4.46.3  Planning the Examination

Manual Transmittal

September 04, 2013


(1) This transmits revised IRM 4.46.3, LB&I Guide for Quality Examinations, Planning the Examination

Material Changes

(1) IRM reference added to IRM for "Potentially Dangerous Taxpayer " (PDT) and "Caution Upon Contact" (CAU) programs per TIGTA recommendation.

(2) Updated ex parte communication references in IRM

(3) Expanded Taxpayer Advocate Service information in IRM

(4) Updated text and added link to LB&I Non-Filer website in IRM

(5) Hyperlinks updated throughout.

(6) Editorial corrections made throughout.

Effect on Other Documents

IRM 4.46.3 dated July 26, 2011 is superseded.


LB&I Team Managers, Specialist Managers, Specialists, and Revenue Agents.

Effective Date


Sunita B. Lough
Director, Pre-Filing and Technical Guidance (PFTG)
Large Business and International Division  (09-04-2013)
Overview of the Planning Process

  1. Factors to consider in planning include:

    1. Return Assignment - Consider factors that could prevent an examination. These factors include statute of limitations, conflicts of interest, and repetitive audits by the same examiner, and should be considered before the pre-contact analysis is performed.

    2. Conflict of Interest - Policy Statement P-4-6 prohibits examiners and their managers from examining or surveying a tax return if a relationship impairs impartiality. A conflict of interest exists if an examiners personal relationship(s) or private interests (usually of a financial or economic nature) conflict, or raise a reasonable question of conflict, with the examiner's public duties and responsibilities.

    3. Importance of Planning - The planning process should be viewed by team managers as their single most important activity. Intelligent, innovative planning and the development of a well-defined examination plan will effectively serve the team manager in directing and controlling the examination.

    4. LB&I Business Plan - The case planning process should include a review of the LB&I Business Plan and specific industry plans. Team managers will discuss proposed deviations from these plans with their territory manager. Specialist managers will also be consulted concerning deviations when appropriate.

    5. Resources Available - Planning an examination is often a painstaking and time-consuming process, particularly in view of the many variables and unknowns that are part of every LB&I examination. This activity is made easier when team managers take advantage of all available resources.  (07-26-2011)
Currency in LB&I

  1. Currency is a priority for LB&I and Agents should explore options to improve currency during the planning process.

  2. There are many reasons to examine LB&I cases that are more current. Among these are:

    1. Taxpayer records are more easily accessible and available on current years.

    2. Taxpayer personnel are more familiar with transactions selected for examination and are more likely to be available.

    3. Resolution tools should eliminate issues from future examinations.

    4. The utilization of pre-filing agreements for future returns is more feasible.

    5. Currency usually results in improved employee and customer satisfaction.

  3. Manager's Risk Analysis - The first step in the planning process is to perform and document a preliminary risk analysis to determine if the case is worthy of examination. This preliminary analysis, completed by the team manager prior to assignment to examiners for audit, applies to both CIC and some IC cases and may indicate a situation where a survey would be appropriate. The manager’s risk analysis is now optional for Industry cases (corporate cases AC 221 and below, partnerships and S Corporations) and individual returns, and Industry cases with ECDs of less than 12 months. Consideration should be given to examining a more current year if the initial analysis so indicates. Collectibility of taxes should be considered during preliminary risk analysis.

  4. Examination Span – It is essential, in order to maintain currency in LB&I, that the examination span (lapsed time from the status code 12 posting to status code 80 or above) is planned so that no more than the two most recent tax periods remain unstarted. Some or all of the options below may be employed to improve currency:

    1. Limited-scope audits - Issues are identified and prioritized using materiality thresholds through the risk analysis process. Limited scope audits focus on the highest priority issues. One way to limit the scope of an examination is to raise the threshold to a point where only the highest priority issues are considered.

    2. Skip-cycle examinations - The option of skipping a year or more in order to get current should be considered. The team manager would ask the taxpayer to file an amended return in order to incorporate all carryover adjustments.

    3. Multi-year examinations - Sometimes the goal of currency can be accomplished by combining more than two years in a cycle or by adding a year to the current cycle. The team manager should consider multi-year examinations and use them if cases can be completed more expediently by employing this option.

  5. Limited Issue Focused Examination (LIFE) Process - LIFE is an alternative approach to our traditional, full scope examination process. See IRM 4.51.3, Limited Issue Focused Examinations, for detailed information about the LIFE process. The key features of LIFE are:

    • Engaging taxpayers to share responsibility for timely completion of the examination;

    • Conducting full risk analysis by the entire team, including specialists;

    • Using materiality principles and other considerations, such as compliance, to limit scope;

    • Establishing materiality thresholds to govern any scope expansion; (This applies to new issues raised by the examiner and claims and affirmative issues filed by taxpayers. Note that new issues may not be raised by examiners without managerial approval.)

    • Waiving mandatory compliance checks as appropriate; and

    • Terminating the LIFE process if taxpayer does not meet its commitments.  (07-26-2011)
Decision to Survey

  1. The Survey Reason Code (SRC) values and definitions are as follows:

    1. 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.

    2. 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.

    3. Survey Reason Code C: Beyond Cycle (includes statute issues) – should be used if the primary reason for the survey is based upon currency and/or statute considerations.

    4. Survey Reason Code D: Lack of Resources – should be used if the primary reason for the survey is due to a lack of resources.

    5. 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.

  2. 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.

  3. Managers will no longer be required to complete an LB&I Survey Form for all returns surveyed by the group using SRC Codes A through D. However, for returns using SRC E, Other, managers must continue to include a separate form in the administrative case file that clearly explains the reason for the survey. Either the LB&I Survey Reason Form or Form 1900, Income Tax Survey After Assignment, can be utilized 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 one year.

  4. Survey Reason Codes for Survey Before and After Assignment - IRM provides guidance on making decisions to survey a return. A Survey Reason Code is required for all LB&I returns that are surveyed either before or after assignment (Disposal Code 31 or 32).  (09-04-2013)
Contacting the Taxpayer

  1. Generally, initial contact should be made by telephone to schedule the initial appointment. For most LB&I taxpayers where appointment letters are utilized, standard form letter, L-3253, Taxpayer Appointment Confirmation Letter, will be used. IRM lists the advantages of contacting the taxpayer by telephone to schedule the initial appointment. In the few cases where initial contact and audit appointments are made via mail, form letter L-2205, Initial Contact Letter, should be used. Whichever appointment letter is used (L-3253 or L-2205), Publication 1 (Your Rights as a Taxpayer) and Notice 609 (Privacy Act Notice) must be included with the letter as required by RRA 98. See IRM 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 L-2205-B should be used, and Notice 1332 (Why Your Return is Being Examined) must be included with the letter. Publication 1 and Notice 609 should also be provided to NRP taxpayers.

    • In those cases where an appointment letter is not utilized or when the taxpayer does not confirm receipt of Pub 1 or Notice 609, both publications will be provided at the opening conference (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 to be mailed with all Preliminary 30-Day Letters (IRM Mailing Preliminary 30-Day Letters).

  2. 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  (07-26-2011)
Involvement of IRS Counsel, Technical Advisors and Specialists

  1. The exam team and taxpayer will discuss the availability and accessibility of personnel assigned to the exam. In addition, the exam team will:

    1. Notify the taxpayer if significant involvement by technical advisors, Office of Chief Counsel and/or specialists are anticipated.

    2. Endeavor to reach agreement with the taxpayer on the facts of an issue or case before extensive involvement of a technical advisor.

    3. Coordinate as early as possible when assistance from the Office of Chief Counsel is anticipated. Contact with Counsel can be made informally via telephone or e-mail, or formally, such as through a request for a Technical Advice Memorandum (TAM).

    4. Invite technical advisors and/or Counsel to attend key issue meetings between the taxpayer and the IRS, as needed and appropriate.

    5. Employ the use of summonses during the IDR management process when appropriate. Prior to issuance of any summonses, the taxpayer will be given notice and encouraged to provide the requested information via a pre-summons letter.  (07-26-2011)
Examination Execution

  1. Quality Examination guidelines emphasize the importance of ongoing dialogue between the exam team and taxpayer throughout execution of the exam plan.  (07-26-2011)
Scope of Exam

  1. Scope of Exam – Risk Analysis provisions should be followed in determining the scope of the examination.

    1. The exam team will discuss with the taxpayer any new issues identified during the exam that were not included in the original audit plan prior to the commencement of extensive audit work on those issues.

    2. The exam team will share/discuss subsequent risk analysis results (i.e., 50% or ongoing risk analysis) with the taxpayer, indicating the scope, depth, and status of the audit.

    3. The exam team will consider the use of statistical sampling or alternative testing methods (e.g. mutually agreed upon judgment sampling) if records are voluminous.

    4. The taxpayer will discuss or provide preliminary information on issues, with the intent of narrowing the scope of the audit and focusing on the most significant issues.

    5. The exam team will inform the taxpayer if issues are dropped or the scope is narrowed.

    6. The exam team will advise the taxpayer that the examination may be expanded if tax shelters, listed transactions or similar transactions are discovered during the course of the examination.

    7. The exam team will engage the appropriate issue management team and/or technical advisor as early as possible in the development of a tiered issue. The team will contemporaneously involve and update the taxpayer to ensure effective communication and consistent application.  (07-26-2011)
Exam Timeline/ Monitoring Progress

  1. To avoid delays during the audit, the exam team will share, solicit and consider all input when planning the matching of audit issues to available taxpayer and examination team resources.

  2. The Rules of Engagement will be timely considered and used as appropriate when impasses and significant concerns arise that cannot be resolved at the IRS team manager and taxpayer audit manager level.

  3. The team manager and team coordinator will share IRS’ input and solicit and consider taxpayer’s input in monitoring the examination and determining who will attend the regular audit progress meetings. This includes meetings to discuss:

    1. Ongoing risk analysis.

    2. Status of issues.

    3. Status of IDRs.

    4. Obstacles/anticipated delays and possible solutions

    5. Anticipated changes to the audit timeline.

  4. At IRS/taxpayer meetings, all agreements and actions items will be recorded (noting the responsible parties) to avoid delays and misunderstandings.

  5. Feedback from audit participants will be collected at prescribed intervals, such as the end of the planning phase, at the 50% mark, and the end of the examination, to assess overall progress and to suggest ways to improve upon the on-going and/or subsequent examination(s).  (07-26-2011)
Information Document Requests (IDRs)

  1. Exam team and taxpayer will agree on primary IDR communication contacts.

    1. Exam team information requests and responses will be directed through the taxpayer’s designated representative(s).

    2. Taxpayer responses will be directed to the IRS team coordinator, primary revenue agent, or specialist.

  2. The exam team will discuss planned draft IDRs with taxpayers in advance of issuance, unless agreed otherwise.

    1. The taxpayer will be informed of the intent of an IDR.

    2. The purpose of an IDR will be plainly stated in its text (i.e., identify the issue).

    3. IDRs will be resolution-focused, ensuring that information requested and/or questions asked add value to the identification or resolution of an issue.

  3. Prior to issuance of an IDR, the appropriate team member(s) and the taxpayer will meet to review the IDR for completeness. All IDRs will be entity - specific unless agreed otherwise.

  4. The taxpayer will be informed of any tiered, coordinated and/or industry issues under audit.

  5. The taxpayer will be notified whenever mandatory IDRs are issued.

  6. The exam team will reach agreement with the taxpayer regarding effective IDR management.

    1. A standard response time for IDRs will be established. Any deviations or exceptions to the response time will be considered on an individual IDR basis.

    2. The taxpayer agrees to advise the exam team as early as possible if and why additional time is needed in responding to any IDR.

  7. The exam team will advise the taxpayer within an agreed timeframe after receiving an IDR response whether it considers the response complete, or if additional information or action is required.

  8. Upon receiving an IDR response, the exam team will review the response within a specific timeframe. Possible outcomes include:

    1. Informing the taxpayer that the IDR response resulted in a closed issue with no further action(s) required.

    2. Issuance of a follow-up IDR.

    3. Issuance of a Form 5701- Notice of Proposed Adjustment.

    4. Notifying the taxpayer that additional time to process the IDR is required and is estimated to take place within a specific timeframe.  (07-26-2011)
Examination Resolution

  1. Exam resolution takes place in stages throughout the examination, both as individual issues are addressed and when the entire audit is completed. The exam team is responsible for fully and completely developing issues under examination and reaching agreement with the taxpayer as to the relevant facts.  (07-26-2011)
Issue Resolution/Notices of Proposed Adjustments - Form 5701

  1. The exam team will discuss all issues with the taxpayer prior to issuance of Form 5701. Consideration should be given to:

    1. The need to either reach agreement or to agree to disagree on the facts.

    2. A discussion of applicable areas of the law.

    3. The identification of specific areas of legal contention or disagreement.

    4. The use of an IDR to confirm any of the above.

  2. The exam team and taxpayer will reach an understanding regarding timeframes and expectations relating to the issuance of and response to Forms 5701:

    1. To facilitate early issue resolution, Notices of Proposed Adjustment (Forms 5701) will be issued throughout the examination instead of at the end.

    2. When a draft Form 5701 is presented, the taxpayer will confirm the facts of the issue and clarify its position within an agreed upon timeframe.

    3. When issues are agreed, the exam team will utilize abbreviated, proposed adjustment narrative formats on Form 886-A – Explanation of Items, attached to Form 5701.

    4. The taxpayer and the exam team will engage in an earnest and collaborative effort to resolve all issues.

    5. Issue resolution tools, such as Fast Track, early referrals to Appeals, etc., will be considered for all unagreed issues as early as possible in the examination.

  3. Within agreed upon timeframes, the exam team will advise the taxpayer when an issue has been closed.

  4. The exam team will inform the taxpayer as early as possible when and why penalties are being considered. The team will provide the taxpayer an opportunity to respond to and/or refute the assertion based on facts and legal application.  (07-26-2011)
Quality Examination Process

  1. The Quality Examination Process (QEP) is a systematic approach for engaging and involving taxpayers in the exam process, from the earliest planning stages through resolution of all issues and completion of the case.  (07-26-2011)
Examination Planning

  1. Pre-examination activities, shown below, focus on developing an effective exam plan. Depending on the nature of the exam to be conducted, some of these activities may be more applicable than others.

  2. Mutual Understanding - The planning process should be conducted to promote a mutual understanding of the taxpayer's systems and the Service's processes, best utilize each party’s resources, and generate quality examinations in a timely manner. The taxpayer and the examination team must work together to achieve such objectives.

  3. Mutual Cooperation and Benefits - The examination should be approached in the spirit of mutual cooperation. Both the Service and the taxpayer can benefit if each works toward a candid and professional relationship. This can be achieved if:

    1. Each party understands, at the beginning of the process, each other's priorities, resources, and available time frames;

    2. Steps are taken to mutually apply resources to ensure the minimum of down time for the taxpayer, as well as the Service; and

    3. The taxpayer's and Service's specialists and experts are matched and their work is scheduled to mutually benefit each other.

  4. Open and Candid Communication - Planning with the taxpayer should be conducted to encourage open and candid communication between the parties. This can be achieved if both parties understand that the examination will be conducted to minimize its impact on their resources. For instance, it is imperative that both realize their obligations to cooperate in expediting the examination and reducing the cycle time, i.e., from the date of filing of the return to the date of final administrative action by the Service. Communications throughout the entire planning process should include:

    1. A discussion of the potential issue areas which will be pursued to avoid surprises late in the examination (e.g., new issues or claims);

    2. Clarification of the use and role of specialists on the examination team;

    3. A discussion of the advisory role of Counsel;

    4. A discussion of efforts to achieve currency in the examination process;

    5. A discussion of the role of the Technical Advisor as it relates to coordinated or Tier issues

    6. A discussion of any potential penalties as they arise;


      Examiners should never discuss significant potential adjustments that could lead to a fraud penalty or any potential for fraud until after a decision is made whether the case will be referred to Criminal Investigation Division. For further details, see IRM 25.1, Fraud Handbook.

    7. A discussion of any problems associated with the examination of proprietary information, trade secrets, etc.; and

    8. Commitments, by both parties, to share all information necessary to bring the examination to a quick and successful conclusion. For example, neither the Revenue Agent Report (RAR) nor the protest should be the vehicle to transmit new facts on an issue.

  5. Mutual Understanding of Processes and Procedures - The taxpayer and the Service should agree to develop an understanding of each other's processes and procedures early in the planning process. This will include a study of the taxpayer’s accounting system, commercial framework, tax return preparation methodology, industry practices, language and terminology, and LB&I examination procedures. The taxpayer should provide the necessary orientations, presentations and training regarding industry techniques, problems, and economic factors which impact on the company's tax considerations.

  6. Early Coordination - Early coordination with the taxpayer should be achieved regarding the way the examination will be conducted. It is important to reach an understanding with respect to the following items:

    1. The provisions of the Information Document Request (IDR) Management Process (See IRM, Information Document Request Management Process),

    2. Response times for IDRs must be determined by the Revenue Agent working with the taxpayer, as set forth in the IDR Management Process,

    3. The need for periodic meetings (e.g., monthly, quarterly, or as needed) to review progress and emerging problems in the administration of the examination plan,

    4. The need for flexibility and ongoing planning,

    5. The coordination of the examination of off-site records and facilities (e.g., assistance and support examinations, travel requirements and scheduling),

    6. The use of Service and taxpayer resources, such as office space and equipment, computer time, libraries, tax workpapers, and working hours, and

    7. The need for examiners to timely communicate to the taxpayer potential new issue areas identified during the course of the examination.

  7. Negotiated Items - Initial joint planning sessions with the taxpayer should include negotiations regarding the following items:

    1. Procedures for obtaining the returns of related parties,

    2. Early submission of items which the taxpayer feels might reduce their tax liability,

    3. An agreed upon date by which claims and affirmative issues will be submitted,

    4. Specific time frame for responding to Forms 5701/886A, Notice of Proposed Adjustment and RARs,

    5. Such remedial procedures as may become necessary (e.g., including discussions with top-level officials, summonses and the use of "Formal Document Requests" section 982 procedures), and

    6. Taxpayer’s efforts to support and facilitate the examination team’s attempt to expedite the examination (e.g., carryover computations, and reconciliations).

  8. Issue Resolution - The planning process should include a discussion directed toward resolving issues at the lowest possible level without sacrificing quality. It is the Service's goal to develop a communication process with the taxpayer to achieve total issue resolution where possible. This concept involves taxpayers and examiners working together to pursue all methods and means appropriate to resolve issues. Examples of issue resolution tools are included in the following list:

    1. Early submission of Technical Advice Requests,

    2. Requests for legislative changes to clarify the law or resolve tax inequities,

    3. Development of regulations, revenue rulings, or revenue procedures,

    4. Identification of issues which lend themselves to the use of team manager settlement authority or Industry Issue Resolution (IIR),

    5. Resolution of an issue through the current filed year, with the agreement of the taxpayer (Accelerated Issue Resolution),

    6. Development of Advance Pricing Agreements, where appropriate, and

    7. Fast-Track – The team manager should discuss the Fast-Track initiative during preliminary meetings with the taxpayer. This initiative enables the Service to resolve tax disputes at an earlier stage within a shorter time than through the normal examination and appeals processes. LB&I examiners are mandated to consider the use of Fast Track for any unagreed issues. Concurrence to accept or deny the Fast Track application is required by the LB&I Territory Manager. The Appeals Officer, under the Fast-Track process, may go on-site to work with the examination team and the taxpayer to resolve unagreed issues. (See Rev. Proc. 2003-40 for details.) Area Counsel is available to assist the examination team in preparing for and during Appeals Fast-Track sessions.

    Examiners should refer to IRM 4.46.5, Issue Development, Proposal and Resolution for Information about other issue resolution tools.

  9. Statute Extension - IRC Section 6501(c)(4)(B) provides that if the Service requests that the taxpayer extend the statute of limitations on assessment, the Service must notify the taxpayer of the taxpayer's right to refuse to extend the statute of limitations or to limit the extension to particular issues or a particular period of time. (See Publication 1035, Extending the Tax Assessment Period.) Area Counsel is available to assist team managers in drafting restricted consents and other statute extension forms.  (03-01-2006)

  1. The exam team gathers publicly available information (e.g., annual reports, SEC filings, materials from the taxpayer’s web site, etc.) and data internal to the IRS (e.g., current transcripts, data on related entities, etc.), then conducts a preliminary risk analysis to determine if an examination is warranted.  (07-26-2011)
Preliminary Meetings and Discussions

  1. The exam team will have various meetings and informal conversations with the taxpayer to discuss a variety of topics. These meetings and conversations will be the foundation in achieving a quality tax examination through effective planning, execution and resolution.

  2. The exam team will present and discuss with taxpayer at the first meeting the publication Achieving Quality Tax Examinations through Effective Planning, Execution and Resolution (04837). The exam team and taxpayer should then discuss:

    1. Roles, expectations, and responsibilities for both the exam team and taxpayer.

    2. IRM 4.51.1 - Rules of Engagement

    3. Names of individuals the taxpayer authorizes to serve as point(s) of contact for the exam team. (See Form 2848 – “Power of Attorney and Declaration of Representative,” and “Communication Agreement,” found on page 2 of Form 4764 – LB&I Examination Plan.)

    4. The attachment entitled, “Formal Opening Conference with Taxpayer” found on pages 5 – 6 of Form 4764 – LB&I Examination Plan .

    5. Findings from the preliminary risk analysis.

    6. Establishing a timeline with specific milestones that can be used to ensure mutual accountability.

    7. Processes for monitoring and adjusting the plan for ongoing developments, and how changes in the plan by either party will be communicated.

    8. Methods for tracking taxpayer and IRS resource needs and constraints and advising each other when planned vacations, training, periods of high workload and/or other significant factors may result in exam delays or increased burden.

    9. Exam team site requirements and taxpayer-provided arrangements (e.g., office space, internet access, building security, emergency drills, information/data security, secure e-mail, etc.).

  3. The exam team may schedule additional meetings and informal conversations as required, depending on taxpayer size, return complexity, and proposed staffing levels, to discuss:

    1. Prior examination results (CIC) or (IC), to determine if areas of review can be limited or eliminated.

    2. Pre-audit and initial risk analyses.

    3. Taxpayer’s plans for, or anticipation of, filing of claims.

    4. Potential domestic or international industry issues, coordinated issues, and/or Tier I issues.

    5. New audit initiatives and general administrative procedures; IDR management process; Form 5701 process; and issue resolution strategies and options.

    6. Whether the IRS or the taxpayer will prepare the schedule of rollover adjustments that resulted from a prior examination.

    7. Giving the exam team access to the taxpayer’s e-mail system as a way of facilitating the communication of IDRs, IDR responses, records, Forms 5701, etc.

    8. Providing secure e-mail to taxpayer.

    9. Applicability of limited scope audit procedures to this examination (LIFE, remote audits, etc.)

    10. Materiality threshold agreements, developed when the exam team is determining exam scope. (Since each taxpayer and each year is unique, materiality thresholds will be set on a case-by-case, year-by-year basis.)

    11. Draft audit plan. (Exam team provides taxpayer with the draft audit plan and an opportunity to provide feedback before the plan is finalized.)

    12. The need for support audits and/or third party contacts (for both IRS and taxpayer).

    13. Possible travel and parking requirements associated with the exam. (Travel requirements should be included in the original exam plan or added as soon as identified.)

    14. Arrangements for specialists to meet with relevant taxpayer personnel to discuss areas to be examined prior to issuing IDRs.

    15. Providing the Computer Audit Specialist (CAS) with advance access to the taxpayer's electronic data.

  4. The exam team and taxpayer will sign an audit plan establishing respective commitments (i.e. audit timeframes, materiality thresholds, IDRs, Forms 5701, affirmative issues, etc.).

  5. The exam team will consider taxpayer input during the preparation of the exam timeline and target milestone dates (i.e. exam plan completion date, 50% risk analysis review, last date for IDRs to be issued, last date for claims to be filed, last date for Forms 5701 to be issued, turnaround dates for IDRs and Forms 5701, target date for issuance of the RAR, etc.).

  6. The taxpayer should provide the exam team with key information. This includes:

    1. A meaningful orientation to its operation, including a general overview of business activities (particularly if the exam team is new) to enhance external awareness, financial statement preparation, tax return results, if applicable, and known significant changes from the prior examination.

    2. A list of significant transactions for the current examination and any other information that is new and/or different from previous examination(s) (e.g., acquisitions, dispositions, tax shelters, accounting method changes - Forms 3115, etc.).

    3. Access to general ledgers; a complete audit trail from the general ledgers and financial statements to taxable income; identification and full description of all significant Schedule M-3 book/tax differences and the requisite supporting documentation; breakdown of all general ledger accounts aggregated in Schedule M-3, and reconciliation of Schedule M-3 items to disaggregated general ledger accounts; and any other tax reconciliation workpapers and/or other workpapers in accordance with the Service Policy outlined in IRM - Requesting Audit, Tax Accrual, or Tax Reconciliation Workpapers.

    4. Financial information (such as the general ledger) in electronic format to allow the exam team to review information directly, thereby potentially reducing the number of IDRs issued.

    5. List of known and anticipated claims and requested audit adjustments (with all supporting documentation made readily available) to ensure that these items are included in the audit plan.

  7. Based upon the initial risk analyses and review of preliminary documents (i.e., annual statements, tax returns, historical files, etc.), the exam team will advise the taxpayer of potential examination areas/issues, and/or business units it plans to review.  (12-29-2009)
Formal Planning Meeting with Examination Team

  1. Purpose - The planning meeting (or series of meetings – sometimes called strategy meetings) is held during the initial phase of the planning process. The purpose of the meeting is to review all available information needed to form the basis for the examination plan. Normally, the planning meeting would be held before the formal opening conference.

  2. Application to Industry Cases - Smaller industry cases will not normally require a formal planning meeting while larger industry cases would benefit from it. The number of team members and complexity of the case will determine the need for a formal planning meeting. The team manager may consider including the risk analysis process in the planning meeting.

  3. First Steps – The following actions must be taken prior to setting up the formal planning meeting with the examination team:

    1. Data must be gathered from all available resources.

    2. Specialists and their managers must be notified of the meeting.

    3. Information must be provided to specialists and team members prior to the meeting.

  4. Team Manager Responsibility - The team manager is responsible for planning, scheduling, and conducting this meeting unless the case is a coordinated case with a senior team coordinator assigned.  (12-29-2009)
Planning Considerations

  1. Initial Preparation for Planning Meeting – Much preparation is needed before conducting the planning meeting. The early selection of a team coordinator and computer audit specialist (CAS) will facilitate the preliminary planning process. Attention must be given to the LB&I rotation policy set out in Policy Statement P-4-5. Generally, the CAS should be selected 3-6 months before the planning meeting. This may not be practical for IC examinations. Various schedules and comparative analyses can be prepared by the CAS and made available for review. The team manager and team coordinator should work together to review all available information. The risk analysis process should begin at this time even though the entire team may not yet be assembled.

  2. First Specialist Selected - The CAS should be the first specialist selected for the examination team. The team manager should make arrangements with the taxpayer to allow the CAS to start work 3 - 6 months before the opening of the examination cycle. The CAS will assess the availability of automated records, execute requested computer programs, and (with the taxpayer’s concurrence) download various files to desktop computers in the examination area.

  3. Projected Starting Date - All mandatory referrals are generated at the same time when the team manager requests a CAS using the automated Specialist Referral System (SRS). It is important to stress the projected starting date for each specialist since the CAS starts work before the other specialists. See IRM, Specialist Referral System, relating to specialists and SRS.

  4. Review of Records - The initial review of records should include all related returns, the planning file, commercial services, and public records as well as consultations with specialist supervisors. The review should be recorded in the form of a general outline of observations regarding size, dispersion and diversification of the case, probable examination expertise and staffing requirements, and matters to be discussed or clarified at the opening conference. The initial review will form the basis for construction of the examination plan when supplemented by information gained at the opening conference.

  5. Area Counsel Assistance – Requesting Area Counsel assistance on CIC cases is mandatory. The need and scope of assistance from Area Counsel should be assessed and addressed early in the preparation process. Area Counsel can provide assistance in risk analysis and other aspects of the LB&I Planning Process.

  6. Risk Analysis - Issue priority should be established through a process which compares the potential benefits to be derived from examining an area to the resources required to perform the examination. This process, referred to as risk analysis, is an integral part of the planning process for both CIC and IC examinations to ensure efficient and effective use of resources.

  7. Technical Advisors (TA) - The team manager will contact the designated TA to seek advice and assistance if the taxpayer is engaged in an industry identified for specialization and coordination. The TA is also contacted if an issue has been designated as being significant enough to warrant a TA program. The TA can assist in identifying coordinated issues to be developed, suggesting potential computer audit applications including statistical sampling, and identifying noncompliance areas to be probed.

  8. Review of Business Operations - The team manager should become thoroughly familiar with the taxpayer's business operations as soon as possible. The team manager should, at a minimum, review the following for the purpose of determining staffing requirements, specialists needed, and the general approach to the examination:

    • Returns

    • Prior RARs including specialists reports

    • Planning files

    • Financial statements

    • Analyses prepared by TAs

    • Computer generated analyses

    • SEC reports

    • Other pertinent data relating to the years included in the current cycle

  9. Specialist Referrals - Referrals for specialist assistance will be made as early as possible in the planning process using the automated Specialist Referral System (SRS).

  10. Assistance or Support Examination Requests - A support examination would be requested from another industry, usually in a different location, while an assistance examination would be requested within the industry but usually in a different location. Form 4485, LB&I Request for Assistance or Support Resources, should be completed for either an assistance or support request.  (12-29-2009)
Risk Analysis and Risk Management

  1. Application - Risk assessment is an essential component of an effective issue management strategy. It should engage managers, examiners, and taxpayers at the earliest stage of the examination to determine the appropriate scope and duration of the examination. It is to be used for LB&I tax returns for all Coordinated Industry Cases (CIC) and Industry Cases (IC). The detail and depth of the process will vary according to the complexity of the tax return.

  2. Benefits of Risk Analysis – Some of the benefits of risk analysis include the following:

    • Utilizes our resources more efficiently

    • Improves audit planning process

    • Reduces cycle time

    • Aids analyzing the root causes for delays

    • Improves currency

  3. Risk Analysis Decision Points - Listed below are common decision points for Risk Analysis:

    • Return received in group

    • Pre-contact analysis

    • Issue identification

    • Issue development (mid-point)

    • Issue resolution

    • Case closure

  4. SAIN Numbers for Risk Analysis - The following SAIN numbers should be used for recording activities associated with risk analysis:

    1. Initial Risk Analysis - Team coordinator and team members should use SAIN 024, Preliminary Examination Plan.

    2. Mid-cycle Risk Analysis - Team Coordinators and Team members should use the SAIN issue number for the issue that is the subject of the analysis, and use SAIN 024 for new issues.

  5. Risk Assessment and Management - Risk assessment and risk management are ongoing processes throughout the entire examination. Risk assessment must be conducted with the initial planning of the examination, when 50% of the case time has been reached, or when a significant event occurs. See paragraph (9) for exceptions to the mid-cycle risk assessment requirement and see paragraph (12) for exceptions to the manager's risk assessment. Risk assessment provides answers to the following questions:

    1. Does the return need to be examined? (consider currency)

    2. What is the level of compliance?

    3. How much time will the examination take?

    4. What are the expected results of the examination?

    5. How would a survey affect future examinations?

  6. Factors - Some factors to be considered are:

    1. Compliance considerations;

    2. Adjustment potential;

    3. Potential impact on future years;

    4. Historical examination data;

    5. Industry issues, practices, and trends;

    6. Coordinated issues;

    7. LB&I directives;

    8. Appeals and litigation considerations;

    9. Financial condition of the company - collectibility;

    10. Taxpayer's systems and controls; and

    11. Resources.

  7. Subjective Process - Risk analysis is a subjective process even where mathematical models are employed. It should be based on experience, judgment, and objective analysis. Priorities can be established once the potential benefits and resources are considered. Virtually all the factors discussed above are difficult to estimate and subject to change, therefore the risk analysis process should be periodically revisited and updated. Risk analysis considered during the planning process should be documented by the team manager and maintained in both the manager's binder and the case file for CIC cases. The risk analysis for IC cases should be maintained in the examiner’s case file.

  8. Examiners’ Responsibility on CIC and IC cases - It is mandatory that revenue agents and any specialists involved in the examination conduct an initial and a mid-point (50% of the total case time has been reached) risk assessment. Note that agents must always conduct an initial risk assessment, even though the manager may waive the manager's initial risk assessment under below. The Examiner’s Risk Analysis Worksheet requires that each issue detail it’s SAIN; issue description; materiality factors and potential adjustment; estimated time needed; any additional resources required and the determination of whether or not to initiate the issue. All non examined LUQs are detailed on the initial risk analysis. The CAS may be excluded if not working issues. Specialists will submit the risk assessment to their respective managers before it is submitted to the team manager. The revenue agent will then submit the risk analysis to the team manager with a recommendation to continue, expand, or reduce the scope of the examination. The initial risk assessment must be submitted to the team manager with a copy of the plan. The team manager must approve the risk assessment and the examination plan. Both the initial and 50% risk analysis documents will be shared with the taxpayer once the revisions have been approved by the team manager.

  9. Mid-Cycle Assessment on IC Cases - The mid cycle risk analysis is now optional for key and related Industry Cases that are corporate cases Activity Code 221 and below, Partnerships, S Corporations and Individual Returns, if the case is closed within 12 months of the Status 12 date. .

  10. Mid-Cycle Assessment on CIC Examinations - The team manager must submit the mid-cycle risk assessment on CIC examinations to the territory manager with an overall assessment to date at the audit mid-point. BNA or RGS NT software should be used to compute the tax potential. The "What if computations" will show the impact of the issue on tax liability. Both the initial and 50% risk analysis documents will be shared with the taxpayer once the revisions have been approved by the territory manager.

  11. Disagreements between team managers, specialist managers, and team members - Consensus among all team members should be the goal. All efforts should be made to resolve disagreements at the lowest level. See IRM, Management of Differences, for guidance related to management of disagreements.

  12. Manager’s Responsibilities on IC Cases – Listed below are some key responsibilities associated with risk analysis:

    1. Conduct the manager's risk analysis on returns which will be examined,

    2. However, the manager's risk analysis is optional for Industry Cases that are Activity Code 221 and below, Partnerships, S Corporations and Individual Returns (agents are still required to perform an initial risk analysis for these cases),

    3. Leave the manager’s risk analysis in the file when the case is assigned to the agent,

    4. Meet with the agent to discuss depth and scope of examination,

    5. Prepare time line with the agent,

    6. Document the approval of the examination plan and time line,

    7. Review progress made at target dates, and

    8. Review and approve mid-cycle risk assessment.

  13. Manager’s Responsibilities on CIC Cases – Listed below are some key responsibilities associated with risk analysis:

    1. Assist the team with the plan and initial risk analysis,

    2. Submit the plan and the initial risk analysis to the territory manager and obtain documented approval,

    3. Conduct the mid-cycle risk analysis with the team and if necessary revise examination plan,

    4. Submit mid-cycle risk analysis to territory manager for approval.

  14. Forms to Use - Required forms to be used in performing a formal risk analysis can be found on the LB&I Home Page.  (03-01-2006)
Notification of Planning Meeting

  1. Specialist Notification - The team manager will notify all specialists and specialist managers who will be involved in the examination and advise them about:

    1. The date, time and place of the planning meeting(s);

    2. The scheduled starting date of the examination;

    3. The description of data available for review;

    4. The requirement for specialists to provide the team manager with a written narrative which should include a risk analysis worksheet identifying each issue area recommended for inclusion in the examination plan (Team managers may find it helpful to have each potential issue identified in priority order. Such information facilitates the process of determining the items to be included in the final plan.);

    5. The need for the specialist to provide a description of the examination procedures to be performed using Form 4764B, LB&I Examination Plan, along with an estimate of the time necessary to complete each portion of the examination. (This should be in sufficient detail to evaluate the potential results and permit subsequent monitoring.)

  2. Other Participants – Other participants who may be invited to the planning meeting (depending on the situation) include the following individuals:

    • Support personnel

    • The territory manager

    • Director of Field Operations

    • A representative of the taxpayer

    • Area Counsel

    • Technical Advisors  (09-04-2013)
Conducting the Planning Meeting

  1. Agenda for the Planning Meeting - See Exhibit 4.46.3-1, Agenda for Planning Meeting, for a suggested list of agenda items to cover in the planning meeting.

  2. Specialists’ Recommendations – The team manager should review specialists' recommendations and approve time allocations during the planning meeting. If the team manager decides to eliminate any specialty areas which were recommended for inclusion in the examination plan, a written explanation should be prepared and retained in the planning file, taxpayer case binder or control file. The team manager should decide those areas which will be included in the examination plan at the conclusion of the meeting.

  3. Section 482 Pricing Issues - The review of a significant IRC section 482 pricing issue should include the territory manager, team manager, international and other specialty managers, technical advisors, team members (as appropriate), and Area Counsel.

  4. Third Party Contacts - The need to contact third parties for the purpose of collecting or determining a tax liability should be considered early in the examination. Section 7602(c) requires the Service to take the following actions:

    1. Provide advance notice to the taxpayer that third party contacts may be made;

    2. Periodically provide the taxpayer with a record of persons contacted;

    3. Provide a list of third parties contacted to the taxpayer upon request.

    Review this code section for exceptions that may apply. Team managers and examiners should refer to IRM 5.1.17, Third Party Contacts, for procedures regarding, and exceptions to the notification requirements.

  5. Correspondence - RRA 98 Sec. 3705 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. The body of the correspondence should prominently contain the courtesy title, last name, telephone number, and the unique identifying number of the employee who can best answer the taxpayer's questions and resolve any subsequent inquiries.

  6. Ex Parte Rules - RRA 98 Sec. 1001(a)(4) prohibits ex parte communications between Appeals Officers and other Service employees to the extent that such communications appear to compromise the independence of the Appeals Officer. Ex parte communications are communications that take place in the absence of the taxpayer or representative. This prohibition is not limited to oral communications but applies to any form of communication, oral or written (See Rev. Proc. 2012-18 and IRM I). The team manager will notify the taxpayer/representative and give the taxpayer/representative the opportunity to attend any pre-conference meeting with Appeals. This is to ensure an independent Appeals function within the Service. The taxpayer may, however, decline to attend the pre-conference meeting, thereby waiving the ex parte restrictions with respect to that meeting.

  7. Available Resources - The team manager should consult with the territory manager who has knowledge of available resources on an industry-wide basis and will ensure the resources are available for the planned span as well as total time.

  8. Counsel Involvement – Area Counsel should be involved in all potentially significant issues where the industry has made a preliminary decision to pursue the issue and any of the following conditions exists:

    1. The issue is sufficiently complex and technical to require Counsel's expertise.

    2. The issue has a known sensitivity.

    3. The team manager is reasonably assured that an agreement is unlikely.  (03-01-2006)
Financial Interests and Disclosure

  1. Awareness of the Rules - The team 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 conflicts that might create a real or apparent conflict of interest.

  2. Disclosure - The team 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.

  3. Documentation – A worksheet is available for use during the planning meeting to document financial interests and disclosure. Form 13664, LB&I Financial Interests and Disclosure, should be used to document whether financial interests exist and should be used to document actions taken by the team manager to address potential conflicts of interest. The team manager will notate in the written examination plan that the above requirements were met for each team member.

  4. Forms to Be Completed - 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 team manager will remove examiners with potential financial conflicts of interest from the case until determinations granting exemptions for financial interests are properly approved.

  5. Self Certification - Team managers will certify to respective territory managers that there are no conflicts of interest with respect to financial interests. The team 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.  (03-01-2006)
Documenting the Planning Meeting

  1. Minutes - The team manager, upon completion of the planning meeting, should summarized the meeting in narrative form and include the following information:

    1. Those income tax areas which should take priority in the examination.

    2. The overall scope and approach to the examination,

    3. The specialists and nonspecialist members needed, and

    4. An initial estimate of time.  (03-01-2006)
Formal Opening Conference with Taxpayer

  1. Purpose -The opening conference is the first formal meeting with authorized employees or corporate officers of the taxpayer. The main purpose of the meeting is to summarize agreements on coordination and accommodations, and to discuss the scope and depth of the examination.

  2. Preparation – The opening conference is an important meeting and much preparation is involved. A fully developed agenda must be prepared in advance of the meeting and arrangements made for presentations by participants. Most Service personnel present should have a part in the meeting.

  3. Participants – The opening conference should be conducted by the team manager and attended by the team coordinator and key team members. Others should also attend when their participation in the meeting would be helpful.  (03-01-2006)
Preparation for Opening Conference

  1. Meeting Arrangements – The team manager or team coordinator will secure a meeting space appropriate to accommodate the opening conference and notify participants of the meeting.

  2. Agenda – An agenda should be prepared for the meeting that covers all mandatory topics, as well as any items for discussion identified in the planning meeting. Exhibit 4.46.3-2, Agenda for Opening Conference provides a list of possible agenda items. This list of agenda items are suggested topics to discuss at the Opening Conference.  (07-26-2011)
Conference Participants

  1. Working Conference - It is important to remember that the opening conference is a working conference. Attendance should be limited to those who can contribute to the meeting. Any conference between the team manager and other team members and the taxpayer should be planned and conducted in an efficient manner.

  2. Service Personnel - Care should be exercised in selecting the Service personnel who will participate in the opening conference. The entire team may attend if needed. Prior to the opening conference, the team manager may find it beneficial to hold a meeting with those who will attend in order to reach an understanding of the role of each participant and to solicit suggestions on agenda coverage. (This may be accomplished during the planning meeting.) The following is a listing of some guidelines for choosing Service participants for the opening conference:

    1. The team manager's attendance is essential at the opening conference for CIC examinations. The team manager has primary responsibility for the opening conference and should conduct it except in instances where a senior team coordinator is assigned to the case. Normally, this is a responsibility that should not be delegated, however, other Service personnel may have assigned agenda topics.

    2. The team coordinator should attend the opening conference. This will afford the team manager an opportunity to reiterate to the taxpayer the team manager/team coordinator relationship. Explaining this relationship is sometimes necessary in order to prevent a misunderstanding of responsibilities.

    3. Specialists and specialist managers should attend if they are to be involved in a significant portion of the examination.

    4. Industry Directors, Directors of Field Operations and territory managers should be requested to participate if circumstances warrant higher level participation. This might be desirable in situations where Service procedures are being challenged.

    5. Other team members and support supervisors should attend only when their presence is needed.

  3. Authority to Make Decisions - The team manager is authorized to make decisions on behalf of the Service in connection with arrangements for the examination. It will be necessary for those representing the taxpayer to have commensurate authority since many agreements will be negotiated. The opening conference should include the head of the tax department and other officials who are necessary to adequately discuss the scope of the examination and how it will be conducted.

  4. Disclosure Safeguards - The team 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:

    1. Separate meetings may be required if corporate authority is decentralized into various operating components of the company.

    2. 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.)

    3. Only corporate officers are authorized to receive confidential return information absent a power of attorney. Agents should be aware at all times who is in the room and that the individual has authorization to receive confidential information from the IRS.

    4. Separate meetings may be required to coordinate assistance and support audit operations.  (09-04-2013)
Conference Process

  1. Goals of the Conference - The following are the primary goals for an opening conference:

    1. Verification of the preliminary analysis regarding the taxpayer's size, dispersion and diversification (a visit of local facilities may be desirable),

    2. Ascertainment of the address of each accounting center and record storage center, and the availability of records and information at the centers,

    3. Discussion of the accounting system (whether centralized or decentralized, kind of cost controls and internal controls used, whether fully or partially automated, etc.) and arrangements for training to be provided by the taxpayer on these topics,

    4. Establishment of the location and availability of controlled foreign corporation records (Adjustments may be recommended causing economic double taxation; therefore the taxpayer should be placed on notice regarding the statute of limitations of the foreign affiliate -- See Rev. Proc. 2002-52),

    5. Discussion of the tax management authority delegated to domestic and foreign plants, divisions or subsidiaries,

    6. Arrangements for review of tax return workpapers, examination reports, including internal audit reports, and other available internal financial information and issuance of mandatory information document requests (see IRM below),

    7. Establishment of procedures for the review of leases, sales agreements, royalty agreements, trust agreements, patents, insurance policies and other business documents affecting determination of the correct tax, and


      The Team Coordinator and taxpayer should clarify terminology to be used in describing internal taxpayer reports and other documents.

    8. Agreement as to when, where, and who will review corporate minutes of the Board of Directors and the Executive Committee.

    9. Corporate minutes are to be requested and reviewed for approval of financial transactions.

    10. Discuss any safety and security procedures that must be observed on the taxpayer's premises including procedures to ensure the security of IRS personnel and examination documents.

  2. Flow of Communications - The conference process should determine the flow of communications from the team manager and the examination team to the taxpayer and vice versa. The following are critical items that need to be addressed by the team manager:

    1. The communications agreement must identify those individuals in the taxpayer's organization who are authorized to furnish information to team members, those who may discuss tax matters and those to whom adjustments may be proposed.

    2. Taxpayer personnel designated to furnish information to team members should be those best qualified to give complete firsthand information.

    3. The roles of team manager, team coordinator and team members should be fully explained. This will include information as to who has authority to secure information, discuss tax matters, and propose adjustments.

    4. Procedures for requesting information should be clearly established and communicated. The examination team will discuss the IDR management process, turnaround time and procedures for handling past due IDR responses, with the taxpayer, during the opening conference (See IRM

    5. Periodic meetings (e.g. monthly, quarterly, or as needed) should be conducted to review progress and emerging problems in the administration of the examination plan.

    6. The periods when the taxpayer may not be able to respond to IDRs and other requests by the team should be discussed.

    7. The rules of engagement for case interactions by IRS executives and/or senior leaders should be discussed.

    8. The publication Achieving Quality Examination through Effective Planning, Execution and Resolution should be discussed.

  3. Additional Goals of the Opening Conference - The opening conference also should accomplish the following additional goals:

    1. Arrangements, to the extent possible, as to when and where each team member (including support group and specialist team members) will begin work,

    2. Agreement on accommodations for the team including such items as locked file cabinets, desks, chairs, telephones and office machines,

    3. An Occupancy Evacuation Plan (OEP) must be established for any POD.

    4. Agreement on how issues will be raised, discussed and resolved as the examination progresses,

    5. Agreement that both parties will attempt to resolve factual differences on unagreed issues and presentation of preliminary legal position(s),

    6. Agreement to identify the need for an early submission of technical advice requests,

    7. Confirmation of implementation of agreements reached during the previously conducted post-examination management critique for the prior cycle, (Items to be considered in preparation for the post-examination critique of the examination cycle can be found in Exhibit 4.46.7-2, Agenda for Post-Examination Critique.)

    8. Agreement to other pertinent matters such as the status of unagreed issues carried over from any prior examination to determine what action may be necessary for the current examination,

    9. Agreement on the security of Service and taxpayer documents maintained on the taxpayer's premises during the examination,

    10. IRC section 6662(e) documentation studies should be secured on all Multinational Enterprise (MNE) cases. Specifically, an IDR should be issued during the planning process requesting copies of all transfer pricing documentation prepared pursuant to section 6662(e) in every case in which there is either a Form 5471 or Form 5472 attached to the return. 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, the same procedure should be followed as if the taxpayer had a Form 5471 or Form 5472 attached to the return. If the taxpayer engaged in transactions subject to the provisions of Section 482 but did not prepare documentation under section 6662(e), the taxpayer should be asked to provide the relevant information regarding the taxpayer’s transfer pricing practices. These are more specific requirements to the Transfer Pricing Directive dated January 22, 2003 (See Exhibit 4.46.3-5).

    11. Communication to the taxpayer of the LB&I one-stop-service concept, where the examination team is the primary point of contact for LB&I taxpayers on all Service matters, examination related or not, (It should be explained that the team will take a proactive lead in resolving all taxpayer inquiries correctly, courteously, and as quickly as possible. A source for additional information may be required because some inquiries may not be resolved immediately. The team shall make the appropriate referrals for taxpayer assistance, and the taxpayer may contact this person directly.) Taxpayers may also go to www.IRS.gov ,under the business tab, to find additional resources.

    12. Presentation of coordinated, emerging and Tiered issues and solicitation of taxpayer response,

    13. Communication to the taxpayer that tax returns of key corporate executives and controlling shareholders will be reviewed as required by IRM

    14. Agreement that the Team Coordinator will be notified of any informal or formal claims affecting the years under audit as soon as possible in the audit,

    15. Issuance of the tax shelter IDR at the beginning of each examination cycle and whenever a new transaction becomes listed (See IRM,

    16. Discussion of the Service’s desire to resolve issues at the lowest level and the issue management strategies including Fast Track Settlement (See IRM Publication 4539 should be handed out at the opening conference,

    17. Issuance of an information document request constituting notice of the commencement of the 15-day period in Section 3.01(2) of Revenue Procedure 94-69 to make adequate disclosure for the purposes of the waiver of the Section 6662 penalty (CIC only),

    18. Discussion of Publication 1, Your Rights as a Taxpayer, which satisfies the advance general notice of potential third-party contact,

    19. Discussion of the Service’s efforts to achieve currency, the LIFE process and the possibility of using LIFE.

    20. 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 a 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 X- Freeze Code exists, fax a completed Form 3870 requesting release of X- freeze along with proper documentation to CCP.  (09-04-2013)
Taxpayer Advocate Service Referrals

  1. Refer taxpayers to the Taxpayer Advocate Service (TAS) (see IRM Part 13, Taxpayer Advocate Service) when the contact meets TAS criteria (see IRM 13.1.7, TAS Case Criteria) and you can’t resolve the taxpayer’s issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve in 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayer's issue. Do not refer these cases to TAS unless they meet TAS criteria and the taxpayer asks to be transferred to TAS. Refer to IRM, Same-Day Resolution by Operations.

  2. When referring cases to TAS, use Form 911, Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order), and forward it to TAS in accordance with your local procedures. Check the TAS box on IMS, if applicable.


    It is important that all IRS employees handle potential TAS cases with the taxpayer's best interest in mind.

    Refer also to IRM, Taxpayer Advocate Service (TAS) Guidelines, for more information.

  3. Provide the taxpayer with the number for the NTA toll-free case intake line, 1-877-777-4778 or TTY/TDD 1-800-829-4059. The taxpayer should be advised that TAS is available if the taxpayer is not satisfied with the service he or she received.  (12-29-2009)
Discussion of Issues

  1. Agreements - An agreement should be reached during the opening conference on the presentation of issues during the course of the examination since it would be inefficient and impractical to hold all adjustments until the closing conference. This agreement should be made a part of the Taxpayer Information Section of the examination plan. The following items concerning proposed adjustments should be discussed during the opening conference and agreed upon between the team manager and the taxpayer:

    1. Stress that proposed adjustments should be reviewed immediately to determine their factual accuracy,

    2. Determine how the taxpayer will respond to proposed adjustments, and

    3. Establish the time periods in which the taxpayer will respond to the notice of proposed adjustment.

    4. Emphasize proposed audit adjustments and clarify that unless the taxpayer’s agreement to an issue is fully documented by the signing of Form 870, the issue will be treated as unagreed and require a written protest response to a 30 day letter. See IRM for unagreed case procedures.

  2. Form 5701, Notice of Proposed Adjustment (NOPAs) - The team manager or team coordinator and taxpayer should agree on how notices of proposed adjustments are to be presented. Forms 5701 will be used to summarize proposed adjustments to the taxpayer. Forms 886-A, Explanation of Items, will be used to present the entire explanation and will be included as attachments to Forms 5701.

  3. Form 5700, Issue Control Log - The issuance of Form 5701 will be recorded by the team coordinator on Form 5700 or a similar computer-generated list. The team manager is responsible for ensuring that the control sheet or computer-generated list is properly, accurately, and timely completed.

  4. Agreement on Factual Issues - The team manager or team coordinator and the taxpayer should work to resolve all factual issues during the examination.

  5. Settlement Authority - The team manager and the taxpayer should discuss and agree where possible the circumstances under which the team manager will use the delegated settlement authority (See IRM 4.46.5, Issue Development, Proposal and Resolution).

  6. Limited Issue Focused Examination (LIFE) - A Memorandum of Understanding (MOU) will be completed and signed to cover the agreements discussed above when Limited Issue Focused Examination procedures are being utilized.  (03-01-2006)
Concluding the Opening Conference

  1. Review Agreements - The team manager should conclude the conference phase by reviewing with the taxpayer all agreements and understandings reached with particular emphasis on the timetable and logistical arrangements.

  2. Minutes - The team manager will summarize, in writing, all pertinent information developed and agreements reached. A draft copy of the minutes of the opening conference will be provided to the taxpayer for comment. Completeness of the minutes will facilitate the preparation of the Taxpayer Information Section, Form 4764, LB&I Examination Plan.

  3. Modifications - Arrangements are subject to modification if warranted. Changes could be generated by suggestions from a team member or the taxpayer. The team manager should notify and discuss changes with the taxpayer and the team members if a decision is made to modify agreements.  (03-01-2006)
Combining the Opening Conference with Post-Examination Management Critique

  1. Post-Examination Critique – The primary objective of the post-examination management critique is to establish the groundwork for the next examination. The participants in the critique should develop recommendations for improving the subsequent examination and obtain data which will be useful to the next examination team. Consideration should be given to combining the post-examination critique for the prior cycle with the opening conference for the next cycle.

  2. Subsequent Examination - The combination of the opening conference and post -examination critique into one meeting may be effective in situations where the same team manager and principal team members will be assigned to the subsequent audit. A new team manager or principal team member should attend the critique (or portions of it) as part of the subsequent opening conference process.

  3. Meeting Options –The two meetings may be held concurrently or consecutively if they are combined. All participants may or may not attend both meetings if held consecutively.  (03-01-2006)
Preliminary Examination Work

  1. Purpose – The preliminary examination of records is to validate decisions made during the risk analysis phase and the selection of issues to be included in the examination plan. It also gives examiners a basis for developing examination procedures for each assigned area of responsibility.

  2. Sequence - Parts I and II of the examination plan should be completed before any substantial audit work is started.  (07-26-2011)
Review of Records

  1. Preliminary Examination Work - Preliminary examination work involves the review of certain taxpayer records and analysis of accounts. Ongoing discussions should continue with the taxpayer in order to determine the availability and location of records and to keep the taxpayer involved in the planning process. This review of records will serve as the basis for

    1. Identifying the procedures necessary to examine the noncompliance areas;

    2. Identifying other unusual and questionable items not apparent during the initial review; and

    3. Modifying decisions reached during the initial review.

  2. Basic Records - The team coordinator and team members shall perform a review of basic records of the taxpayer which at a minimum should include:

    • Tax return

    • Schedule M (i.e., M-1, M-2 or M-3)

    • Corporate minutes

    • Annual Reports

    • Internal controls

    • Internal management reports

    • Accounting manuals and systems

  3. Automated Data – Computer-generated data should be utilized in most cases to facilitate the review of taxpayer accounts. The CAS can assist with the generation of the following types of reports and analyses:

    1. Stratification or account analysis,

    2. Comparative analysis of balance sheet and profit and loss accounts, and

    3. Other computer-generated data.

  4. Pricing Issues - Some examination areas require the commitment of substantial time and resources to develop and document. Section 482 pricing is one of those areas. Documents received pursuant to the LB&I Commissioner Directive dated January 22, 2003 should be referred to an international examiner or economist for risk assessment as soon as they are received (See Exhibit 4.46.3-5, Transfer Pricing Compliance Processes). These issues should be included in the examination plan if the risk assessment indicates that transfer pricing issues should be examined. Planning the examination of Section 482 pricing issues must utilize a team approach and should include input from the territory manager, team manager, specialty managers, economists, domestic and international examiners, Area Counsel (when warranted) and the taxpayer.

  5. Required Filing Checks – For the current strategy of risk based/issue focused, filter focused and Compliance Initiative Project examinations, the following changes to required filing checks in IRM 4.10.5 are adopted:

    • Prior and subsequent year key examination returns (use TIG report for filing verification)

    • Related returns (use IDRS – BMFOL-I or IMFOL-I)

    • Employment Tax returns (use IDRS – BMFOL-I)

  6. Filing verification of W-2s, Forms 5500 and 8300, Excise Tax and other Information Returns can be waived. Filing checks for W-4's are no longer required as this procedure is now moved to the Campuses.


    Form 5500 filing verification is required for examinations that are under consideration for referral for EP issues.


    For Form 8300 and other Information Returns, filing verification is not waived if the examination involves a financial institution.

    See the Compliance Checks Audit Tool at Exhibit 4.46.3-4, also available on the Audit Tools WEB site

  7. Decision to Survey a Return – Examiners, with the concurrence of the team manager, must decide if the return or selected issues should be surveyed after assignment once the in-depth analysis and evaluation of audit potential is completed. An LB&I Survey Form is no longer required for returns surveyed either before or after assignment (disposal code 31 or 32) using Survey Reason Codes A through D (see IRM For returns surveyed either before or after assignment using Survey Reason Code E, "Other" , LB&I managers must continue to include a separate form in the administrative case file that clearly explains the reason for the survey. Either the LB&I Survey Reason Form or a Form 1900, Income Tax Survey After Assignment, can be utilized for this purpose. The form will remain with the case when sent to Files. For paperless surveys, this form is maintained in CCP with the respective closing documents for one year. The International team manager’s concurrence is required to survey returns that meet the international mandatory referral criteria in IRM, International Procedures.

  8. Other Factors - Team managers and team coordinators should consider other matters such as the prevailing economic factors during the years to be examined, issues common to the particular industry, or issue areas common to the taxpayer's business operations.  (12-29-2009)
Developing Examination Procedures

  1. Team Recommendations - The team coordinator and team members will submit the following to the team manager after completing their preliminary examination work:

    1. A list of specific accounts on the taxpayer's books to be examined,

    2. Preliminary examination procedures to be used for each account,

    3. The reasons justifying the examination of a particular account,

    4. Coordinated and Tier issues considered, and

    5. A time estimate for each specific account.

  2. Review and Approval - The proposed procedures are subject to the approval of the team manager. It is the team manager’s responsibility to document their approval or modify the procedures using judgment based on the planned scope and depth of the examination. Modifications may be a result of the planning sessions involving the taxpayer. Examination procedures will be included in Part III of the examination plan.

  3. Request for Sensitive Documents - The team manager should emphasize to all team members that the taxpayer's books and records are the primary source of factual data to support the tax return. Accountants' audit or tax accrual workpapers normally should be used only when such factual data cannot be obtained from the taxpayer's records, unless a listed transaction is involved. Access to the accountants' audit or tax accrual workpapers should be requested with discretion and should not be requested as a matter of standard examination procedure, except in the listed transaction circumstances described in (4) below. IRM 4.10 provides additional guidance regarding Service Policy for Requesting Workpapers.

  4. Listed Transactions – Listed transactions will be raised and developed when identified during an examination. Accountants' audit or tax accrual workpapers should be requested in circumstances described in Announcement 2002–63 and in the section of IRM 4.10 that provides guidance regarding the Service's policy for requesting workpapers. The examiner should follow procedures provided in IRM, Coordination of Listed Transactions (below).

  5. Technical Advisor Approval Required - Decisions not to examine coordinated issues require approval from the appropriate Technical Advisor.  (03-01-2006)
Coordination of Listed Transactions

  1. Contacting a Technical Advisor - Examiners must contact the technical advisor, identified coordinator or issue management team responsible for coordinating the issue and Area Counsel. The examiner should provide the following information regarding the listed transaction:

    1. The name of the taxpayer,

    2. Taxable period(s) involved,

    3. Type of listed transaction,

    4. The name of the promoter, if known, and

    5. The names of the team manager and team coordinator and their telephone numbers.

  2. Technical Advisor Involvement - Examiners should consult with the Technical Advisor on the development of the issue and take the following actions:

    1. Secure the concurrence of the Technical Advisor if their examination deviates from any mandated specific audit techniques proposed for issue development or their proposal for adjustment deviates from any stated legal positions, and

    2. Consult with and secure the concurrence of the Technical Advisor before proposing any resolution other than full concession of the issue by the taxpayer.

  3. Accuracy-Related Penalties - The penalties under section 6662 and 6662A must be considered for all listed transactions where there is an underpayment or understatement attributable to a listed transaction. Director of Field Operations' (DFO) approval is required regarding the decision to impose or not to impose the accuracy-related penalty. Certain penalties under section 6662(b) will be waived if the transaction was properly disclosed under the Announcement 2002-2 Disclosure Initiative. Examiners should refer to IRM 20.1, Penalty Handbook, for additional guidance.

  4. Tax Shelters - LB&I examiners must contact Area Counsel as well as the Office of Tax Shelter Analysis (OTSA) when they identify and evaluate the facts regarding a new potentially abusive tax shelter transaction. OTSA and Reporting Enforcement are responsible for coordinating and assisting in the identification of tax shelters.

  5. Tax Accrual Workpapers - Tax accrual workpapers relating to the listed transaction will be routinely requested if a taxpayer claims tax benefits from a listed transaction on a return filed on or after July 1, 2002. All tax accrual workpapers will be routinely requested if the taxpayer did not disclose the listed transaction. All tax accrual workpapers will be requested as a discretionary matter if the taxpayer invested in multiple listed transactions or claimed tax benefits from a single listed transaction that was disclosed and there are financial irregularities with respect to the taxpayer. (See the Tax Accrual Workpapers web site and the Abusive Tax Shelters and Transactions web site at http://www.irs.gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions, as well as Announcement 2002–63 and IRM 4.10 related to Returns Filed on or after July 1, 2002).  (07-26-2011)
Abusive Tax Shelter Mandatory Information Document Request (IDR)

  1. In early 2002, the Office of Tax Shelter Analysis (OTSA), while working in concert with LB&I Division Counsel, and the Office of Chief Counsel, developed an Information Document Request (IDR) for use by LB&I examiners in requesting the production of information and documents related to listed transactions.

  2. The Tax Shelter IDR was designed, principally, to assist examiners in the early-identification of listed transactions. It is believed to play a vital role in the Division’s efforts to combat abusive tax shelters and therefore, the issuance of the IDR is mandatory in all LB&I examinations, including those having a limited scope, as well as those classified as "LIFE" examinations (Limited Issue Focus Examinations).

  3. The issuance of the Tax Shelter IDR also is mandatory for examination activities that originate from certain pre-filing compliance initiatives, such as the Compliance Assurance Process (CAP).

  4. In addition to the traditional LB&I examinations, consisting mostly of large corporate taxpayers, Forms 1120, LB&I examinations, involving Coordinated Industry Cases (CIC), as well as those involving Industry Cases (IC), also have the potential to include various other categories of returns, e.g., Forms 1120S, 1120F, 1065, 1040, 1041, etc., all of which are subject to the Division’s policy requiring the issuance of the Mandatory Tax Shelter IDR.

  5. The Mandatory IDR must be issued at the start of all LB&I examinations and a supplemental IDR must be issued whenever a new transaction becomes listed. Moreover, if any LB&I examination is expanded to include additional years, or related returns, including any individual income tax returns, Forms 1040, as an example, the IDR must be issued at the commencement of those examinations. Finally, whenever any transaction is listed by way of published guidance, a supplemental IDR must be issued in all open LB&I Examinations, i.e., those examinations having AIMS/ERCS Status Codes less than Status Code 30. There are no exceptions to this requirement and rare modifications to the IDR may be made only under the guidance of OTSA in consultation with LB&I Division Counsel.

  6. The language contained in the IDR is written to be specific, and in sufficient detail to permit LB&I taxpayers to ascertain the nature of the information and documents they are requested to produce. Team managers, therefore, should consult with their Area Counsel Attorneys in considering whether and when to employ the use a summons, i.e., in those situations in which a taxpayer either fails to respond to the IDR outright or fails to provide an adequate response.

  7. The Mandatory Tax Shelter IDR, Listing Notices, and other published "listing" guidance are maintained on the OTSA Website (under PFTG) at Mandatory Tax Shelter IDR Home Page, also available publicly at http://www.irs.gov/Businesses/Corporations/Abusive-Tax-Shelters-and-Transactions.  (03-01-2006)
The Examination Plan

  1. 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.

  2. 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:

    1. 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);

    2. Provide management with information regarding the type of examination planned and resources required;

    3. Define each team member's responsibility and how that responsibility is to be carried out;

    4. Serve as a basis for monitoring and directing the progress of the examination; and

    5. Contain the scope of the examination.

  3. 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.

  4. 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.

  5. Taxpayer involved - 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 gain 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.

  6. 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.

  7. Responsibility for the Examination Plan - The examination plan is the responsibility of the team manager, however the team coordinator will assist in its preparation.  (12-29-2009)

  1. 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.

  2. 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.

  3. Taxpayer agreement - The orderly progress of the examination will depend upon the taxpayer's full agreement to and complete understanding of the examination arrangements.

  4. 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 can be completed.

  5. 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.  (03-01-2006)
Sections of the Examination Plan

  1. 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:

    1. 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.

    2. 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.

    3. Part III -- Examination Procedures Section. This section contains each team member's assignment and the procedures to be used in accomplishing the assignment.

  2. 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 can not be included in the examination plan.  (07-26-2011)
Part I - Taxpayer Information Section (Examination Arrangements)

  1. 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 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.

  2. For IC cases (Corporations, Partnerships and S Corps) and individual returns, the only required pages are:

    • the cover page

    • Sections 1a and 1b (IRS Personnel and Communication Agreement)

    • Section 8 (Other Pertinent Agreements)

    • Attachment to Form 4764 Formal Opening Conference with Taxpayer and Instructions

    The other sections are now optional.


    Mandatory items are required topics that the LB&I team manager or agent will discuss with the taxpayer at the Opening Conference. Non-mandatory items are optional topics that the LB&I team manager or agent can discuss with the taxpayer at the Opening Conference.

  3. 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 which require a senior team coordinator.

  4. 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.

  5. 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:

    1. LIFE examinations,

    2. Follow up on issues raised in the preceding cycle,

    3. Repeat examinations where unabsorbed claimed credits (e.g., foreign tax credits) are so large as to preclude a productive full scope examination, and

    4. Coordinated Issue special purpose audits, etc.

  6. 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:

    1. List of Service personnel including names, badge number, position, and telephone,

    2. Dates that each team member can be expected to begin working on the case,

    3. Location where examination activities are to be carried out,

    4. Records to be provided,

    5. Space and equipment required, and

    6. Requests for information (See IRM 4.46.4, Inspection and Fact Finding).

  7. Authority - Team managers should make certain that the individual they are dealing with is a duly authorized corporate officer or delegate 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.

  8. Communications - Part I of the plan should contain a Communications Agreement. This agreement should include the following items:

    1. Identification of individuals in the taxpayer's organization who are authorized to furnish information to team members, who may discuss tax matters, and to whom adjustments may be proposed,

    2. Identification of the team coordinator and team members and the roles each will have in the examination, and

    3. 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.)

  9. Arrangements - The Taxpayer Information Section should cover the details of all arrangements, including:

    1. The space set aside for the agent's use;

    2. Work hours and parking arrangements;

    3. Names of individuals who will provide equipment needed by the team;

    4. Telephone and data lines needed; and

    5. Agreements regarding status meetings with the taxpayer to discuss problems.  (12-29-2009)
Part II - Service Management Information Section (Examination Program)

  1. 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. This section is optional for IC audits regardless of return type: corporations, S corporations, partnerships and individual returns.

  2. Taxpayer orientation - The taxpayer should be requested to provide an orientation that will provide much of this information needed for this section.

  3. 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.  (07-26-2011)
Items Included in Part II of the Examination Plan

  1. Information Regarding Taxpayer – This section includes:

    1. A summary of the organization's acquisitions, mergers, or liquidations;

    2. 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).

    3. 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.)

    4. The record retention limitation agreement under Rev. Proc. 98-25;

    5. Titles and frequency of reports to regulatory agencies;

    6. Public or other sources of information; and

    7. 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.)

  2. Instructions to Team Members - This section includes instructions related to the following subjects:

    1. Standard for workpapers (size, etc.),

    2. 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),

    3. Routing of requests for information to and from the taxpayer,

    4. Procedures for requesting conferences with the taxpayer,

    5. Maintaining a folder of summary topics (planning file) and related background material to be used in preparation for the post-examination critique,

    6. Procedures for monitoring time,

    7. Development of examination procedures, presentation of issues and preparation of the report,

    8. Procedures for requesting information,

    9. Procedures for requesting accountants' workpapers,

    10. Written communication procedures,

    11. Requirements associated with confidentiality privileges relating to taxpayer communications,

    12. Instructions for documentation of examining officer's activity and interest abatement,

    13. Requirements associated with confidentiality of taxpayer information/taxpayer privacy,

    14. Awareness of Unauthorized Access (UNAX) requirements,

    15. Procedures related to third party contacts,

    16. Awareness of taxpayer rights, and

    17. Examiner verification requirements related to providing the taxpayer with official employee identification information.

    18. Communicate to field employees the policy on responding to work/case related information requests and practices to comply with IRM item (6).

  3. Information for Team Members – The following types of information would be beneficial to all team members:

    1. Brief outline of team manager’s planned activities,

    2. Brief outline of team coordinator’s activities,

    3. Industry practices and issues common to this type of industry,

    4. Special examination features to be used, and

    5. Projected travel expenses (optional).

  4. 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, and

    • Review management letters from CPA firm and responses thereto, where applicable.

    Verify required return filing compliance. (See IRM

  5. 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.

  6. Requests to field employees for work/case related information ( Policy Memo) - LB&I field employees should use the following policy and practices when responding to requests for work-related information in the following situations.

  7. For requests from external stakeholders, such as Congressional staff and members of the media, to an LB&I employee asking for work-related information, the following procedures and steps should be taken:

    1. The employee should notify his or her manager of the request before responding.

    2. The manager should forward the request up to the Industry Director.

    3. The Industry Director should coordinate the response with LB&I Headquarters.

    4. Requests from Congressional staff or the media should be coordinated with LB&I Communications and Liaison.

  8. For requests from other IRS employees asking for work/case related information, the following procedures and steps should be taken:

    1. If LB&I employees receive a request from another IRS employee whom they do not know, they should take actions to verify the identity of the employee making the request, the reason for the request, and the need to know.

    2. If employees are unable to verify employee's identity, a valid reason for request, and need to know, they should notify his or her manager immediately.

    3. The employee may contact the Office of Chief Counsel for assistance involving highly sensitive issues where discussions of those issues can pose risk of an unauthorized disclosure and any related questions as to what information may be discussed.  (03-01-2006)
Administrative and Processing Details

  1. 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:

    1. Type of workpaper (size, color, etc.),

    2. Type of workpaper indexing, and

    3. Indexing of electronic storage media.

  2. Software - BNA and RGS software should be utilized to the greatest extent possible.

  3. 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.

  4. Tax Computation Specialist (TCS) Review: All closed examinations must contain an examination report prepared by a Tax Computation Specialist.  (12-29-2009)
Role of the Team Manager

  1. 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:

    1. Planned contacts with specialists and assistance or support team supervisors;

    2. Frequency of manager's meetings with taxpayer and team members;

    3. Coordination with assistance or support groups;

    4. Involvement in creating the examination plan and method for documenting approved changes in the examination plan;

    5. Review of work in process;

    6. Input and review of issues selected through the manager’s initial and mid cycle risk analysis process;

    7. 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;

      • Third Party Contacts, Issuance of Summons and Summons Enforcement

      • Contacts made to District Counsel

      • Requests for outside services

    8. Involvement in the Information Document Request (IDR) Management Process to address delays;

    9. Review and approval of significant or sensitive proposed issues (Forms 5701, Notice of Proposed Adjustment).

    10. Approval of the assertion of all penalties.

    11. Protection of all statutes of limitations.

    12. Review the case at the end of the examination

  2. 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 the LB&I Commissioner Directive dated January 22, 2003 (See Exhibit 4.46.3-5). 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 Management Process if the taxpayer fails to respond to the document request within this 30-day time frame, see IRM Exhibit 4.46.4-1, IDR Management Process. 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.

  3. 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.  (12-29-2009)
Role of the Team Coordinator

  1. 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:

    1. Prepare the examination plan with the assistance of the team manager,

    2. Update the risk analysis with the assistance of the team manager,

    3. Review all team members' information requests (including specialists) for uniformity, clarity, duplication of other requests,

    4. Ensure that information requests are discussed with appropriate taxpayer representative prior to their issuance, if necessary,

    5. Ensure that issues to be presented on Forms 5701, Notice of Proposed Adjustment, are discussed with the appropriate taxpayer representative prior to issuance,

    6. Review all team members' (including specialists) proposed adjustments (Forms 5701/NOPAs),

    7. Detail 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,

    8. Secure the team manager's approval of requests where required,

    9. Maintain an IDR & 5701 log to document the date of issuance and receipt of each IDR.and retain copies of the requests,

    10. Function as the liaison with the taxpayer for the day-to-day activities of the team,

    11. 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, and

    12. Update the planning file; and prepare Post-Examination critique,

    13. Monitor the case for TEFRA links using command code TSUMY periodically,

    14. Control the coordination of meetings (e.g., planning meeting/opening conference/mid-cycle review/post-examination critique),

    15. Ensure that ERCS, IDRS, and IMS are correctly updated,

    16. Protect all statutes of limitations, and

    17. Perform other duties as determined appropriate by the team manager.

  2. 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).  (03-01-2006)
Scope of Examination

  1. Scope – Risk Analysis provisions should be followed in determining the scope of the examination.

  2. 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.

  3. 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:

    1. Avoid developing useless feeder information;

    2. Alert the team manager to significant interrelated issues which, if fully developed, would require that the component be brought under examination; and

    3. Recognize information which was not available to the team manager in deciding the scope of the examination.  (12-29-2009)
Examination Assignments

  1. Assignment spreadsheet - The examination assignment portion of Part II is a summary of the accounts, transactions, examination areas, organizational components and the specific team member responsibilities for carrying out each segment of the examination. This section helps the Senior Team Coordinator or Team Manager control assignments and permits each team member to see how individual areas of responsibility fit into the overall examination pattern. This is particularly helpful where a consolidated return or a segment of a return is involved. The information also permits the team member to begin consideration of the specific procedures to use in accomplishing the assignment and in predicting the examination time.

  2. Alternative formats - It may be more desirable to use variations of the summary of assignments format shown on Form 6609, Schedule of Work Assignments and Planned Time. Each of the assignments should be clearly and completely outlined to facilitate management and coordination of the case regardless of the format used. The Senior Team Coordinator or Team Manager may also extend the information shown on Form 4764, Large Cases Examination Plan, by including the name of the support territory, scheduled starting dates, and estimated examining time.  (12-29-2009)
Modification of Part II of the Examination Plan

  1. 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. These situations are listed below:

    1. 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.), and

    2. Restricted scope or LIFE examination.  (12-29-2009)
Part III, Examination Procedure Section (Examination Assignments)

  1. Purpose of Part III - The purpose of this section is to:

    1. Inform team members of their assignments and to convey any special instructions;

    2. Permit team members to indicate the specific examination procedures and techniques they propose to use in fulfilling their assignment; and

    3. 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.

  2. 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:

    1. Flow and order of the examination process;

    2. Planned start and completion dates;

    3. An estimate of examination time by specific segments, such as line items from a return, SAIN item, potential issue(s), etc.;

    4. A description of testing, sampling, or other specific examination techniques to be used (including compliance checks), when warranted;

    5. Depth to be achieved in the examination of items within the segment;

    6. Special coordination with other team members to achieve the best possible uniformity and consistency in raising and resolving issues; and

    7. Prioritization of significant areas/issues.

  3. 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.  (12-29-2009)
Special Instructions and Summary of Assignment

  1. 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.

  2. 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:

    1. Contain special instructions on case management activities for particular assignments only (Instructions of a general nature should be covered in the Service Management Section.);

    2. 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;

    3. Clearly describe the assignment and the team members’ responsibilities and staff day allocation (This will help to determine the examination procedures to be applied); and

    4. 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.)

  3. Distribution – Form 4764A, LB&I Examination Plan – Summary of Assignments, should be given to each team member before work begins.  (12-29-2009)
Outline of Examination Procedures

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. Sequence – The examination procedures should be divided or arranged in the sequence to be followed.

  7. 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.

  8. 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.

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