to access and download Publication 1 and Notice 609 at www.irs.gov/businesses. The transfer pricing IDR should be issued with any form of the initial contact letter on all LB&I cases when a Form 5471 or Form 5472 is attached to the return.
Refer to IRM 25.4.1 and IRM 25.4.2 for guidance in dealing with taxpayers designated under the "Potentially Dangerous Taxpayer" (PDT) and "Caution Upon Contact" (CAU) programs, respectively. Additional information can also be found on the Office of Employee Protection web site: http://sbseservicewide.web.irs.gov/OEP/default.aspx
For individual returns (1040 taxpayers), LB&I will use Letters 2205 and 3253 to ensure that taxpayers who have limited access to the web receive the required publications and notices. Publication 1,Your Rights as a Taxpayer, and Notice 609, Privacy Act Notice, must be included with the letters as required by RRA 98. See IRM 126.96.36.199.4.2. Receipt of Publication 1 and Notice 609 will be confirmed at the first in-person meeting with the taxpayer and should be documented in the case file.
For National Research Program (NRP) cases, appointment Letter 2205-B is used, and Notice 1332, Why Your Return is Being Examined, must be included with the letter. Publication 1 and Notice 609 is also provided to NRP taxpayers.
In those cases where an appointment letter is not used or when the taxpayer does not confirm receipt of Pub 1 or Notice 609, both publications will be provided at the opening conference (meeting) (e.g. when the examination of a subsequent cycle is initiated).
Publication 3498, The Examination Process, explains the audit process from the initiation of the examination through an overview of the appeals and collection processes. It is mailed with all preliminary 30-Day Letters. See IRM 188.8.131.52.6Contents of Preliminary 30-Day Letters.
Risk analysis is an on-going process throughout the examination. To leverage and effectively utilize our resources, a comprehensive risk analysis should be conducted by the exam team with consideration of input from the taxpayer and focus on issues that raise significant compliance challenges. The detail and depth of the risk analysis may vary according to the type and complexity of the tax return.
A comprehensive risk analysis should :
Define the scope of the audit
Assign the right resources to the issues
Establish the case timeline based on all the issue timelines
Inventory received may already have an initial risk analysis component and instructions. Review all information transmitted with the case. If no guidance is received, conduct a preliminary risk analysis using the information resources that are available to the examiner. Financial information resources available will depend on whether the entity is publicly or privately held.
Publicly held entities have published financial information that provides a basis for understanding the entity’s business activities, operations, accounting and financial data, and policies. In contrast, privately held entities may have limited public information. The examiner should consider obtaining necessary information on potential issues during the opening conference (meeting) when information is limited to establish the risk analysis.
Internal information resources available for preparing the preliminary risk analysis include:
Tax return information
Historical information: planning file (Exhibit 4.46.3-1), prior RARs, ACMs, etc.
Internal information systems (IMS, ERCS, IDRS, etc.)
IRWeb (the IRS intranet)
Subject Matter Experts and Financial Statement Reviewers (FSR)
External resources include:
Financial statement information
Security Exchange Commission (SEC) Filings
Contracted vendor services (i.e. Lexis Nexis, Westlaw, Accurint, Capital IQ,etc.)
Publications such as newspapers, trade magazines, industry journals etc.
Other regulatory agencies
Any other third parties (See IRM 25.27.1,Third Party Contact Program, for procedures)
Many of the taxpayers in LB&I deal with one or more regulatory agencies, either federal or state. These agencies usually conduct detailed examinations of the taxpayer's operations. The case manager can sometimes save time by the use of the audit reports and workpapers of those agencies. The case manager should ensure that the team attempts to get the information from the agency directly if the taxpayer does not voluntarily make the reports available. A request for the reports should be made through Privacy, Governmental Liaison and Disclosure (PGLD) if the requests to the taxpayer and to the agencies are unsuccessful (See IRM 11.4, Office of Governmental Liaison).
When contacting third parties to obtain non-public information about the taxpayer under examination, see IRM 184.108.40.206.1.
To facilitate the understanding of potential industry issues, any recent legislation changes and emerging issues, consider contacting Area Counsel or Technical Specialists. Area Counsel and Technical Specialists can provide assistance in risk assessment and other aspects of the case planning process. Counsel Involvement is a valuable technical resource. See http://lmsb.irs.gov//TAHome.asp
A risk analysis must be completed during the planning stage of the examination. This risk analysis should be reviewed throughout the development of each issue being examined. Risk analysis decision points to consider include:
Return received in group
Mid-cycle risk analysis (see IRM 220.127.116.11.6)
Ongoing factual development
Acknowledgment of the facts
Team members should engage at the earliest point of the planning phase to collaborate on the initial risk analysis of the return . The case manager in consultation with specialist managers will collectively assess potential issues and establish issue priorities. Throughout the risk analysis process, an ongoing dialogue should occur among the team members. For example, depending on the complexity of the case, informal discussion(s) prior to the internal planning meeting are encouraged to discuss logistical concerns such as assignment of issue(s), overlapping of multiple specialties, assignment of a team member to multiple issue teams, etc. The informal discussions will enhance the internal planning meeting by resolving issues beforehand. Any informal agreement(s) discussed should be formalized at the internal planning meeting.
The risk analysis is a process that is based on experience, judgment, and objective analysis. An issue-based approach should be used when performing the risk analysis to identify issues that are material or have significant compliance risk. Other goals of the issue-based approach are to:
Improve the audit planning process
Reduce examination cycle time
Enhance utilization of resources
The factors considered during the risk analysis process may change as additional facts are developed. Therefore, the risk analysis should be periodically revisited and updated. Priorities can be established when weighing the potential benefits and resources needed. Some of the factors that should be considered in conducting the risk analysis include but are not limited to:
Return information, including related returns, should be reviewed to determine possible large, unusual and questionable amounts. Risk assessment should ascertain the size and complexity of the case which may include related entities, changes between years and locations of entities.
Potential tax adjustment compared with the resources needed
Significant interrelated issues which, if fully developed, would require additional returns to be brought under examination. For example, recognition of income and deduction of expenses between related parties may require expansion of examination to include related parties' returns or tax treatment and valuation of assets in mergers and acquisitions.
Weighing the risks and benefits against the resources required to examine a highly complex issue, such as transfer pricing.
Consideration should be given to prior cycle issues that have been settled or are pending in Appeals. For issues that have been resolved, consideration should be given to settlement authority. See IRM 18.104.22.168.2.2. If the issue is open, teams should have on-going discussion with the taxpayer on the status of the issue before Appeals, and when settled, obtain an Appeals Case Memorandum (ACM). For those issues still pending, the ex parte rules must be followed. See Rev. Proc. 2012-18 and IRM 22.214.171.124.
Compliance consideration or items of strategic importance
Financial condition of the entity - collectability
Materiality - adjustment potential
Potential impact on future years
Business risks that may result in material misstatements in financial statements
Significant changes in entity such as large acquisitions, reorganizations, or other unusual events
Significant changes in the taxpayer’s industry
Significant new products, services, or new lines of business
Tax haven locations and significant changes in or expansion to different tax jurisdictions
Operations in areas with unstable economies
High degree of complex regulations
Effective Tax Rates (ETR) – changes and trends in US and worldwide rate
Foreign Tax Credits/ limitations
Taxpayer’s system and controls
The Schedule UTP must be reviewed and analyzed. It is a tool that should be used to identify the highest compliance risks among our taxpayer base and will assist us to work our issues effectively and efficiently.
Overall tax impact should be considered when risk assessing issues. For example:
Offset of potential adjustments by different issues (e.g. foreign tax credit may be reduced or increased by an unrelated issue adjustment)
Overall tax effect of partnership adjustments. (For example, look at the big picture regarding potential dividend adjustments, which may be negligible if the primary partner is a government entity owning an 80 percent equity base for which dividends may be exempt).
Offsetting impact of potential adjustments on prior years (e.g. research credit adjustment may provide offsetting adjustment to prior year(s) research credit amount) may be reduced or increased by issue adjustment
Schedule M-3 is a critical schedule for identifying potential tax issues resulting from both temporary and permanent differences between financial and tax accounting.
It is important to verify that net income per the taxpayer’s books agree with net income per Schedule M-3. It is also crucial to reconcile the taxpayer’s worldwide net income (or loss) on Schedule M-3 to the financial statements.
The taxpayer’s workpapers should be obtained for selected Schedule M-3 adjustment calculations and corresponding supporting schedules. Schedule M-3 adjustments should be reviewed to identify potential issues. Inquiries should be made regarding items or transactions that have a different treatment for book and tax, but are not shown on Schedule M-3.
Schedule M-2 is used to analyze all changes in the retained earnings account per books during a given accounting period.
Retained earnings and their tax effect should be reviewed when material changes are made.
Tie net income per the financial statements to the Schedules M-2 and M-3 and to the year-end trial balance.
Materiality is a relative, not an absolute, concept relating to the significance of an amount, transaction or discrepancy. When risk assessing a return, information is material if a decision is changed or influenced based on the magnitude of an omission or misstatement of accounting information in light of surrounding circumstances. Absence of an item may be material.
The assessment of what is material is a matter of professional judgment. In setting materiality thresholds the exam team should consider both quantitative and qualitative factors. These factors include but are not limited to:
Given equal dollar value, an item which causes a permanent difference in tax liability is more material than one that reverses in future periods
Before selecting an area for examination that might result in a timing adjustment, consideration should be given to the number of years income is deferred or an expense is accelerated
Principles of materiality may be outweighed by other factors such as policy or compliance considerations – tax shelters, emerging issues, fraudulent items, or items contrary to public policy.
LB&I’s Outside Expert Program (OEP) provides access to outside expert services at the examination and Appeals levels. The Outside Expert Budget Committee (Committee) provides outside expert funding to LB&I examination teams to assist in the development of significant issues and to supplement the work of in-house personnel. The Committee provides cross-practice area management level oversight and guidance and acts as liaison for the OEP.
The services of the outside experts are justified in special situations such as the following:
Strategically managed issues
Cases involving high impact precedent setting issues
High dollar issues
High impact compliance issues
Significant issues where in-house expertise is limited or not available
When considering the use of an outside expert, the examination team management should discuss potential outside expert needs with team members who will have a primary responsibility for examination of the issue, including specialists and their management.
Some key factors that should be considered when requesting outside expert assistance include the following:
Availability of in-house specialists
Strategic initiatives impacted
Tax revenue impact
Significant emerging issues
Counsel support for the legal foundation of the subject issue
High potential for litigation
More information can be found at http://lmsb.irs.gov/hq/shsp/dporl/OEP/OEP.asp.
To facilitate issue development, on-going risk assessment should occur in all cases. It is mandatory that all issue teams conduct and document an initial risk assessment.
Mid-cycle risk analysis is required on all CIC cases and must be approved by the Territory Manager. Mid-cycle should occur when the case reaches the earliest of either 50% of time applied or 50% of time lapsed based on ECD.
Mid-Cycle risk analysis is optional on IC cases with ECDs of less than 12 months. Should the ECD of an IC case be extended to exceed 12 months, an updated risk assessment is required. The issue team's risk assessment is approved by the issue manager(s) and forwarded to the case manager for concurrence. Depending on your management's practices, the risk assessment may need to be forwarded to the territory manager for approval. At mid-cycle, the issue team will submit the issue team’s risk analysis to the case manager with a recommendation to continue, expand, or reduce the scope of the examination. Both the initial and mid-cycle risk analysis documents will be shared with the taxpayer once the revisions have been approved by the case and specialist managers.
A major objective for every examination is the efficient use of resources requiring thoughtful planning from all parties involved.. Internal planning prior to meeting with the taxpayer will aid in preparing for future meetings with the taxpayer. Internal planning discussions should be considered for all situations where multiple personnel (team members or consultants) are anticipated to be involved in the examination of a return. Internal planning between the LB&I examination team allows for the creation of a unified and consistent preliminary examination plan to facilitate discussions with the taxpayer. Communication and collaboration between team members, taxpayers and managers on issues, audit procedures, timelines and other responsibilities will lead to a unified and efficient planning and execution of the examination.
The goals for internal planning include the following:
Preliminary issue identification
Preliminary examination procedures
Preliminary identification of LB&I issue team members
Preliminary target dates
Cover communication and administrative items
Factors such as organizational complexity of taxpayer, magnitude or complexity of potential issues, personnel availability, size of the team, time availability and geographic differences may lead to one or multiple planning discussions. It is important that the discussion(s) be held in a timely fashion to promote progression and continuity.
The need to contact third parties for the purpose of collecting or determining a tax liability should be considered early in the examination. IRC 7602(c) requires the Service to take the following actions:
Provide advance notice to the taxpayer that third party contacts may be made;
Periodically provide the taxpayer with a record of persons contacted; and
Provide a list of third parties contacted to the taxpayer upon request.
Review this code section for exceptions that may apply. Case and issue managers and examiners should refer to IRM 25.27.1, Third Party Contact Program, for procedures and exceptions to the notification requirements.
RRA 98 Sec. 3705(a) provides that any manually or computer generated correspondence shall include the name, telephone number, and unique identifying number of a Service employee who can be contacted with respect to the correspondence and resolve any subsequent inquiries.
The case manager will ensure that each team member on the LB&I examination, including specialists and support examiners, is aware of and understands the statute requiring disclosure of any financial interests or other conflicts of interest that might create a real or apparent conflict of interest.
The case manager will ascertain from each team member that all financial interests which are potential conflicts of interest are properly disclosed as part of the planning process for each LB&I examination.
A worksheet is available for use during the planning meeting to document financial interests and disclosure. Form 13664 , LB&I Financial Interests or Other Conflicts of Interest and Disclosure, should be used to document whether financial interests or other conflicts exist and to document actions taken by the team manager to address potential conflicts of interest. The case manager will notate in the written examination plan that the above requirements were met for each team member.
Other appropriate IRM sections should be reviewed for details of conflicts of interest, disclosure procedures, and completion of Form 6782, Certification of Financial Interest in a Work Assignment. This form will be completed only when a potential conflict exists. The case manager will remove examiners with potential financial conflicts of interest from the case until determinations granting exemptions for financial interests are properly approved.
Case managers will certify to respective territory managers that there are no conflicts of interest with respect to financial interests. The case manager will follow the disclosure procedures and complete the certification form discussed in the Rules of Conduct in instances where a potential conflict may exist.
There are various internal and external sources of information available to assist the case manager and agents in identifying potential issues, determining staffing requirements, specialists needed, and the general approach to the examination. See IRM 126.96.36.199.1.
Depending on the resources deployed and the number of issues and complexity of those issues use your judgment in terms of the depth that these procedures are needed to efficiently prepare for the examination.
For preliminary risk analysis of the return see IRM 188.8.131.52.
All available sources from past cycles should be reviewed to ascertain potential effects on current examinations. This will include a review of the Historical or Planning File Information (See Exhibit 4.46.3-1LB&I Planning File). Automated data is also a valuable resource.
Depending upon the complexity of the case, internal discussion may involve only the team coordinator and the case manager.
When cases involve multiple issue team members, team members assigned to the case may need to have more formalized internal discussions prior to meeting with the taxpayer.
Team members assigned to the case will assess the risks of the potential issues with respect to their specialties. All team members will come to the internal planning meeting with a listing of the potential material issues and related preliminary audit procedures for consideration and collaboration.
Team members should be prepared for the internal discussion based on the research and data gathered related to the taxpayer and the industry. This includes the review of initial risk analysis and the Historical or Planning File information (See Exhibit 4.46.3-1, LB&I Planning File.) Automated data is also a valuable resource.
An agenda can be created to emphasize the objectives of the internal planning discussions. See Exhibit 4.46.3-2Sample Agenda Topics for Initial Internal Planning Meetings, for a suggested list of agenda items to cover in the planning discussions.
Specialist examiners and their managers who will be involved in the examination should be notified of:
The date, time and method of the internal planning discussion(s)
The scheduled starting date of the examination
Data available for review
Other participants who may be invited to the planning discussion(s) (depending on the situation) may include the following individuals:
Subject Matter Experts
Director of Field Operations
Tax Law Specialists
Major topics to consider in internal planning discussions should include:
Team member briefing
Issue identification/risk assessment
Resource allocation and utilization (issue teams)
Setting tentative timelines for the case and issues
Review and documentation of preliminary examination procedures
Consolidation of common examination procedures
Preparation for discussions with the taxpayer
Time schedule coordination
Sharing important taxpayer information and issue expertise amongst the team members early may answer questions and address concerns raised from their initial risk assessment of the case.
During internal planning discussions potential issues identified will be discussed and risk assessed. LB&I has several initiatives on classification of issues. If you receive a case through one of those programs, follow the instructions that come from that program.
In the internal planning phase, a tentative identification of an issue team would be useful in some cases as a starting point prior to discussions with the taxpayer. For example, depending on the issue, you may want to consult with subject matter experts from International, economists, engineering, financial products, and/or computer audit. Discussion of the skills and experience of the potential team members and managers regarding the issues identified will help in determining the effective selection of the issue team members/manager.
During internal planning a tentative case timeline may be established based on the projected issue(s) under consideration, for example a transfer pricing issue may be the most complex issue that would drive the case timeline. Certain factors may be known such as historical knowledge of the taxpayer or issue, statute concerns, and known administrative or legal requirements for case processing. This tentative timeline will be used to collaborate with the taxpayer during the joint planning discussions. Examples of administrative or legal case requirements may include:
Utilization of issue resolution tools such as Pre-Filing Agreements or Technical Advice Memorandums that would require additional time for the team to service the request, thereby establishing a need to extend the examination time frame. Tentative timelines for the issue(s)/case should factor in additional workload requirements.
Time specific or sensitive administrative procedures such as Joint Committee, TEFRA or informant claims (aka Form 211 Claims).
Case and tentative issue managers should collaborate to review examination procedures for each individual issue to ensure that they are appropriate. For example, audit procedures may take into consideration prior examination procedures or the applicability of issue resolution tools and prior closing agreements, etc.
Tentative Issue teams should collaborate to consolidate common examination procedures and leverage taxpayer presentations such as organizational structures, product development or tours of facilities. Communication on exam procedures between issue teams will lead to efficient resource utilization.
Discuss potential topics for subsequent meetings with the taxpayer. Planning for subsequent meetings with the taxpayer should focus on objectives. Each meeting should have an agenda or plan with each party knowing their individual responsibilities. See Exhibit 4.46.3-3, Sample Agenda for Opening Conference (Meeting) and IRM 184.108.40.206, Issue Discussion Meetings for suggested topics to be discussed for meeting(s) with taxpayer.
IRS personnel attending meetings should be selected based on the value that they can contribute to the meeting depending upon the subject matter. Blanket invitations to taxpayer meetings for all team members should be considered only when discussions will pertain to the entire team.
When the examination team is scheduling the meeting with the taxpayer, they should communicate the planned agenda in advance and request that the taxpayer provide their own relevant personnel who can add value to the meeting. Communication between the taxpayer and the examination team should be ongoing to clarify attendance of essential personnel.
Team members should share time availability for items such as planned leave and other commitments such as other cases, special details or projects.
Consideration should be given to scheduling regular and periodic status discussions with and without the taxpayer for IDR updates, Issue Status updates, etc.
Consideration should be given to leveraging technologies. Examples include establishing a secure email arrangement with the taxpayer as well as the sharing of e-fax numbers. The case manager may consider consulting with the CAS manager to requisition a virtual server in complex and large cases to handle remote or local coordination of electronic files.
Discussions regarding administrative procedures should be held to promote consistency for case administration, taxpayer contacts and expectations for both managers and team members. Some items that should be considered include:
Instructions to team members for procedures for preparation of workpapers
Discussion of procedures for requesting information from taxpayers and monitoring the IDR management process
Discussion of procedures for requesting conferences (meetings) with taxpayers
What to expect during on-site visits by case managers
Discussion of senior team coordinator’s requirement to provide feedback on team member’s performance if the case has an STC.
Minutes - Upon completion of the internal planning discussion, the discussion outcomes should be summarized in narrative form. The planning agenda should be used as a template when preparing the minutes. The minutes should capture all of the agreements, decisions, arrangements, etc. made during the internal planning discussion.
Compliance Checks will aid in risk analysis and help to determine the scope of the audit. See Exhibit 4.46.3-5, Compliance Checks Tool.
The opening conference (meeting) sets the groundwork for a mutual exchange of information and understanding that will assist both the exam team and the taxpayer in defining the scope and setting expectations for carrying out the examination process.
Key objectives of the opening conference (meeting) are to explain the LB&I examination process to the taxpayer and to reach agreements on accommodations and coordination such as establishing the flow of communication between the taxpayer and LB&I. Depending on the timing of the opening conference (meeting), another key objective is to discuss the preliminary risk analysis of issues identified for examination.
Publication 5125, LB&I Examination Process, must be shared and interactively discussed with the taxpayer. Agenda items discussed at the opening conference (meeting) can vary depending on the type of entity, the size of the entity, and the complexity of the potential issues and the audit history of the taxpayer. See Exhibit 4.46.3-3 for a sample opening conference (meeting) agenda.
A successful opening conference (meeting) occurs when both parties understand their responsibilities and agree to be accountable for how the audit is planned, executed and resolved.
The exam team should exercise judgment when determining what items to include on the agenda, when to hold the opening conference (meeting), and who should attend. On complex examinations it may be necessary for the team coordinator, specialists and their respective managers to attend the opening. On less complex cases, the opening meeting may consist of only the team coordinator and the taxpayer.
An agenda should be prepared for the meeting that covers mandatory topics as well as recommended items, including the items identified during internal planning . The exam team will provide a copy of the agenda and the preliminary risk analysis in advance to the taxpayer, so the taxpayer is aware of the agenda items and can prepare accordingly. Invite the taxpayer to add any items they would like to address during the opening conference (meeting).
Disclosure Safeguards - The case manager is responsible for making all arrangements authorizing discussion and exchange of information between team members and the taxpayer's personnel. It may be necessary to hold separate opening conferences in the following circumstances:
Separate meetings may be required if corporate authority is decentralized into various operating components of the company.
Separate meetings may be required to avoid unauthorized disclosure of information between related entities. (Note that the taxpayer, in these instances, may request separate examination plan sections for some of the entities.)
Only corporate officers who have the authority under State law to bind the corporation are authorized to receive confidential return information absent a power of attorney or other authorization. Examiners should be aware at all times who is in the room and that the individual has authorization to receive confidential information from the IRS. See IRM 220.127.116.11.3 which discusses what individuals in a corporation may have access to return and return information.
Separate meetings may be required to coordinate assistance of support audits.
IRM Exhibit 4.46.3-3, Sample Agenda for the Opening Conference (Meeting), lists recommended agenda items for discussion at the opening conference (meeting) and should be tailored depending on the type of entity, size, complexity and industry of the taxpayer, and whether they are publicly or privately held. It can also be tailored to include potential tax issues and/or transactions of the taxpayer that the team is aware of, such as: reorganizations, bankruptcies, major acquisitions or dispositions.
The sample agenda includes a review and discussion of the mandatory transfer pricing IDR if the return includes Forms 5471 or 5472. If not, ask the taxpayer during the opening conference if they had any cross border transactions with any entity in which they had an economic interest.
Entities that are publicly held have published financial information that provides a basis for understanding the taxpayer's business activity, operations, accounting systems and policies, and financial data. When preparing for the opening conference (meeting), the exam team should leverage relevant public information and other tools used to assist in the preparation of the preliminary risk analysis. See IRM 18.104.22.168.1 for a list of available information.
The type of agenda items and inquiries in an opening conference (meeting) for a privately held entity may be different from those of a publicly held entity. Public information may not be as readily available for a privately held entity and therefore the opening conference is an opportunity for the examiner to obtain information about the entity. The opening conference (meeting) is a method to obtain information needed to reach informed decisions to help establish the scope and depth of an examination. See IRM 22.214.171.124.1 for a list of available information.
Suggested inquiries to assist in setting the scope of the examination are, but not limited to:
An understanding of the internal controls of the company, the taxpayer's financial and accounting policies, business activities, structure of operations
An understanding of how the books and records of the taxpayer are maintained and organized
A review of the company's certified audit statements or other company financial or regulatory reviews
An explanation of potential tax issue identified for examination including large, unusual or questionable items on the tax return
A review of significant transactions
For additional guidelines on opening questions, see "Opening Conference (meeting) Questions" at http://lmsb.irs.gov/reference/audit_tools/Job_Aids/AuditAids.asp.
Depending on the size and type of the entity, the exam team may decide it is more efficient to hold an administrative opening conference before the internal planning meeting. If the internal planning meeting has occurred, the opening conference (meeting) would be combined to include both the administrative items and a discussion of the preliminary risk analysis.
Separate opening conference meetings may be required if the taxpayer is decentralized into various operating entities.
The 30-day window for accepting informal claims will start at the first opening conference held. The taxpayer should be made aware of the last date to submit informal claims.
The timing of the opening conference and whether to hold an administrative-only opening conference or combined with the preliminary risk analysis is up to the judgment of the exam team.
Audits may require a separate opening conference to discuss administrative items and a separate meeting to discuss the preliminary risk analysis.
For example, during the examination of a small, privately-held entity with limited public information, the team coordinator may want to hold the opening conference before an internal planning meeting to gain a better understanding of the taxpayer's business and activities, and to review the taxpayer's books and records, before submitting a referral for a specialist. In this situation, the team coordinator can make a more informed specialist referral or consult after the opening conference (meeting) and then conduct the internal planning meeting with the specialist(s).
In another example, with large complex taxpayers , the opening conference (meeting) may serve only as an administrative meeting before the internal planning meeting is held. In this situation, the preliminary risk analysis would be prepared after the administrative opening conference (meeting). A subsequent meeting would then be scheduled for the exam team and the taxpayer to discuss the preliminary risk analysis.
The opening conference (meeting) can be combined to include administrative items as well as a discussion of the preliminary risk analysis prepared during internal planning meeting(s). The exam team may determine that it is more efficient to combine the administrative items and the preliminary risk analysis discussion during the opening conference (meeting).
The preliminary risk analysis will be shared and discussed with the taxpayer with the intent of obtaining information that will help the exam team to narrow or focus the scope of the audit on the most significant issues.
The exam team should describe to the taxpayer their concerns as to why each tax issue has been initially selected for audit. If the taxpayer is unable to alleviate the exam team's tax concerns regarding an issue, then the following objectives should be addressed at either the opening conference (meeting) or at separate issue discussion meeting(s) with the taxpayer:
Select which issues or aspects of a particular issue warrant examination
Identify LB&I team members and taxpayer personnel to include on each issue team
Establish effective and efficient initial audit steps
Determine an estimated timeline and issue completion date for each issue as needed
The opening conference (meeting) should be conducted by the case manager (or delegated to the team coordinator) and attended by the team coordinator and other team members including specialist manager(s) whose attendance adds value by being able to discuss potential issues or assist in gathering information. It is important to remember that the opening conference (meeting) is a working conference (meeting). If the taxpayer will be presenting a thorough overview of their business activities, operational structure, and accounting systems, team members that will benefit should attend. Participants who add value can be determined during internal planning or other discussions with the team coordinator, case manager, and specialist manager(s).
For complex cases or large examination teams, there may be value in conducting an internal pre-meeting before the opening conference (meeting) to review the opening conference (meeting) agenda and confirm the role of each exam team member attending. In some instances the pre-meeting may coincide with the internal planning meeting.
The opening conference (meeting) should include the head of the tax department and other appropriate key employees who can adequately discuss the agenda items as well as the preliminary risk analysis. Only corporate officers are authorized to receive confidential return information absent a power of attorney or other authorization. Examiners should be aware at all times who is in the room and that the individual has authorization to receive confidential information from the IRS. Refer to IRM 4.11.55, Examining Officers Guide (EOG), Power of Attorney Rights and Responsibilities.
If the preliminary risk analysis is to be discussed at the opening conference (meeting) agenda, the exam team member(s) who can explain to the taxpayer why each issue is being considered for examination should attend. For issues selected for examination, the appropriate taxpayer personnel and exam team member(s) should work together to develop initial audit steps.
During the opening conference (meeting) materiality thresholds should be discussed. Setting a materiality threshold involves both quantitative and qualitative factors. There is no economic or mathematical formula or standard that should be applied to determine whether an amount is material in an examination. See IRM 126.96.36.199.5.3, Materiality. The issue team(s) should use their judgment and experience in establishing materiality thresholds.
As with any other agreement, materiality thresholds agreed to should be memorialized in the examination plan and should apply to issues examined as well as claims. The issue team and taxpayer will have to weigh all the facts and circumstances in assessing materiality either by category type (such as credits, deductions, etc.) or as specifically defined in the examination procedures of an issue.
Materiality threshold agreements should apply equally to both the exam team and the taxpayer. A cooperative and transparent taxpayer will use the same materiality thresholds before filing any claims.
The exam team will discuss the claim expectations at the opening conference (meeting).
The opening conference (meeting) will also trigger the start of the 30-day window for submitting informal claims. LB&I exam teams will consider informal claims that are fully documented and supported within 30 days of the opening conference (meeting). However, after the 30-day window, claims for refund should be filed using Form 1120X, Form 1040X or Form 843 and a copy provided concurrently to the team along with supporting documentation to enable the exam team to make a tax determination without the use of IDRs. See IRM 188.8.131.52.
The case manager should conclude the conference (meeting) phase by reviewing all agreements and understandings reached with the taxpayer.
Any modifications or additions to the preliminary risk analysis should be reviewed and approved. Also, arrangements made for future issue discussion meetings, presentations, site visits, review of corporate minutes, etc. should be scheduled and confirmed.
LB&I spends considerable time and resources in the planning phase to assure that its examinations are effective and efficient. In setting the examination plan, LB&I understands that taxpayers invariably will identify items requiring corrections, including items that could result in an overpayment of tax for which the taxpayer could file a claim. Of course, resources can be best allocated if claims are brought to the attention of the exam team during the planning phase or early in the examination process. In addition, resources are significantly preserved when a taxpayer submits the supporting documentation upon which it relied in making its claim in order that the exam team can make its tax determination, ideally without issuing a Form 4564, Information Document Request (IDR).
Claims submitted after the exam team has completed its examination plan result in inefficiencies because of the need to reallocate resources from other compliance matters and/or increase the anticipated time period for completing the examination.
All claims, formal and informal, must meet the standards of Treasury Regulation 301.6402-2 regardless of when submitted. A valid claim must:
Set forth in detail each ground upon which credit or refund is claimed
Present facts sufficient to apprise the IRS of the exact basis for the claim
Contain a written declaration that it is made under penalties of perjury
Be in writing
LB&I will not require a formal claim if an issue has been identified for examination, unless IRS published guidance specifically requires formal claims to be filed for an issue, for example, Notice 2008-39, (2008-13 IRB 684) for research credit claims.
Claims for issues not identified for examination or specifically requiring formal claims must meet the requirement set forth in Treasury Regulation 301.6402-3. In other words, claims will be required to be filed through the Campus on Form 1120X, Form 1040X, or Form 843. See IRM 184.108.40.206.1.1.
A taxpayer’s failure to timely notify the teams of anticipated claims, timely submit claims, or provide supporting information with the claims could lead to unnecessary refund litigation.
For an illustration of the LB&I claims process see IRM Exhibit 4.46.3-7, LB&I Guidelines for Reviewing Claims and IRM Exhibit 4.46.3-8, Risk Assessing Claim Issue(s).
The case manager has the responsibility for reviewing claims to ensure they meet the LB&I expectations for timeliness and completeness and should collaborate with specialist managers when risk assessing claims. If it is determined that a claim needs to be examined it should be added to the exam plan and an issue team should be identified to examine the issue. In appropriate cases, the case ECD and statute of limitations will be extended to allow sufficient time for the issue team(s) to properly examine all claim issues.
Examiners should consider IRC 6676, Erroneous Claim for Refund or Credit , when examining claims. The penalty applies to all claims, formal and informal, relating to federal income taxes. Refer to IRM 220.127.116.11, IRC 6676, Erroneous Claim for Refund or Credit Penalty.
For further guidance on processing claims refer to the procedures in IRM 18.104.22.168, Claims and/or the LB&I Reference Guide for Claims, Amended Returns, Tentative Allowances, Quick Refunds, Requests for Abatement and Administrative Adjustment Requests at http://lmsb.irs.gov/hq/pqa/downloads_LMSB_Ref_Guide/LMSB_Ref_Guide_Home.asp.
The earlier the exam team receives a fully substantiated claim, the sooner it can be risk assessed to determine whether it should be accepted or examined. To improve efficiency in LB&I examinations, LB&I has set forth the following claim expectations.
LB&I has established a 30-day window to allow taxpayers to submit informal claims or affirmatives which should enable LB&I and the taxpayer to more efficiently identify and assign the appropriate resources to address claim issue(s). The 30-day window also provides the taxpayer an opportunity to submit informal claims and may reduce their burden of filing amended returns.
LB&I will waive the requirement that a formal claim be filed during the 30-day window established at the opening conference (meeting).
The 30-day window is determined to be 30 calendar days from the opening conference (meeting). If the last day of the 30-day window falls on a weekend or holiday, the last day to consider informal claims is the next business day. The specific date identifying the 30-day window should be documented in the agreement section of the exam plan.
When adding subsequent or prior period(s) to the existing examination, the 30-day window for the new tax period(s) will begin when the taxpayer is notified of the start of the examination of the new tax period(s). The 30-day window for the new tax period(s) should be added to the exam plan after discussing with the taxpayer.
LB&I exam teams will consider valid informal claims (i.e. meet the standards in Treasury Regulation 301.6402-2) that are received within 30 calendar days of the opening conference (meeting) and respond to the taxpayer within a reasonable time.
If an informal claim is valid and includes sufficient documentation to make a tax determination, it may be accepted or examined. See IRM 22.214.171.124.3(2).
If an informal claim is valid but does not include documentation to permit the exam team to make a proper tax determination without issuing an IDR, the exam team should remind the taxpayer of LB&I’s claim expectation to provide fully documented claims before deciding if an IDR should be issued. See IRM 126.96.36.199.3(3).
If an informal claim is not valid (does not meet the standards of Treas. Reg. 301.6402-2), the exam team must discuss the deficiencies with the taxpayer. See IRM 188.8.131.52.2.2 (2).
All claims received after the 30-day window must be filed with the Campus using Form 1120X, Form 1040X or Form 843. Treasury Regulation 301.6402-3 gives the Commissioner the authority to require that a claim for credit or refund be filed on a formal claim. The taxpayer should be informed to file the correct claim form with the Campus and promptly provide a copy with supporting documentation to the exam team.
If a formal claim is valid and includes sufficient documentation to permit the exam team to make a tax determination, it should be risk assessed before deciding whether to accept or add to the exam plan. See IRM 184.108.40.206.3(2).
If a formal claim is valid but does not include documentation to permit the exam team to make a proper tax determination without issuing an IDR, the exam team should remind the taxpayer of LB&I’s claim expectation to provide fully documented claims before deciding if an IDR should be issued. See IRM 220.127.116.11.3(3).
If a formal claim does not meet the Treasury Regulation 301.6402-2 standards, the exam team must discuss the deficiencies with the taxpayer. See IRM 18.104.22.168.2.2(2).
If an informal claim is valid and is received after the 30-day window, the territory manager must decide whether the exam team should accept or decline to act on the informal claim. See IRM 22.214.171.124.2.5(2).
The formal claim requirement under Treasury Regulation 301.6402-3 may be waived by the exam team if a valid informal claim is received for the following reasons:
Issues already identified for examination, unless a formal claim is specifically required by other IRS guidance
Appeals Case Memorandum (ACM) impacting the year(s) under examination
Published guidance impacting the period(s) under examination with territory manager concurrence
Exception granted by the territory manager. See IRM 126.96.36.199.2.5(2).
Claims that properly set forth the legal and factual grounds, along with sufficient documentation will allow exam teams to expeditiously determine whether to accept or examine a claim without requiring the use of IDRs.
The burden of proof is on the taxpayer to fully support their claim and issuing IDRs for a claim is not effective tax administration or an efficient use of LB&I resources.
If a claim fails to meet the fully documented expectation, the exam team should reiterate the fully documented claim expectation with the taxpayer. See IRM 188.8.131.52.3(3).
Claims should be brought to the attention of the exam team as soon as the taxpayer becomes aware of any potential claim for refund. Early discussions about claims that the taxpayer has submitted or filed will allow the examination team to incorporate the claims into the examination plan in order to better ascertain the resources required for the entire examination and establish a reasonably accurate examination timeline.
Verbal notification is not a valid claim. Until a claim is received in writing and the exam team determines that the claim meets the standards of Treasury Regulation 301.6402-2, no examination action should be taken.
Taxpayers must file formal claims with the Campus as early in the examination as possible, but no later than the milestone date established during the opening conference for filing formal claims and indicated on the case timeline. The exam team should remind taxpayers to provide a copy concurrently to the team along with supporting documentation, including all information the taxpayer relied on when preparing the claim.
Claims not submitted timely to the exam team may cause a less efficient examination, which may result in a need to extend the estimated closing date (ECD) and the statute so that all claim issue(s) can be properly examined.
Regardless of when a claim, formal or informal, is submitted during the examination, the exam team must timely review the claim to ensure the claim meets the standards of Treasury Regulation 301.6402-2. After the 30-day window, the claim must also meet the requirement of Treasury Regulation 301.6402-3. For an illustration of the LB&I claim review process, see Exhibit 4.46.3-7, LB&I Guidelines for Reviewing Claims.
Claim issue(s) should be risk assessed in the same manner as any other potential audit issue, after the claims have satisfied the appropriate Treasury Regulations. See IRM 184.108.40.206.3.
All claims must meet the standards contained in the Treasury Regulation to be considered a valid claim before LB&I takes any action to examine a claim.
If a valid claim is received within the 30-day window, then risk assess the claim issue(s). See IRM 220.127.116.11.3.
If a valid claim is received after the 30-day window, unless an exception exists, it must be filed on a formal claim form before risk assessing. See IRM 18.104.22.168.2.4 and IRM 22.214.171.124.2.5.
If a claim, formal or informal, does not meet any of the standards, it is not a valid claim and should not be acted upon until discussed with senior management and/or counsel. See IRM 126.96.36.199.2.2.
A claim failing to meet any standard of Treasury Regulation 301.6402-2 is not a valid claim and should not be acted upon until discussed with senior management and/or counsel. Counsel’s advice is essential in determining whether to act or decline to act on the taxpayer’s submission based upon whether it meets the standards for a claim under the regulations.
If the claim is not valid, the exam team must discuss the claim’s deficiencies with the taxpayer and provide the taxpayer an opportunity to correct the deficiencies within a specified target date determined by the exam team. The taxpayer can cure the defect by submitting a corrected claim with the exam team.
Once the deficiencies have been corrected by the taxpayer, the claim is risk assessed in the same manner as any other audit issue. See IRM 188.8.131.52.3. If the corrected claim is received after the 30-day window, a formal claim is required; however, the territory manager may grant a formal claim exception if the claim was originally received before the 30-day window, depending on the timing of the perfected submission.
If the taxpayer does not correct the claim’s deficiencies within the specified target date, the exam team should discuss the claim’s deficiencies with senior management to weigh the risks, benefits and burdens before declining to act on a claim. Counsel’s advice is also essential in weighing the risks associated with declining to act on a claim. Senior management may determine it is in the best interest of the government to risk assess the claim. A high-level discussion with senior management and the taxpayer equivalent should be held to address the deficiencies in the claim and to improve compliance with the standards of the Treasury Regulation for claims filed in the future.
LB&I should not act on an incomplete or otherwise invalid claim if the taxpayer does not correct the claim’s deficiencies by the specified target date. Senior management has the discretion to accept an invalid claim after weighing the benefits and burdens but not before having a discussion with their taxpayer equivalent to address the deficiencies and improve compliance of future claims.
LB&I should not take any actions that could be deemed as examining the claim as such actions may be deemed to waive the defect in a claim that is not valid. Examination actions may include: issuing IDRs, disallowing the claim, etc.
Senior management and counsel must concur that the claim does not meet the standards of the Treasury Regulation. A memorandum should be provided to the taxpayer explaining the reason(s) for declining to act on the claim.
An informal claim that is not valid would require a memorandum to the taxpayer explaining the claim’s defects. Suggested memorandum language:
LB&I has received what we believe you intended to be a claim for refund. However, your claim fails to meet the requirements set forth in Treasury Regulation 301.6402-2, Claims for Credit or Refund. LB&I will not act on your defective claim for the reason(s) outlined below:
It is unlikely that a formal claim is not valid, but if counsel and senior management concur that a formal claim is not valid, in addition to providing the taxpayer the above memorandum, a Form 3870, Request for Adjustment, is required to reverse the transaction code posted to the master file and to remove freeze code "-A" . A copy of the memorandum should be included when submitting the Form 3870 to the Campus, along with any other supporting documentation. Refer to IRM 184.108.40.206.2, -A Freeze.
If LB&I has not begun to examine a defective claim but has simply taken no action with respect to the claim (i.e. decline to act), the taxpayer would need to file a valid formal claim within the statute of limitations and wait six months before bringing a suit for refund, per IRC 6532(a).
Before LB&I acts on a claim received after the 30-day window, it must meet all of the standards contained in the Treasury Regulation 301.6402-2 and be filed formally with the Campus unless an exception is allowed. See IRM 220.127.116.11.1.1(3) and (4).
If a claim is valid and a formal claim was properly filed with the Campus, risk assess the claim issue(s). See IRM 18.104.22.168.3.
After the 30-day window, if the claim is valid but was not properly filed with the Campus, LB&I will decline to act on the claim unless an exception is allowed. See IRM 22.214.171.124.2.5.
If a taxpayer does not comply with the claim expectation and submits a valid informal claim after the 30-day window that meets the standards of Treas. Reg. 301.6402-2, the exam team should reiterate to the taxpayer the LB&I expectation to file the formal claim with the Campus and also set a target date for filing the formal claim, unless an exception applies. The following exceptions can be granted without seeking territory manager approval :
Appeals Case Memorandum (ACM) impacting the period(s) under examination where a settlement authority delegation order could be applied
If the taxpayer does not file a formal claim by the date set when the exam team reiterated the formal claim expectation, then the territory manager(s) must decide whether to grant a formal exception or to decline to act on the valid informal claim. Until a decision is reached by the territory manager(s), the exam team should not take any actions which could be deemed to be examining the claim such as: issuing IDRs, disallowing the claim, etc.
If the territory manager(s) waives the formal claim requirement, risk assess the informal claim issue(s). See IRM 126.96.36.199.3.
If the territory manager(s) does not waive the formal claim requirement, counsel should be consulted before any action is taken with respect to the informal claim. Careful consideration must be given in deciding whether there is an advantage for the Service to consider the untimely informal claim, or whether the Service is disadvantaged to adequately audit the claim without substantial additional resources and time.
If senior management and counsel concur that the formal claim requirement should be enforced, the exam team should follow counsel’s guidance before taking any action on the informal claim.
The taxpayer can meet the requirement by filing a formal claim with the Campus and providing a copy to the exam team.
Informal claims may result in unnecessary refund litigation which reasonably can be avoided if a formal claim is filed. By declining to act on the claim, the taxpayer would need to file a valid formal claim within the statute of limitations and wait six months before bringing a suit for refund, per IRC 6532(a).
Claim issues(s) should be risk assessed in the same manner as any other audit issue. For an illustration of the LB&I claims risk assessing process see Exhibit 4.46.3-8, Risk Assessing Claim Issue(s).
If the taxpayer provides sufficient documentation necessary for the exam team to make a proper tax determination, the exam team should weigh compliance and materiality against the risks, benefits and burdens of examining claim issue(s). Consideration should also be given to any materiality threshold agreements.
After risk assessing, accept the claim issue(s) not requiring examination and incorporate claim issue(s) allowed into the revenue agent’s report (RAR). If appropriate, group allowed claim issues on Form 5701, Notice of Proposed Adjustment. See IRM 188.8.131.52.5.
After risk assessing, add issue(s) and issue team(s) members to the exam plan. The issue team(s) should discuss with the taxpayer the resources needed, the issue timeline(s), and if necessary, the extension of the case ECD and statute.
If sufficient information was not provided to enable the exam team to make a tax determination, the exam team should reiterate to the taxpayer the claim expectation to provide fully documented and factually supported claims that may permit the exam team to make the proper tax determination without requiring the use of IDRs. The burden of proof is on the taxpayer to support their claim issue(s), and as such the taxpayer must provide all credible evidence to support its claims, ideally without issuing an IDR.
If the taxpayer subsequently provides all documentation necessary for the exam team to make a proper tax determination, the claim issue(s) should be risk assessed.
After reiterating the claim expectation, if the taxpayer still does not provide sufficient documentation for a proper tax determination to be made, based on the facts and circumstances of the claim, it must be determined whether it is appropriate to issue an IDR or disallow the claim as the taxpayer has failed to meet the burden of proof. Generally an IDR will be issued only in instances where the team believes that an IDR will focus and facilitate the taxpayer’s production of documents sufficient to support its claim.
If an IDR is issued and the taxpayer does not respond by the IDR response date or the response is incomplete, the issue team must decide whether to disallow the claim based on the taxpayer’s failure to satisfy its burden of proof. Generally, the IDR enforcement process should not be used since the taxpayer has an existing obligation to produce sufficient information to support its claim, without which the claim will be appropriately disallowed. Each situation has unique facts and circumstances; therefore, the issue manager in collaboration with the case manager must determine which option to follow and when it is appropriate to consult with senior management and/or counsel.
When disallowing a claim, refer to the procedures in IRM 184.108.40.206, Claims and/or the LB&I Reference Guide for Claims, at http://lmsb.irs.gov/hq/pqa/downloads_LMSB_Ref_Guide/LMSB_Ref_Guide_Home.asp.
When following the IDR enforcement process, refer to IRM 220.127.116.11, Information Document Request Process. The issue team may elect to accelerate the IDR enforcement process for claim issues.
When disallowing a claim in full or partially, the acknowledgment of facts process applies and must be followed. Taxpayers may attempt to present new information or evidence to Appeals on unagreed claim issue(s) and the added step of securing an acknowledgment of facts provides Appeals with a clear understanding of the facts that were presented to exam. Refer to IRM 18.104.22.168 - Written Acknowledgment of the Facts.
In order to identify adjustments that originated from claims or affirmatives, the use of an alpha-prefix on each numbered Form 5701 is recommended.
Use the alpha-prefix CLA for claim issue(s) accepted without examination (e.g. CLA-01, CLA-02,… etc.)
Use the alpha-prefix CLE for claim issue(s) examined (e.g. CLE-01, CLE-02,… etc.)
To reduce administrative burden, if appropriate, claim and affirmative issue(s) accepted without examination may be grouped by character and tax treatment (income, expense, credit etc.) when establishing issues in IMS, and combined on one Form 5701 for processing. When grouping claim or affirmative issues consideration should be given to the potential impact grouping issues can have on other items on the tax return, and carryback or carry forward attributes.
In order to identify claims or affirmatives in IMS not warranting examination, it is recommended to use either SAIN 060 for Claims or SAIN 061 for Self-Audit Adjustments (Affirmative Adjustments). To identify the character or tax treatment of the grouped issues, a general UIL code may be used, such as 162.00-00 for expenses and 61.00-00 for income. When using these general UIL codes it is recommended that adjustments in BNA are entered on line 10 for "other income" and line 26 for "other deductions" .
After the 30-day window, all issues that have not been identified for examination that result in a claim for refund (i.e. taxpayer’s favor), must be filed on a formal claim. The exam team should request that the taxpayer concurrently provide a copy of the formal claim to the team along with supporting documentation, including all information the taxpayer relied on when preparing the claim.
Occasionally, a taxpayer may net issues on a claim (i.e. issues in the government’s and the taxpayer’s favor); however, offsetting amounts do not preclude the requirement for filing a formal claim on issues that could result in a refund.
If the taxpayer submits a netted informal claim after the 30-day window, the exam team should explain that a formal claim is required for those issue(s) that result in a claim for refund (i.e. the taxpayer’s favor) unless there is an exception. See IRM 22.214.171.124.1.1(4).
If a taxpayer submits a claim late in the examination that adversely impacts the ECD, the statute and/or resources, a high-level discussion with senior management and the taxpayer equivalent should be held to ascertain the reason for the late claim and to discuss methods to improve tax administration.
If the claim is not valid or filed with the Campus, and is not perfected by the target date, LB&I may decline to act on the claim. See IRM 126.96.36.199.2.3.
If the claim is valid and filed with the Campus, the exam team should risk assess the issues on the claim. See IRM 188.8.131.52.3. The exam team and the taxpayer should determine the appropriate resources and issue timeline for all claim issue(s) that need to be examined. The case ECD and statute will be extended if necessary to allow sufficient time for the issue team(s) to properly examine all claim issues.
If the exam team determines that a claim issue(s) is material or has an impact on compliance and cannot be examined in the current cycle, the exam team and the taxpayer should collaborate on the most efficient option to examine the claim. Options may include but are not limited to: examining the claim issue(s) in a separate examination or resolving the issues through an existing resolution tool.
Time spent examining the protection of the revenue base must be kept separate from regular examination time. This is accomplished through the use of the codes in IMS and ERCS. For guidance on how to correctly use the N, P, and R codes when reporting time refer to the procedures in IRM 184.108.40.206.6 - Protection of Revenue Base.
Issue discussions are conducted with the taxpayer after the preliminary risk analysis has been prepared. Large or complex issues may require multiple issue discussions to achieve the objectives below, while less complex issues can be combined into one issue discussion meeting or held during the opening conference (meeting). In some instances it may be appropriate to hold issue discussions on a conference call with the taxpayer. Each examination has different facts and circumstances and therefore the forum used to hold issue discussion meetings is up to the judgment of the issue team.
The preliminary risk analysis should be shared with the taxpayer prior to the issue discussions to allow the taxpayer sufficient time to identify knowledgeable personnel on the potential tax issue(s) and arrange for their participation.
Successful issue discussions occur when both sides collaborate to define how issues selected for examination are to be efficiently examined. The issue team should clearly describe to the taxpayer their concerns as to why each tax issue has been initially selected for audit. If the taxpayer is unable to alleviate the issue team's concerns regarding an issue, the taxpayer should provide input to facilitate the issue team in establishing the initial audit steps and timelines for each issue. Ultimately, the issue team retains the authority to determine which issues will be examined, and what audit steps are needed to conduct the examination of the issue.
Issues or concerns can be elevated by either the taxpayer or the issue team using the principles of collaboration. See IRM 220.127.116.11, Principles of Collaboration.
During the issue discussions, potential tax issues that are identified in the preliminary risk analysis are discussed with the following joint objectives:
Select which issues or aspects of a particular issue warrant examination
Finalize the issue team members along with taxpayer personnel for each issue
Establish effective and efficient audit steps
Prepare an issue timeline, as necessary
The issue manager is ultimately responsible for working with the taxpayer in setting the issue timeline, approving the audit steps, and managing the issue. The issue manager should coordinate with the case manager when setting the issue timeline.
Issue selected for examination, audit steps , issue team members, and issue timelines will be documented in the examination plan. As a part of the planning process the case manager will collaborate with the issue manager(s) to determine the issues that warrant a separate timeline and the issues that run on a concurrent timeline. Once all issue timelines are determined, the overall case timeline and estimated case closing date will be driven by the tax issue requiring the longest time to complete.
During issue discussions, issue team members necessary to most efficiently examine each issue will be finalized and added to the exam plan. Taxpayer personnel should also be identified for each issue.
The issue team will explain to the taxpayer what issue(s) have been selected for examination and the tax concern associated with the issue. In return, the taxpayer is responsible to explain the facts and circumstances surrounding the issue, why a particular position was taken on the return, and provide the documentation relied upon when reporting the tax issue.
The issue team will solicit the taxpayer’s input into developing the best methods and the most efficient audit steps to begin examining the issue. A mutual understanding of these audit steps should also make the IDR process more efficient and relevant.
A combination of several methods may be required to begin examining each issue. Whatever method or methods are agreed to, the discussions should be conducted with the taxpayer and documented. Examples are listed below but should not be considered as all-inclusive.
Issue IDRs following the IDR process to request data
Schedule a taxpayer presentation describing the transaction and providing associated documentation.
Schedule site visits to the taxpayer's facilities to gain a better understanding of the taxpayer's business activity or operations
Use statistical or judgment sampling to reduce burden on the taxpayer and LB&I
Conduct interviews or meetings with taxpayer personnel who are most familiar with the issue
Establish issue-specific materiality thresholds
Focus the examination to specific accounts, divisions, cost centers, expenditures, etc
Consult with Counsel and subject matter experts (SMEs)
Identify relevant IRS procedural guidance such as the Industry Issue Resolution (IIR), Revenue Procedures, etc. specific to the issue being examined
Initial audit steps for each issue should be documented in the exam plan, and modified as facts and circumstances change. The procedures documented should clearly identify the steps to examine each issue. Establishing the framework for examining a tax issue should also help in preparing clear and relevant IDRs.
The audit steps should be tailored to the taxpayer's industry and the facts and circumstances specific to the issue being examined. Where appropriate, the audit steps should also be divided or arranged in the sequence to be followed.
The issue manager is responsible for setting and monitoring the issue timeline. In addition, the issue manager will inform the case manager of the issue timeline and discuss any modifications needed to the timeline throughout the examination.
Once the initial audit steps are developed, the issue team should now be able to estimate how long it will take to examine an issue. An issue timeline will ensure that resources are efficiently planned and that the time needed to effectively examine an issue is adequate.
The issue team should use judgment when deciding if more than one timeline is needed on an examination. For issues that require a similar period of time to examine, it may be appropriate to share the same timeline. Conversely, issues requiring a significantly longer or shorter period of time to examine may require separate issue timelines. The issue requiring the longest examination time will be used to set the ECD and milestone dates such as issuing the Revenue Agent Report (RAR) and other administrative closing procedures.
Issue teams must keep in mind that in estimating timelines they are dealing with variables and unknowns. Initial timeline estimates should be as accurate as possible; however, teams may need to revise a timeline during the course of the examination due to unforeseen circumstances.
Issue timelines will be prepared with the taxpayer's involvement and will include target dates, such as; the last day to issue an IDR, dates for periodic risk assessment of the issue, date for acknowledgment of the facts, the last day to issue a NOPA, etc.
The issue team will collaborate in developing an issue timeline. Some factors to consider in setting an issue timeline may include but are not limited to:
Complexity of the issue
Audit steps identified
Location and availability of records
Availability of taxpayer and LB&I resources
Use of computer assisted audit techniques
Obtaining an Advanced Pricing Agreement
Request for Technical Advice Memorandum or other legal advice
The examination plan is memorialized at the end of the planning phase; however, it is a living document and may be modified as the examination progresses. In other words, audit steps can be modified, issues can be added or dropped, timelines can be modified as necessary, etc.
The ultimate goal of the planning phase is to timely complete an efficient and effective examination plan. While there is no benchmark for when to complete the examination plan, the sooner the plan is completed, the sooner the execution phase can begin. To timely complete the examination plan, issue team members must work together and engage the taxpayer as soon as possible. An effective plan will enable LB&I to use its resources in executing and resolving issue(s) in the most efficient manner. The issue team retains the judgment of when it may be more efficient to issue IDRs, attend a taxpayer presentation(s) or conduct a site visit(s) before the exam plan is completed.
The exam plan can be documented using one of three options as described below in IRM 18.104.22.168.6.
The examination plan at a minimum should include:
Detailed audit steps for each selected issue
Case and issue timeline(s) with milestone dates
Issue team members, including each team member's estimated days
Issue manager identified for each issue
Taxpayer members assigned to work with each issue team
Taxpayer contact information and each individual’s level of authority with respect to the examination (i.e. authorized to discuss tax matters, authorized to provide and receive information and authorized for all matters including binding taxpayer regarding adjustments)
Established dates and/or decision points that are used to periodically risk assess issues being examined
Agreements and arrangements made during the opening conference (meeting)
The issues drive the case timeline. The issue requiring the longest period of time to examine will be used to set the estimated case closing date (ECD). The case timeline will be prepared with the taxpayer's involvement and will include target dates such as, but not limited to:
Date to issue exam plan
Dates for periodic status meetings to monitor the overall progress of the examination
Last date to submit informal claims (30-day window)
Last date to file formal claims (recommended prior to the midpoint of the examination)
Last date for issuing IDRs
Last date for NOPAs to be issued
Date to issue the RAR, etc.
Factors to consider in setting the case timeline and estimated closing date include:
Statute of limitations
Longest issue timeline
Administrative procedures (Appeals, resolution tools, etc.)
Advanced Pricing Agreement
Technical Advice Memorandum or other legal advice
Other external factors when taxpayer availability is limited (holidays, regulatory or business obligations, etc.)
When extending an issue timeline that requires extending the ECD, the issue manager should explain to the case manager the reason for extending the issue timeline and should also prepare a revised issue timeline along with a written explanation. If the revised timeline warrants extension of the statute a meaningful discussion will occur with the taxpayer. Statute extensions must be secured to accommodate the revised ECD. Once the issue manager and the case manager agree that an extension of the ECD is appropriate, they will follow guidance for requesting approval of a case ECD extension.
The examination plan must be shared and discussed with the taxpayer before the plan is final. This discussion should be conducted in an interactive manner to increase the taxpayer's involvement in the planning process, which contributes to their understanding of the examination plan and also affords them the opportunity to propose changes before the plan is final.
The examination plan must be signed and approved by the case manager, issue manager(s), and for certain examinations the territory manager before providing the plan to the taxpayer. The taxpayer signs to acknowledge their receipt of the examination plan. A copy of the completed plan with all signatures will be provided to the taxpayer. This concludes the planning phase.
The examination plan is a flexible document and may be revised during the examination if warranted by unforeseen changing facts and circumstances. Any proposed revisions to the examination plan will be shared and discussed with the taxpayer, issue manager(s), and affected issue team members for their input before being approved by the case manager, and for certain examinations approved by the territory manager.
The issue-based examination plan is prepared using Form 13744-I , Issue-Based Examination Plan and Risk Analysis. Form 13744-I is optional and replaces Forms 4764, 4764-A, 4764-B, 13744, and the examination timeline. Attach the opening conference (meeting) minutes, including any pertinent agreements reached during the opening conference (meeting). See opening conference (meeting) agenda in IRM Exhibit 4.46.3-3.
A complete issue-based examination plan will include:
Form 13744-I, Issue-Based Examination Plan and Risk Analysis
Meeting minutes including pertinent agreements reached during the opening conference (meeting)
If this option is selected, a complete IC Examination Plan will include the following:
Form 4764-IC, LB&I Examination Plan for Industry Case (IC) Audits
Form 13744, Risk Analysis Worksheet
Form 4764-A, Summary of Assignments (optional)
Form 4764-B, Examination Procedures
Examination timeline using optional Form 13745, Examination Timeline, or similar workpaper.
The Administrative Summary Sheet Workpaper for an IC case is available to assist in preparing the examination plan and is not part of the plan given to the taxpayer. See the LB&I IC Re-Engineering home page.
The following subsections are original CIC procedures from previous revisions of this IRM. The original date of each subsection has been retained. However, citations were updated, obsolete references were removed and other minor editorial changes were made. IC cases are now addressed in IRM 22.214.171.124.6. This part of the IRM is in transition.
Written document - The examination plan is a written document for all LB&I cases containing agreements with the taxpayer, information for Service personnel, work assignments, examination scope, examination procedures, time estimates, and special instructions. The plan is prepared using Form 4764, LB&I Examination Plan, Form 4764A, LB&I Examination Plan - Summary of Assignments and Form 4764B, LB&I Examination Plan – Examination Procedures. The use of Form 4318, Examination Workpapers Index, is no longer permissible.
Organizational tool - The examination plan is the principal tool the team manager has for unifying a diverse group of Service personnel, having separate and distinct responsibilities, into an effective team. It should:
Serve as a document for formalizing agreed upon arrangements with the taxpayer (these arrangements will have been negotiated through various preliminary planning meetings and the opening conference with the taxpayer)
Provide management with information regarding the type of examination planned and resources required
Define each team member's responsibility and how that responsibility is to be carried out
Serve as a basis for monitoring and directing the progress of the examination
Contain the scope of the examination
Flexible - The examination plan should be only as sophisticated and detailed as needed for the examination to be performed. The plan for a single-location one-product business normally requires less detail than one written for an examination of a conglomerate type taxpayer having diversified products and global operations. An examination employing four or five team members may involve little or no coordination, whereas; a larger case with twenty or more agents will need more detailed written guidelines on how the members are to be used.
Balanced - The plan should also have a proper balance between rigidity and flexibility. Excessive rigidity may result in a poor examination or a misuse of resources ; however, a plan which is too general or flexible will defeat the purpose for which it is intended - a tool for directing, controlling and monitoring the examination. Proper evaluations of these factors when drafting a plan will not only result in an effective examination but will also save planning time.
Taxpayer involvement - The examination plan is as important to the taxpayer as it is to the Service. The taxpayer, through involvement during the entire planning process, develops a vested interest (aside from tax consequences) in how the examination is to be conducted. Both the taxpayer and the Service benefit when the taxpayer is able to plan ahead to provide space, equipment and personnel when needed by the team. Therefore, the taxpayer and the Service should have a mutual understanding in sufficient detail as to what, where, and when examination activity will take place.
Living document - The examination plan is not a static tool. Team managers should revisit and revise the plan throughout the examination to take advantage of the additional information and feedback obtained. Personnel resources are thus more effectively used and the most significant issue areas are covered.
Responsibility for the Examination Plan - The examination plan is the responsibility of the team manager, however, the team coordinator will assist in its preparation.
Sequence - Parts I and II of the plan should be completed before any substantial amount of examination work is started. The preliminary analysis, planning conferences and the initial survey of the taxpayer's records provide the information for the preparation of these parts of the plan. Part I, Taxpayer Information Section, should be completed first, since decisions reached in completing this section could influence instructions to the team and work assignments. Other portions of the examination plan may be developed simultaneously.
Review and approval – Parts I and II of the examination plan contain important information such as the type of examination being planned, the time span scheduled and the estimated cost in resources and travel, which are of interest to second and top level LB&I management. This portion of the plan is subject to their review and approval (which must be documented) and must be submitted as early as possible so that the team manager can make any requested modifications. This further highlights the fact that Part I and Part II should be submitted before any substantial amount of examination time is expended.
Taxpayer agreement - The orderly progress of the examination will depend upon the taxpayer's full agreement to and complete understanding of the examination arrangements.
Review of books and records - The taxpayer's books and records should be reviewed for noncompliance areas before the last part of the Examination Procedures Section is completed.
Examination procedures - Team members are expected to develop the written examination procedures to be used to accomplish their assignments. Form 4764B, LB&I Examination Plan – Examination Procedures, has been designed for this purpose. Other formats may also be employed reflecting the required written procedures and other pertinent data. The team manager must require timely submission of the planned procedures to decide if they are compatible with the overall plan. This is a primary device for controlling examination time. The planned procedures are to be submitted for the review and approval of the team manager.
Three parts - The plan is the product of the team manager, team members, and the taxpayer. It is comprised of three individual sections as follows:
Part I - Taxpayer Information Section (Examination Arrangements). This section is the overall plan of examination. It contains information extremely important to both the taxpayer and the team. The taxpayer is asked to sign this portion of the plan indicating agreement with its content.
Part II -- Service Management Information Section (Examination Program). This section is the team manager's instructions to team members containing information about the taxpayer, as well as information of a general management nature.
Part III -- Examination Procedures Section. This section contains each team member's assignment and the procedures to be used in accomplishing the assignment.
Sharing the Plan with the Taxpayer - All parts of the plan should be shared with the taxpayer. Information which would impair tax administration such as Law Enforcement Manual (LEM) information, Official Use Only (OUO) documents and some specialized audit compliance techniques cannot be included in the examination plan.
Two-fold purpose - The Taxpayer Information Section has a two-fold purpose. One is to formalize the groundwork for an examination consistent with the concepts of LB&I. The other is to prevent misunderstandings of commitments made and agreements reached. It should be sufficiently detailed and complete so that team members and taxpayers will not unknowingly create a sensitive situation by acting contrary to the agreements. Automated Form 4764, Large Cases Examination Plan, should be used in preparing this part of the plan.
Preparation of Part I - Part I should be prepared following the opening conference and should clearly identify, in writing, the agreements reached with the taxpayer. The preparation of this part of the plan is the responsibility of the team manager. The examination plan is a shared responsibility of the team manager and the senior team coordinator in cases that require a senior team coordinator.
Signatures on Part I - Acknowledgment regarding the matters covered and agreements reached at the opening conference is best evidenced by signatures of both the team manager and a duly authorized corporate officer of the taxpayer in spaces provided on the last page of Part I.
Limited Scope Audits - Part I should be completed for each LB&I examination; however, at the discretion of the team manager, during a limited scope audit, only the pertinent portions of this section may be prepared. Examples of limited scope examinations include:
Follow up on issues raised in the preceding cycle
Repeat examinations where unabsorbed claimed credits (e.g., foreign tax credits) are so large as to preclude a productive full scope examination
Coordinated Issue special purpose audits, etc.
Commitments and Content - Taxpayer and Service commitments regarding examination activities should be realistic regarding examination activities. Every effort should be made to live up to them, particularly in the following areas:
List of Service personnel including names, badge number, position, and telephone
Dates that each team member can be expected to begin working on the case
Location where examination activities are to be carried out
Records to be provided
Space and equipment required
Requests for information, (see IRM 4.46.4, Inspection and Fact Finding)
Authority - Team managers should make certain that the individual they are dealing with is a duly authorized corporate officer or delegates who can provide information and enter into agreements regarding examination procedures when seeking commitments from the taxpayer. Also, the individual will be responsible for notifying primary parties in the taxpayer's organization of the arrangements affecting them.
Communications - Part I of the plan should contain a Communications Agreement. This agreement should include the following items:
Identification of individuals in the taxpayer's organization who are authorized to furnish information to team members, who may discuss tax matters to whom adjustments may be proposed
Identification of the team coordinator and team members and the roles each will have in the examination
Identification of persons best qualified to give complete firsthand information. (This may include persons responsible for preparing the documents to be examined, such as voucher clerks.)
Arrangements - The Taxpayer Information Section should cover the details of all arrangements, including:
The space set aside for the agent's use
Work hours and parking arrangements
Names of individuals who will provide equipment needed by the team
Telephone and data lines needed
Agreements regarding status meetings with the taxpayer to discuss problems
Purpose of Part II - This section provides information regarding the taxpayer, its organization and structure, including the relationships of its entities, and business purposes. Part II also contains instructions to the team and various procedures to be followed during the examination.
Taxpayer orientation - The taxpayer should be requested to provide an orientation that will provide much of this information needed for this section.
Additional Information– Part II provides information for the team members regarding their specific assignments, the role of the team manager and team coordinator, scope of the examination and when necessary, special examination techniques. Information provided in Part II will allow team members to be in a position to make the best use of their time. They will know their role in the examination, how to proceed with the assignment and, if called for, what information to develop for other team members.
Information Regarding Taxpayer – This section includes:
A summary of the organization's acquisitions, mergers, or liquidations
A description of accounting and internal control systems. (This should show accounting and record keeping centers where primary and summary records are maintained and establish the location where records are available for examination).
A brief description of the organizational structure. (An organization chart is considered helpful in keeping team members aware of the structure and interrelationships of taxpayer's components. This becomes extremely important where assistance or support group are involved since it assists them in coordinating their efforts with other components of the examination.)
The record retention limitation agreement under Rev. Proc. 98-25
Titles and frequency of reports to regulatory agencies
Public or other sources of information
Information regarding key taxpayer, effectively controlled entities, and divisions or branches, etc. (This would include a list of branches, plants, divisions, and entities not to be examined with an explanation why they should not be examined. This listing and analysis should include comments regarding relative size, last year examined and last year an on-site inspection/examination was conducted as well as information regarding the location of business activities and major product lines. It should include a description of any foreign subsidiaries including details of what books and records are overseas along with their locations and the responsible employees.)
Instructions to Team Members - This section includes instructions related to the following subjects:
Standard for workpapers (size, etc.)
Indexing of workpapers and final report. This will include the use of the Standard Audit Index Numbering (SAIN) method of indexing workpapers (See Exhibit 4.46.6-1, Corporate SAIN Codes – LB&I)
Routing of requests for information to and from the taxpayer
Procedures for requesting conferences with the taxpayer
Maintaining a folder of summary topics (planning file) and related background material to be used in preparation for the post-examination critique
Procedures for monitoring time
Development of examination procedures, presentation of issues and preparation of the report
Procedures for requesting information
Procedures for requesting accountants' workpapers
Written communication procedures
Requirements associated with confidentiality privileges relating to taxpayer communications
Instructions for documentation of examining officer's activity and interest abatement
Requirements associated with confidentiality of taxpayer information/taxpayer privacy
Awareness of Unauthorized Access (UNAX) requirements
Procedures related to third party contacts
Awareness of taxpayer rights
Examiner verification requirements related to providing the taxpayer with official employee identification information
Communicate to field employees the policy on responding to work/case related information requests and practices to comply with IRM 126.96.36.199.188.8.131.52
Information for Team Members – The following types of information would be beneficial to all team members:
Brief outline of team manager’s planned activities
Brief outline of team coordinator’s activities
Industry practices and issues common to this type of industry
Special examination features to be used
Projected travel expenses (optional)
Outline of compliance and filing checks, procedures, and special techniques to be used:
Examine internal audit reports
Check for "grass roots" lobbying expenses
Review travel and entertainment of officers, where applicable
Verify requirements of Corporate Executive Compliance Program
Review management letters from CPA firm and responses thereto, where applicable
Verify required return filing compliance. (See IRM 184.108.40.206)
Examination Assignments – A schedule of examination assignments will be prepared showing the planned order of the examination focusing on the priority of the identified issues. Examiners should use this schedule as a guide in preparing examination procedures in order to ensure the highest degree of coordination of the examination.
Modifications allowed - Part II should be completed for all CIC examinations. However, there are situations when parts of it may be abbreviated or omitted at the discretion of the team manager such as subsequent CIC examination cycles involving the same team manager or team coordinator. Much of the data will be the same as in the prior cycle and can be copied over to the new examination plan.
Purpose of Part III - The purpose of this section is to:
Inform team members of their assignments and to convey any special instructions
Permit team members to indicate the specific examination procedures and techniques they propose to use in fulfilling their assignment
Assist the Senior Team Coordinator or Team Manager in facilitating the distribution of individual assignments and provide feedback on the manner in which each team member intends to carry out the assignment
Forms to be used – Forms 4764A and 4764B are used in preparing this section of the plan and should contain the name of entity, the years involved, a brief description of the examination assignment, and date. These forms should contain the names of team members and a listing of various examination segments (accounts, transactions, etc.) of the assignment to reflect:
Flow and order of the examination process
Planned start and completion dates
An estimate of examination time by specific segments, such as line items from a return, SAIN item, potential issue(s), etc.
A description of testing, sampling, or other specific examination techniques to be used (including compliance checks), when warranted
Depth to be achieved in the examination of items within the segment
Special coordination with other team members to achieve the best possible uniformity and consistency in raising and resolving issues
Prioritization of significant areas/issues.
Form 4764B, LB&I Examination Plan, Examination Procedures –This form also should contain procedures developed specifically for significant examination areas, compliance checks and in-depth probes. The standard SAIN procedures can be used for the balance of the examination areas. See the LB&I website for additional information on workpapers located at the audit tools link.
Distribution - The examination plan is a working tool and once completed, should be distributed to those who have use for it:
The taxpayer will be given a copy of the plan in all cases. Changes made to the plan should be promptly discussed and coordinated with the taxpayer.
All team members should receive those portions of the plan, and other material and information, which are pertinent to their assignment. Instructions provided should be sufficient to permit full understanding of their assignments and enable team members to place in proper perspective their relative portion of the entire team's effort. A complete copy of the plan should be kept on site for reference.
Area Counsel will be furnished relevant portions of the plan.
The approving official (i.e. territory manager, team manager) should retain a copy for reference files.
Periodic review and revision - Time allocations and estimated closing dates should be subject to continual managerial review during the life of an LB&I examination. These projections are to be modified when changes are called for by any case-related developments, particular needs of the examination, or needs of the Service.
Plan addendum - Modification of the original plan, if significant, will be explained in an addendum to that plan. The team manager is responsible for making the judgments necessary to determine whether a particular change has the degree of significance to justify the preparation and submission of an addendum. A change of plus or minus 10 percent in planned time may not, by itself, be indicative of significance but may be material if considered in association with other factors.
Significant changes - Changes involving the taxpayer's component entities could also be deemed significant. Adding a loss-year to a multiple-year examination already in process would also warrant an addendum to include that year. The taxpayer's input should be considered when making modifications to the plan.
Approval - Development and documented approval of an addendum will follow the same processing procedures used for the original plan.
Taxpayer’s copy of the plan - The Taxpayer Information Section of the plan should be signed by both the taxpayer and the team manager. The team manager should deliver the examination plan personally since it will provide an opportunity to:
Review the document with the taxpayer
Obtain the taxpayer's signature as an acknowledgment of receipt and that the agreements and information are correctly stated. (The team manager should document delivery of the plan and the fact that its correctness was orally acknowledged in the event the taxpayer declines to sign).
Remind the taxpayer that the examination plan is subject to change when necessary
Preparation of workpapers - Part II of the plan should contain instructions for preparation of workpapers and reports in enough detail to ensure the degree of uniformity desired. The workpapers and reports should be neat, legible, grammatically correct, and standardized for easy collating into a single file or report and procedures for disk control and labeling should be stated. Instructions should cover items such as:
Type of workpaper (size, color, etc.)
Type of workpaper indexing
Indexing of electronic storage media
Software - BNA and RGS software should be utilized to the greatest extent possible.
Maintenance of planning file (CIC cases) - The entire team should be alert to current trends and instructed to maintain a planning file to assist the team manager in preparing for the next examination cycle.
Tax Computation Specialist (TCS) Review: All closed examinations must contain an examination report prepared by a Tax Computation Specialist.
Responsibility - Team managers are fully responsible for all management aspects of their cases. This requires substantial activity on their part in reviewing and discussing matters with all members of the team. Their activity should be briefly outlined in this section of the examination plan so that team members and the taxpayer will be able to properly coordinate their activities. The outline should cover items such as:
Planned contacts with specialists and assistance or support team supervisors
Frequency of manager's meetings with taxpayer and team members
Coordination with assistance or support groups
Involvement in creating the examination plan and method for documenting approved changes in the examination plan
Review of work in process
Input and review of issues selected through the manager’s initial and mid cycle risk analysis process
Identification of requests which will require the team manager’s documented approval (include only those that are relevant)
Requests for accountants' work papers and tax accrual work papers (see IRM 4.10.20)
Third Party Contacts, Issuance of Summons and Summons Enforcement
Contacts made to District Counsel
Requests for outside services
Involvement in the Information Document Request (IDR); Process to address delays (see IRM 220.127.116.11)
Review and approval of significant or sensitive proposed issues (Forms 5701, Notice of Proposed Adjustment)
Approval of the assertion of all penalties
Protection of all statutes of limitations
Review the case at the end of the examination
Section 482 Pricing Issue IDR review – All requests for information relating to the examination of section 482 transfer pricing issues should be reviewed by the team manager and international manager. A request should be prepared, reviewed for content, and forwarded to the taxpayer at the opening conference in accordance with Exhibit 4.46.3-4. The taxpayer, according to statute, has 30 days to respond to this document request. Minor or inadvertent failures to respond within this time frame can be excused only in cases of a good faith effort to comply and prompt remedial action. The team manager should arrange appropriate meetings to resolve the matter with the taxpayer as set out in the IDR Process if the taxpayer fails to respond to the document request within this 30-day time frame, see IRM Exhibit 4.46.4-1, Requirements for Issuing IDRs. The territory manager should be informed if the requested information is still not received. Area Counsel should be consulted to assist in the initiation of appropriate remedial enforcement procedures to affect early compliance with the original document request if the records still are not made available.
Meetings and travel – The team manager should prepare estimates of likely dates for meetings and associated travel costs. Planned travel costs must be approved by the next level of management.
List of activities - The team coordinator's activities should be fully explained in Part II of the examination plan so that all team members will be able to conform to the administrative procedures involved in those activities. For example, team coordinators will:
Prepare the examination plan with the assistance of the team manager
Update the risk analysis with the assistance of the team manager
Review all team members' information requests (including specialists) for uniformity, clarity, duplication of other requests
Ensure that information requests are discussed with appropriate taxpayer representative prior to their issuance, if necessary
Ensure that issues to be presented on Forms 5701, Notice of Proposed Adjustment, are discussed with the appropriate taxpayer representative prior to issuance
Review all team members' (including specialists) proposed adjustments (Forms 5701/NOPAs)
Specify who will receive requested information from the taxpayer (will team members get their own information, or will the Team Coordinator receive it and forward it to team members?)
Secure the team manager's approval of requests where required
Maintain an IDR & 5701 log to document the date of issuance and receipt of each IDR and retain copies of the requests
Function as the liaison with the taxpayer for the day-to-day activities of the team
Determine what work papers will be keep to document the audit trail (time tracking, preparation of minutes/memos detailing significant meetings, etc. during the course of the exam), including retaining copies of requests for information, NOPAs and all statistical samples
Update the planning file
Prepare Post-Examination critique
Monitor the case for TEFRA links using command code TSUMY periodically
Control the coordination of meetings (e.g., planning meeting/opening conference/mid-cycle review/post-examination critique)
Ensure that ERCS, IDRS, and IMS are correctly updated
Protect all statutes of limitations
Perform other duties as determined appropriate by the team manager
Senior team coordinator – Extremely large CIC audits may require the assignment of a senior team coordinator. The duties of a senior team coordinator are significantly expanded to include conducting many of the planning conferences and to include preparation of major parts of the examination plan. Also STC’s may be required to keep a quarterly or monthly narrative that documents the activity on the case and any significant non-examination activities (vacations, training, etc.) of all of the Team Members (including specialists).
Scope – Risk Analysis provisions should be followed in determining the scope of the examination.
List of components – Part II of the plan provides for the listing of all components of the taxpayer. The listing should indicate percentage ownership of components, the principal product or function of each component, filing location if the component is a separate legal entity (files a separate return), and reasons for not examining components. This information will help acquaint team members with the nature of their assignment and alert them not only to the possibility of inter-company transactions but also to those accounts in which those transactions may be found. This list will be used in the risk analysis process to help determine scope.
Limiting the Scope - Reasons for not including various items in the examination plan should be made known to team members, as well as to technical advisors and management. Documenting this information allows management to evaluate decisions regarding cycle time and examination scope which may have a bearing on the territory's resource utilization, examination program, and currency. The individual team members also need to know this information in order to:
Avoid developing useless feeder information
Alert the team manager to significant interrelated issues which, if fully developed, would require that the component be brought under examination
Recognize information that was not available to the team manager in deciding the scope of the examination
Team assignments - The team manager and team coordinator should give specific assignments to each of the team members after the planning meetings. It should also be made clear to all of the team members that the instructions are a guide and are flexible depending upon the needs of the case. The team manager should encourage independent thinking by all team members at all times.
Special instructions – This part of the plan aids the Senior Team Coordinator or Team Manager in conveying special instructions to the team members and is used for summarizing the assignments. Variations of this format may be desirable in some cases. It should:
Contain special instructions on case management activities for particular assignments only. (Instructions of a general nature should be covered in the Service Management Section)
Contain instructions as to special accounts, special examination procedures to be applied, and issues or other matters the Senior Team Coordinator or Team Manager wants to have covered
Clearly describe the assignment and the team members’ responsibilities and staff day allocation. (This will help to determine the examination procedures to be applied)
Point out special features or problems about the assignment that are known from past examinations or other sources. (It will not be necessary to duplicate information already contained in the Service Management Section.)
Distribution – Form 4764A, LB&I Examination Plan – Summary of Assignments, should be given to each team member before work begins.
Format - Variation of the format for outlining procedures may be desirable in some cases, but should reflect the information contained on Form 4764B, LB&I Examination Plan – Examination Procedures.
Preparation - Team members should begin preparing the procedures part of the plan upon receipt of their assignments. It should be prepared to reflect clearly the steps to be taken in the examination of each particular account or item. Changes to procedures should be shown so that there will be a record of what was actually done.
Preliminary examination work – Some preliminary work will have to be done before examination procedures can be finally determined. This could include a review of accounting procedures, internal controls and a test of their effectiveness, or other limited examination work. The procedures used in any preliminary or initial work should be documented in this section.
Modifications - The procedures may have to be modified as the examination progresses. The examiner must be alert for any changes that may be necessary and, after discussion with the team manager, incorporate any revisions in the appropriate section of the examination plan. The Senior Team Coordinator or Team Manager will coordinate significant changes with the taxpayer.
Tailored procedures - The procedures to be used should reflect the agent's tax knowledge, ingenuity, and imagination. The mere reiteration of stereotyped text book techniques may not be appropriate.
Sequence – The examination procedures should be divided or arranged in the sequence to be followed.
Assistance or support team - The team manager will decide if assistance or support group team members will also write the examination procedures for their assignments. It may be necessary for the team manager to recommend procedures in some areas in those cases where it will be a first-time examination for the assistance or support group. It may also be necessary for the team manager or team coordinator to travel to the assistance or support group to help in identifying appropriate procedures.
Forms 4764B for administrative procedures (preliminary audit work, case closing, and compliance checks) can be found at this link http://.publish.no.irs.govgetpdf.cgi?=41980.
Responsibility - The Senior Team Coordinator or Team Manager is responsible for planning the time necessary for each examination. Time planning is essential in order to ensure staff resources are effectively utilized and concentrated in the most productive areas.
Data available - Senior Team Coordinators or Team Managers have information developed during the preparation of Parts I and II of the examination plan that will assist in time planning. They must evaluate the information obtained, consult with team members, specialists, managers, the taxpayer, and others, including prior examiners who may be able to contribute to or supplement information about the taxpayer. The team manager must then relate this accumulated information to the planned depth and scope of the examination to be conducted.
Prior cycle information available - The best judgment of the team members and the team manager is an important factor in those cases where detailed information about time expended for the prior examination is available. The team manager and examination team must take into account any changes to the depth and scope of the current examination, as well as any other known factors which would influence the examination. The team manager must be careful not to simply roll over time estimates from prior examinations.
No prior cycle - Some audits do not have a prior history of examination time. The detailed projection of time requirements in these audits must reflect the team members' and team manager's best judgment after taking into account everything learned about the taxpayer.
Other considerations - The following additional factors should be considered:
Experience of the team manager and team members
Extent of computer assisted audit techniques
Location of records
Travel time (on-site vs. assistance or support)
Effectiveness of taxpayer’s retrieval system
Extent and nature of in-depth probes
Complexity of examination areas selected
Format - Form 6609, Schedule of Work Assignments and Planned Time, may be used to document time planned by specific activity or examination area.
Modifications - Team managers must keep in mind that in estimating time they are dealing with many variables and unknowns. Initial estimates of specific time requirements should be as accurate as possible, however, team managers are expected to revise and adjust the time allocations during the course of the examination (on-going risk analysis). This ensures the application of time to those areas having the greatest compliance potential.
Identification and History of Taxpayer
Reorganizations, Acquisitions, and Liquidations, etc.
Accounting Records and Procedures
Continuing Year-to-Year Analysis
Contracts, Documents and Agreements
Current Data Affecting Subsequent Years
ADP & Computer Applications
Record of Examination Team Activity
An agenda is useful to set the objectives and scope of the meeting. It is also useful as a reminder of discussion topics. The sample agenda topics below include items that may be relevant to the internal planning of an examination:
Internal Planning Meeting Agenda Topics
Introduction of team members
IRS team members assigned to the case First, Last Name, Title, contact information
Discussion of financial interest in assignments
Reporting requirements for team members
Discuss P-4-5 and P-4-6 and complete Form 6782 and Form 13664
Review of taxpayer information:
Review of information secured from internal sources:
Background of the taxpayer
Prior examinations and results
Status of any cycles in Appeals
Claims filed by the taxpayer
Prior taxpayer relationships (how cooperative?)
Review of tax returns
Review of Planning File See Exhibit 4.46.3-1
Review of prior RARs
Discussion of carry-over issues
Review information from Case Built File (CBF)
Review of Resources Available to the Team Manager
Review of information secured from external sources:
Review of Annual Reports
Review of SEC Reports
Review of industry Issues
Issue identification/risk assessment
Discussion of Risk Analysis process
List potential issues in this cycle by team members
Presentations of initial issues identified
Determine resources needs
Tentative identification of issue team members
Tentative identification of issue managers
Roles of the case manager, issue manager and team coordinator
Tentative examination procedures for each issue
Tentative timeline for each potential issue
Discussion of Technical Advice Requests, i.e., TAMs, and possible Chief Counsel Advice requests
Discussion of additional staffing needs such as subject matter experts, counsel, outside experts etc.
Preparation for meetings with taxpayers
Review and prepare agenda for the opening conference (meeting) and issue discussion meetings with the taxpayer. See Exhibit 4.46.3-3
Discussion of how third-party contacts will be handled
Discussion of statutes – notification of taxpayer’s rights
Discussion of privilege and tax accrual workpapers
Discussion of policy and practice regarding responses to requests for work/case related information from external stakeholders/other IRS employees outside case. See IRM 18.104.22.168.1.1.
Discussion of adequate documentation for examination reports (IRM 22.214.171.124) and taxpayers’ agreement or non-agreement to those reports (IRM 126.96.36.199 to 188.8.131.52), and clarification of an agreed issue, that unless the taxpayer signs Form 870, the issue will be treated as unagreed per IRM 184.108.40.206.
Discussion of taxpayer’s rights, privacy (disclosure), and unauthorized access to taxpayer’s accounts
List of questions and topics to discuss with taxpayer during opening conference (see Exhibit 4.46.3-3, Sample Agenda for Opening Conference )
Discuss Communication Methods/Time Schedule Coordination
Internal communication and time schedules and logistics
Instructions to team members for procedures for the preparation of workpapers
Discuss procedures for requesting information from taxpayers
Discuss procedures for requesting conferences (meetings) with taxpayer
What to expect during on-site visits by case manager
Discussion of Senior Team Coordinator’s requirement to provide feedback on team member’s performance if the case has an STC
The opening conference (meeting) agenda should be modified based on the entity being examined, the experience with the taxpayer, and the information available. The sample agenda below includes items that may be relevant to the examination and should be considered. The sample agenda below is not all-inclusive but should only be used as a guide to prepare an agenda specific to the examination.
TAXPAYER NAME, EIN, AND TAX YEARS
First, Last Name, Title and post of duty
First, Last Name, Title and location
LB&I EXAMINATION PROCESS
Review the LB&I Examination Process - Provide a copy of Publication 5125, LB&I Examination Process, to the taxpayer and discuss the major sections below:
LB&I Examination Team Roles and Responsibilities
Taxpayer or Their Representatives Roles and Responsibilities
Expectations with Respect to Claims
Issue Team Approach
Issue Development Process
Written Acknowledgment of the Facts for Unagreed Issues
Information Document Request (IDR) Process
Letter 2205-L - The letter has embedded website links to Publication 1 - Your Rights as a Taxpayer and Notice 609 - Privacy Act
Revenue Procedure 94-69 (For Coordinated Examination Program taxpayers) - Issuance of an information document request constitutes notice of the commencement of the 15-day period in Section 3.01(2) of Rev. Proc. 94-69 to make adequate disclosure for purposes of the waiver of the IRC 6662 penalty. Rev. Proc. 94-69 is not impacted by the 30-day claim window expectation.
Issue Resolution Tools - Explain the various issue resolution tools with the taxpayer.
Application of Appeals Settlement to LB&I Taxpayers (D.O. 4-24)
Settlement Authority for Coordinated Issues (D.O. 4-25)
Advance Pricing Agreements ( Rev. Proc.2015-41, )
U.S. Competent Authority Assistance (Rev. Proc. 2015-40)
Early Referral to Appeals ( Rev. Proc. 99-28)
LB&I Fast-Track Process (Pub 4539and Rev. Proc. 2003-40)
Accelerated Issue Resolution (Rev. Proc. 94-67)
Pre-filing Agreements (Rev. Proc. 2009-14)
Information Document Requests - Form 4564, Information Document Request, will be used to request information. The current IDR process should be discussed with the taxpayer to ensure their understanding and commitment to the process. Refer to IRM 220.127.116.11.
Acknowledgment of the Facts for Unagreed Issues - A written acknowledgment of the facts for unagreed issues should be obtained prior to issuing a NOPA. See IRM 18.104.22.168. The case manager or examiner must inform the taxpayer that if a case is closed to Appeals and new information is provided by the taxpayer, the case will be returned to exam's jurisdiction for consideration. See IRM 22.214.171.124. If the taxpayer raises a new theory or alternative legal analysis, the case will remain in Appeals’ jurisdiction, but the issue team will be given the opportunity to respond in writing to the new argument. See IRM 126.96.36.199.
Notice of Proposed Adjustment (NOPA) - A Form 5701, Notice of Proposed Adjustment, along with Form 886-A, Explanation of Items, will be used for all issues adjusted. Before issuing a NOPA, the issue team must discuss it with the taxpayer and both parties should agree to a reasonable timeframe for response unless a standard response date for all NOPAs is determined at the opening conference (meeting).
Claims - Identify the date that the 30-day window ends, determined as 30 calendar days from the opening conference (meeting). If the last day of the 30-day window falls on a weekend or holiday, the last day to accept informal claims is the next business day. After the 30-day window, all claims for refund must be filed with the Campus and a copy provided to the issue team with all supporting documentation. See IRM 188.8.131.52.
Issue Mandatory Transfer Pricing IDR if it was not sent as recommended with the contact letter - IRC 6662(e) documentation studies should be secured on all Multinational Enterprise (MNE) cases in which there is either a Form 5471 or Form 5472 attached to the return. Review and discuss any response when received from the taxpayer. If there is no Form 5471 or Form 5472 attached to the return, inquiry should be made whether the taxpayer engaged in cross-border transactions with any entity in which the taxpayer had an economic interest. This inquiry should be documented in the workpapers. If the answer is affirmative, issue the mandatory transfer pricing IDR. If the taxpayer engaged in transactions subject to the provisions of IRC 482 but did not prepare documentation under IRC 6662(e), the taxpayer should be asked to provide the relevant information regarding the taxpayer’s transfer pricing practices. See IRM Exhibit 4.46.3-4.
Computer Records– Discuss with the taxpayer the intention is to conduct the examination as quickly and efficiently as possible. Consider requesting electronic book to tax reconciliation records and data from the tax software used in preparation of your tax return and electronic records supporting items on the tax return. Discuss the pertinence and scope of the requests with the taxpayer before providing corresponding Information Document Requests.
Electronic Recordkeeping Requirements – If a CAS is assigned to the examination, discuss and provide copies of pertinent revenue rulings and revenue procedures regarding electronic or machine-sensible records and recordkeeping to the taxpayer. After review of systems, records, policies and documentation, discuss observations regarding the taxpayer's compliance with those rulings and procedures and answer any questions or concerns. The CAS should consider issuing a Feedback Letter for items that should be corrected or adjusted in a subsequent examination.
Other Periods Impacting Current Examination - Discuss the impact of any prior examination adjustments on the current examination. Discuss the impact of unagreed issues from prior examinations and their status in Appeals. Discuss the impact of any (1) change in accounting methods (Form 3115) filed or anticipated and (2) carry back claims (Form 1139) filed or anticipated.
Compliance Checks - Discuss the relevant compliance checks. Refer to the on-line tool, Mandatory Items Audit Tool or IRM Exhibit 4.46.3-5.
Key Officer's Returns - Explain the requirement to inspect the tax returns for officers, key corporate executives, and controlling shareholders as required by IRM Exhibit 4.46.3-6
Statute Extension Policy - An effective examination plan will ensure that statutes are covered for the entire plan timeline through status 80 or 90. See IRM 184.108.40.206, Guidelines for Soliciting Extensions.
Communication Agreement - The communication agreement must identify individuals in the taxpayer's organization who are authorized to provide and receive information, who may discuss tax matters and those with whom adjustments may be proposed. A written authorization must be secured and signed by the responsible officer, IRC 6103. A Form 2848, Power of Attorney, should be secured as appropriate.
Flow of Communications - Identify who will serve as the contact point between the taxpayer and the issue team on administrative items and/or items related to tax issue(s), such as; issuing and responding to IDRs and NOPAs, etc. Administrative items may include coordinating meetings, receiving claims, one-stop service, etc. If circumstances change during the examination it may be necessary to modify the flow of communication and document the exam plan.
Leveraging Technology - Discuss using secure e-mail messaging and/or e-fax. See secure messaging MOU and directions on set-up. http://lmsb.irs.gov/hq/bsp/SEMS/index.asp
Materiality Threshold Agreement - Setting a materiality threshold involves both quantitative and qualitative factors. Materiality is relative, not an absolute, concept. During the opening conference initial discussions regarding materiality should occur. Materiality threshold agreements should apply to both the examined issues and taxpayer claims.
Monitoring the Progress of the Exam - Depending on the size and complexity of the case, consider establishing agreed upon status meetings with the taxpayer to monitor the overall progress of the examination. Additionally, separate status meetings may be appropriate to monitor the progress of specific complex issue(s). The taxpayer should disclose periods when their availability is limited due to other regulatory or business obligations such as quarterly or year-end reporting.
Safety and Security - The taxpayer should provide their evacuation plan and on-site safety policies and procedures. Taxpayer should advise the team of their security procedures, such as badges, check-in and check-out procedures and data protection.
Facilities - Items required for day to day operations such as; adequate workspace , locks/security of workspace, hours of operation, work space requirements, phone and internet access, contact points and procedures, etc.
Customer Service (One Stop Shop Concept) - If the taxpayer has a problem with any area of compliance and/or dealing with IRS, suggest that the taxpayer discuss the situation with the case manager first. The case manager will try to find an expedient solution or contact person.
Other Agreements - Arrange for the review of necessary workpapers, reports, corporate minutes or other pertinent records.
PRELIMINARY RISK ANALYSIS REVIEW
If completed before opening conference, the preliminary risk analysis should be shared and discussed with the taxpayer with the intent of obtaining information that will help the team to narrow or focus the scope of the audit on the most significant issues. See IRM 220.127.116.11.1.
Subject Matter Experts (SMEs) - SMEs are available for consultation to the issue team. If issue discussions will occur during the opening conference, SMEs may be invited to attend if their participation adds value; for example, the SMEs can assist with developing examination procedures or can attend the presentation of a complex transaction.
Counsel - Counsel is available for consultation to the examination team. They may be invited to the opening conference if their participation adds value to the discussion of a potential issue planned to be examined. Technical Advice Memorandum (TAM) and Chief Counsel Advice (CCA) should be coordinated as early as possible when advice is needed from the Office of Chief Counsel.
Contracting Officer's Technical Representative (COTR) - If an outside expert is anticipated, the COTR process should be discussed. (See http://lmsb.irs.gov/hq/shsp/dporl/OEP/OEP.asp).
Frozen Refunds - Discussion of large frozen refunds (credit balance of $10,000,000 or more). These refunds have to be manually processed because they are frozen with an X- Freeze Code. The following actions are recommended to identify and process these refunds: Discuss with the taxpayer at opening conference how the large frozen refund should be resolved. If it is determined that the refund is improperly frozen during the examination, review BMFOLI for X- Freeze Code. If an X- Freeze Code exists, fax a completed Form 3870 requesting release of X- freeze along with proper documentation to CCP.
CONCLUDING THE OPENING CONFERENCE:
Review Agreements - The case manager should conclude the conference by reviewing all agreements and understandings reached with the taxpayer. Agreements reached during the opening conference will be documented in the exam plan.
Preliminary Risk Analysis - Any modifications to the preliminary risk analysis should be reviewed. Also, arrangements made for future issue discussion meetings, presentations, site visits, etc. should be scheduled and confirmed.
Minutes - A draft of the meeting minutes, including agreements reached during the opening conference (meeting), may be provided to the taxpayer for review. Final meeting minutes, including agreements, may be attached to the exam plan.
At the joint opening conference for each audit cycle, issue a written information document request for a copy of any transfer pricing documentation prepared by the taxpayer pursuant to section 6662(e). The following language should be used to request the pricing documentation: "Please provide within 30 days of this request any principal documentation outlined in Treas. Reg. § 1.6662-6(d)(2)(iii)(B) that has been prepared."
Apply the 30-day time frame provided by statute for providing a copy of any documentation prepared pursuant to section 6662(e). The discretion authorized by the regulations to excuse minor or inadvertent failures to provide required documents is limited to those situations where the taxpayer has made a good faith effort to comply and promptly remedies the failure when it becomes known, and should be exercised sparingly. With the exception of the principal documentation items described in Treas. Reg. § 1.6662-6(d)(2)(iii)(B)(9) and (10), any documentation prepared by taxpayers pursuant to section 6662(e) must be in existence when the return is filed in order to be used to meet the documentation requirement of Treas. Reg. § 1.6662-6(d)(2)(iii).
If, as the statute permits, the taxpayer has not prepared section 6662(e) documentation, issue a written information document request at the beginning of the audit for relevant information regarding the taxpayer’s transfer pricing practices. An exception should be made only if recent experience with the taxpayer has indicated that examination of some or all transfer pricing issues is unnecessary, and there have been no major changes in the taxpayer’s transfer pricing practices.
Follow similar processes where Industry Cases are selected for audit.
For more detailed information, see the Transfer Pricing Roadmap at https://www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf
Audit Planning Process
As soon as the taxpayer’s IRC 6662(e) documentation or other transfer pricing information is received, consult with the appropriate subject matter experts for risk assessment.
If the risk assessment indicates that transfer pricing issues should be examined, include those issues in the audit plan.
In accordance with current IRM procedures, refrain from pursuing de minimis transfer pricing adjustments.
Section 6662(e) Penalty
Assert the penalties provided under section 6662(e) where warranted. Under the law, an otherwise applicable net section 482 transfer price adjustment penalty under section 6662(e)(3) may not be waived unless documentation is prepared and submitted in accordance with the requirements of the statute and regulations. For further details, see IRM 18.104.22.168.3 .
When conducting compliance checks, examiners are expected to:
Determine if taxpayers are in compliance with federal tax return filing requirements
Ensure returns within the taxpayer’s sphere of influence have been filed
Assess their audit potential
Required – Compliance check must be completed in accordance with IRM guidelines and conclusions documented in the workpapers.
Waiver – Examiners may waive the compliance check. Compliance checks can be waived when it is determined that substantial compliance exists. When an examiner waives a specific compliance check, the workpapers should document the reasoning and analysis used to support the conclusion reached.
Not Required – Compliance check is not required. But if information developed during the exam indicates the potential for noncompliance, examiners should evaluate whether to perform the compliance check and document actions taken.
For additional guidance on a specific compliance check, see the IRM link in each section.
|Compliance Check||Primary Return Examinations||Related/Prior/Subsequent Year Returns (a)|
|Prior & Subsequent Year Returns IRM 22.214.171.124||Required||Required|
|Form 5471 & 5472|
|Employment Tax Returns|
|Information Returns |
|Waiver (b)||Waiver (b)|
|Form 8300 and Currency Transaction Reports (CTRs) IRM 126.96.36.199|
|Excise Tax Returns IRM 188.8.131.52|
|Form 5500 Pension Plan Returns IRM 184.108.40.206|
|Minimum Income Probes IRM 220.127.116.11|
|Inventory Checks IRM 18.104.22.168.2||Not Required||Not Required|
|Withholding Compliance Program (Questionable W-4s) IRM 5.19.11|
(a) Related/Prior/Subsequent Year Returns: Related, prior, and subsequent year returns are the returns where the scope of exam is expanded beyond the primary return. For example, the Form 1120 is the primary return when an examination begins with that return. Examiners should use the "Primary Return Examinations" column to determine compliance checks needed. If the examination is expanded to include additional tax years or related returns, use the "Related/Prior/Subsequent Year Returns" column to determine the compliance checks needed for these additional tax years or related returns.
(b) For IIC (International Individual Compliance) only: Information Returns, Forms 8300, and CTRs compliance checks cannot be waived. These compliance checks are required in IIC.
This exhibit contains information from a memorandum that was originally issued by the LB&I (then LMSB) Commissioner in August 2004. All references to LMSB have been changed to LB&I.
LB&I’s Executive Compensation Strategy was initiated to support the Service-Wide High Income Taxpayer Strategy (HITS) and is part of our responsibility to strengthen corporate governance. One of the components of this strategy is that field personnel must assess the compliance risk of corporate officers and other key executives as part of any comprehensive audit of Coordinated Industry Case (CIC) and Industry Case (IC) examinations.
This memorandum provides guidance and instructions to LB&I team managers and agents for the inspection of, and when warranted, the examination of corporate officers and other key executives concurrent with the examinations of CIC and IC taxpayer returns.
Discuss the "package audit requirements" at opening conference with the taxpayer.
Inspection of Officer and Key Executive Returns – At a minimum, the team manager will secure and inspect the individual returns of the top officers of the corporation and other key executives or highly compensated employees. If the taxpayer filed a consolidated return, the team should include the top officers of the largest subsidiaries in meeting the minimum requirement for inspection purposes. Key corporate officers are those officers who have control or authority over corporate activities, or whose relationship with any segment of the case is close enough to significantly influence corporate management or tax results. This would include, for example, board chairman, chief executive officer, chief financial officer, officers in charge of foreign operations, officers in charge of governmental activities, or any other officer with significant decision-making responsibility. For IC taxpayers, the inspection will generally be limited to the officer/shareholder returns.
The team manager should be alert to any TC 420 indicators showing an open examination. If the return is open in another operating division, it may be excluded from inspection sampling. Flow thru adjustments will be referred to the controlling group.
Securing the Individual Returns – The team should requisition the returns of the corporate officer/key executives using the ERCS/AIMS system during the planning stage of the examination. If an examination is warranted, the team manager will use the ERCS/AIMS system to establish the individual returns and any other related returns.
Scope of Individual Examinations – It is the responsibility of the team, with participation by employment tax specialists as necessary, to conduct any examinations if potential issues are identified. In addition to possible issues identified because of the corporate relationship (Executive Compensation Issues), the examiner should be alert to Schedule D losses, Schedule E losses, losses generated by related and flow-thru entities, and tax shelters.
Verification of Individual Return Filing – The team manager should secure a transcript for "key" executives’ returns not inspected or examined to ensure the filings of all required returns through the most recent filing season.
Statute Concerns – Every effort should be made to conduct the examinations of the corporate officers’ returns and the corporate tax return concurrently. If this is not possible, it may be necessary for the team to solicit a consent from the corporate officer/key executive.
Referrals to Other Operating Divisions – Referrals to SB/SE to conduct individual examinations identified during the course of a CIC or IC examination should be limited and must be approved by the appropriate Territory Managers. Referrals will be considered only when the issue is substantial and affects a number of executives which can be worked separately from the corporate return. The team is then responsible for preparing the position paper and providing a listing of the individual taxpayers, with social security numbers, impacted by the issue to the accepting operating division.
The LB&I agent will use Form 6229 when making any referrals to SB/SE. The LB&I team manager will contact the local SB/SE group manager to determine which SB/SE territory manager is responsible for this POD and taxpayer. The LB&I territory manager will forward the request to the responsible SB/SE territory manager. If SB/SE declines the referral, the LB&I team manager should consider conducting the individual examinations.
"Whipsawing" of Issues – Some executive compensation issues have extremely high whipsaw potential. A government whipsaw position exists where two parties involved in a transaction take inconsistent positions. A case involving restricted stock illustrates a $20 million whipsaw situation. See Robinson v. United States , 335F.3d 1365, 1370 ( U.S. App., 2003). Agents examining executive compensation issues should be careful to protect against a whipsaw position and contact the Compensation and Benefits Issue Practice Group for more information.
Examinations of Nonfilers – If a failure to file situation is discovered, the examination team should report the nonfiling to the LB&I Non-filer Coordinator. The examination team should then establish AIMS controls. The Non-filer Coordinator will then monitor these failure-to-file instances to ensure appropriate action has been taken. Detailed instructions on the establishment of AIMS controls and IDRS research are posted to LB&I Non-Filer Program web site.
Note 1: Treasury Regulation 301.6402-2 provides that a valid claim must: set forth in detail each ground upon which credit or refund is claimed; present facts sufficient to apprise the IRS of the exact basis for the claim; and contain a written declaration that it is made under penalties of perjury.
Note 2: Treasury Regulation 301.6402-3 gives the Commissioner the authority to require that a claim for credit or refund be filed on Form 1120X, Form 1040X or Form 843 if applicable.
Note 1: Based on the facts and circumstances of the case, the exam team must decide whether it is appropriate to issue an IDR or disallow the claim.
Note 2: The taxpayer has primary responsibility to provide all documentation to justify the claim issue(s). For taxpayers who fail to meet the documentation standard, LB&I can exercise the IDR enforcement process as an alternative to disallowing the claim issue(s). Each situation has unique facts and circumstances; therefore, the exam team must determine which option is appropriate. If necessary, territory manager and counsel may be consulted