4.70.14 Resolving the Examination

Manual Transmittal

November 24, 2023

Purpose

(1) This transmits new IRM 4.70.14, Resolving the Examination.

Material Changes

(1) The TE/GE Examinations process was created to provide a consistent and streamlined examination process across TE/GE.

(2) Editorial changes have been made throughout, including for plain language.

(3) Incorporated Mandatory Review Alert issued on August 3, 2023.

(4) This IRM was extracted from the Internal Guidance Memos (IGMs) and IRM sections tabled here:

IGM IRM Section
TEGE-04-0820-0015, TE/GE CSP Agreements, dates August 17, 2020 4.71.1, Overview of Form 5500 Examination Procedures, dated February 25, 2022
TEGE-04-0920-0007, Modification of Department of Labor (DOL)/Pension Benefit Guarantee Corporation (PBGC) Referral Processes, dated September 24, 2020 4.71.3, Unagreed Form 5500 Examinations and EP Examinations Closing Agreements, dated March 18, 2022
TEGE-04-1220-0005, Change in Signatures on Various Examination Letters, dated December 12, 2020 4.71.4, Discrepancy Adjustments, dated December 8, 2020
TEGE-04-0221-0003, Interim Guidance on Letter Consolidation, dated February 2, 2021 4.71.5, Form 5330 Examinations, dated February 14, 2022
TEGE-04-0621-0009, Cases Protested to Appeals through the EO Closing Unit, dated June 22, 2021 4.71.6, Employee Plans Referrals, dated October 29, 2019
TEGE-04-0921-0018, Activity, Disposal, Source and Status Codes, dated September 28, 2021 4.71.8, EP Claims, dated December 17, 2019
TEGE-04-0322-0009, Interim Guidance on Fully Electronic (100% Paperless) Cases, dated March 15, 2022 4.71.9, Statute Control Procedures, dated August 12, 2021
TEGE-04-0422-0013, TE/GE RCCMS Naming Convention, dated April 26, 2022 4.71.10, Form 990-T Processing, dated October 29, 2019
TEGE-04-0522-0014, Interim Guidance on Establishment of Form 5330 Returns, dated May 3, 2022 4.71.12, Case File Assembly Guidelines, dated November 5, 2019
TEGE-04-0622-0015, Cases Subject to Mandatory Review, dated June 1, 2022 4.71.13, Technical Assistance, Technical Advice and Requests for Relief under IRC Section 7805(b), dated July 12, 2019
TEGE-04-0622-0025, Discontinue using paper Forms 895/895-EP, dated June 21, 2022 4.71.14, EP Mandatory Review, dated August 26, 2021
TEGE-04-0622-0027, Tax Exempt and Government Entities Examination Process, dated June 21, 2022 4.71.17, Non-Return Unit Examinations, dated December 2, 2021
TEGE-04-0722-0024, Fully Electronic (100% Paperless) Cases, dated July 13, 2022 4.71.19, Fast Track Settlement Procedures, dated October 28, 2019
TEGE-04-1122-0033, Letter Consolidation for Change due to Correction of Operations Closing Letter, dated November 15, 2022 4.71.27, Form 5329 Examination Procedures, dated December 23, 2020
TEGE-04-1122-0003, Letter Consolidation for Change due to Correction of Operations Closing Letter, dated November 15, 2022 4.75.15, Closing Letters and Examination Reports, dated January 14, 2020
TEGE-04-1122-0035, Interim Guidance on Certain Accepted as Filed Returns, dated November 28, 2022 4.75.16, Case Closing Procedures, dated February 5, 2020
TEGE-04-0123-0003, Interim Guidance on use of Standardized Letters and Forms, dated January 10, 2023 4.75.20, Final Case Processing, dated July 30, 2019
  4.75.21, EO Special Examination Procedures, dated November 5, 2019
  4.75.22, EO Delinquent, Amended and Substitute for Return Procedures, dated November 7, 2019
  4.75.24, Organizations Covered by a Group Ruling, dated May 18, 2021
  4.75.25, Exempt Organizations Examinations Closing Agreements, dated May 1, 2017
  4.75.31, Conversion of Returns, dated October 18, 2019
  4.75.32, Declaratory Judgment Cases and The Administrative Record, dated May 2, 2019
  4.75.34, Procedures for Disposition of IRC 501(p) Cases, dated May 29, 2019
  4.75.37, Claims, Requests for Abatement and Examination Reconsiderations, dated February 7, 2020
  4.75.40, Employment Tax Audit Procedures, dated December 18, 2019
  4.81.5, Tax Exempt Bonds (TEB) Examination Program and Procedures, Conducting the Examination, dated August 5, 2021
  4.81.6, Closing Agreements, dated February 20, 2019
  4.81.12, Compliance Review of Form 8038-CP, dated October 1, 2019
  4.81.14, Unagreed Issues, dated October 17, 2019
  4.82.2, Arbitrage Payment Refund Claim Procedures, dated March 18, 2021
  4.86.5, Indian Tribal Governments (ITG) Procedures, Conducting Indian Tribal Government Examination, dated December 15, 2020
  4.88.1, Examination Issues Pertaining to ITG Cases, dated December 10, 2021

Effect on Other Documents

This IRM supersedes and obsoletes:
IRM 4.71.1, Overview of Form 5500 Examination Procedures, dated February 25, 2022,
IRM 4.71.3, Unagreed Form 5500 Examinations and EP Examinations Closing Agreements, dated March 18, 2022,
IRM 4.71.4, Discrepancy Adjustments, dated December 8, 2020,
IRM 4.71.5, Form 5330 Examinations, dated February 14, 2022,
IRM 4.71.6, Employee Plans Referrals, dated October 29, 2019,
IRM 4.71.7, Survey Returns, dated October 4, 2019,
IRM 4.71.8, EP Claims, dated December 17, 2019,
IRM 4.71.9, Statute Control Procedures, dated August 12, 2021,
IRM 4.71.10, Form 990-T Processing, dated October 29, 2019,
IRM 4.71.12, Case File Assembly Guidelines, dated November 5, 2019,
IRM 4.71.13, Technical Assistance, Technical Advice Requests and Requests for Relief under IRC section 7805(b), dated July 12, 2019,
IRM 4.71.14, EP Mandatory Review, dated August 26, 2021,
IRM 4.71.17, Non-Return Unit Examinations, dated December 2, 2021,
IRM 4.71.19, Fast Track Settlement Procedures, dated October 28, 2019,
IRM 4.71.27, Form 5329 Examination Procedures, dated December 23, 2020,
IRM 4.75.15, Closing Letters and Examination Reports, dated January 14, 2020,
IRM 4.75.16, Case Closing Procedures, dated February 5, 2020,
IRM 4.75.17, Mandatory Review, dated October 15, 2019,
IRM 4.75.20, Final Case Processing, dated July 20, 2019,
IRM 4.75.21, EO Special Examination Procedures, dated November 5, 2019,
IRM 4.75.22, EO Delinquent, Amended and Substitute for Return Procedures, dated November 7, 2019,
IRM 4.75.24, Organizations Covered by a Group Ruling, dated May 18, 2021,
IRM 4.75.25, Exempt Organizations Examinations Closing Agreements, dated May 1, 2017,
IRM 4.75.31, Conversion of Returns, dated October 18, 2019,
IRM 4.75.32, Declaratory Judgment Cases And The Administrative Record, dated May 2, 2019,
IRM 4.75.34, Procedures for Disposition of IRC 501(p) Cases, dated May 29, 2019,
IRM 4.75.37, Claims, Requests for Abatement and Examination Reconsiderations, dated February 7, 2020,
IRM 4.75.40, Employment Tax Audit Procedures, dated December 18, 2019,
IRM 4.81.5, Tax Exempt Bonds (TEB) Examination Program and Procedures, Conducting the Examination, dated August 5, 2021,
IRM 4.81.6, Closing Agreements, dated February 20, 2019,
IRM 4.81.12, Compliance Review of Form 8038-CP, dated October 1, 2019,
IRM 4.81.14, Unagreed Issues, dated October 17, 2019, IRM 4.82.2, Arbitrage Payment Refund Claim Procedures, dated March 18, 2021,
IRM 4.86.5, Indian Tribal Governments (ITG) Procedures, Conducting Indian Tribal Government Examination, dated December 15, 2020,
IRM 4.88.1, Examination Issues Pertaining to ITG Cases, dated December 10, 2021, and
IRM 7.11.2.6 EP Examination Case Grading Criteria, dated July 25, 2008.

This section incorporates Internal Guidance Memos
TEGE-04-0820-0015, TE/GE CSP Agreements, dated August 17, 2020,
TEGE-04-1220-0005, Change in Signatures on Various Examination Letters, dated December 12, 2020,
TEGE-04-0221-0003, Interim Guidance on Letter Consolidation, dated February 2, 2021,
TEGE-04-0621-0009, Cases Protested to Appeals through the EO Closing Unit, dated June 22, 2021,
TEGE-04-0921-0015, Mandatory Actuarial Input for Examination Cases Involving Defined Benefit Plans, dated September 15, 2021,
TEGE-04-0921-0018, Activity, Disposal, Source and Status Codes, dated September 28, 2021,
TEGE-04-0222-0006, Elimination of requirement to post Form 3198-A as a separate workpaper in RCCMS Office Documents folder, dated February 23, 2022,
TEGE-04-0322-0009, Interim Guidance on Fully Electronic (100% Paperless) Cases, dated March 15, 2022,
TEGE-04-0422-0013, TE/GE RCCMS Naming Convention, dated April 26, 2022,
TEGE-04-0522-0014, Interim Guidance on Establishment of Form 5330 Returns, dated May 3, 2022,
TEGE-04-0622-0015, Cases Subject to Mandatory Review, dated June 1, 2022,
TEGE-04-0622-0016, Checksheet for Employee Plans Compliance Activities, dated June 22, 2022,
TEGE-04-0622-0025, Discontinue using paper Forms 895/895-EP, dated June 21, 2022,
TEGE-04-0622-0026, Reporting Compliance Case Management System (RCCMS) Electronic Case Policy dated June 21, 2022,
TEGE-04-0622-0027, Tax Exempt and Government Entities Examination Process, dated June 21, 2022,
TEGE-04-0722-0024, Fully Electronic (100% Paperless) Cases, dated July 13, 2022,
TEGE-04-1122-0033, Letter Consolidation for Change due to Correction of Operations Closing Letter, dated November 15, 2022,
TEGE-04-1122-0035, Interim Guidance on Certain Accepted as Filed Returns, dated November 28, 2022, and
TEGE-04-0123-0003, Interim Guidance on Use of Standardized Letters and Forms, dated January 10, 2023.

Audience

Tax Exempt and Government Entities Examination Employees and Managers

Effective Date

(11-24-2023)

Robert Choi
Deputy Commissioner
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: IRM 4.70.14, Resolving the Examination, provides guidelines for TE/GE examiners to use during the resolution phase of the examination. The resolution phase has three steps:

    1. Final Determination

    2. Resolve Case

    3. Close Case

    Note:

    Each of these steps will be discussed in further detail within IRM 4.70.14, Resolving the Examination.

  2. Audience: This IRM provides procedures for examiners, managers, and support staff in TE/GE examination functions.

  3. Policy Owner: The Directors, Employee Plans and Exempt Organization/Government Entities.

  4. Program Owner: The Directors, Employee Plans Examinations, Exempt Organizations Examinations, and Government Entities.

Background

  1. This IRM provides an overview of the responsibilities that examiners should understand and apply in the performance of their duties in executing the resolution phase of the TE/GE examination process.

  2. Examination of exempt organizations will be conducted to determine whether such entities meet continued qualification of exempt status, compliance and the causes of noncompliance with the tax laws and applicable resolutions.

  3. Examination of employee benefit plans is regulatory, with emphasis on continued qualification of employee benefit plans. The IRS selects and examines returns to:

    1. Promote the highest degree of voluntary compliance with the tax laws governing plan qualification.

    2. Determine the extent of compliance and the causes of noncompliance with the tax laws and applicable resolutions.

    3. Determine whether such plans meet the applicable qualification requirements in operation.

  4. Examination of governmental entities will be conducted to determine whether such entities are in compliance with their employment tax filing, reporting, and payment requirements.

  5. The Tax Exempt Bond Examination Program is to identify and correct noncompliance in tax-advantaged bonds.

  6. TE/GE Examiners should refer to IRM 4.23.3, Exam Program and Procedures, when examining employment tax cases in addition to this IRM section.

  7. The procedures contained in this IRM are not intended to be all inclusive. Examiners must use their professional judgment in completing their exam cases and other compliance activities.

Authority

  1. Examinations are conducted according to Policy Statement 1-236 (IRM 1.2.1.2.36), Fairness and Integrity in Enforcement Selection, and the Taxpayer Bill of Rights per IRC Section 7803(a)(3). The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see https://www.irs.gov/taxpayer-bill-of-rights.

  2. Policy Statement 4-4 (IRM 1.2.1.5.2) provides package audit requirements, that:

    1. Income tax examinations will include consideration of employment tax liability.

    2. If warranted, employment tax returns will be examined concurrently with the income tax examination.

    3. The examination of any return will include a check for filing other federal tax or information returns required to be filed.

  3. Under Policy Statement 4-117 (IRM 1.2.1.5.34), examiners and managers:

    1. Have broad authority to consider and weigh conflicting information, data, and opinions.

    2. Use professional judgement when applying examination standards for findings of fact and application of tax law to determine the correct tax liability.

    3. Exercise authority to get the greatest number of agreements to tax determinations without sacrificing the quality or integrity of those determinations.

    4. Resolve tax differences at the lowest level.

  4. Policy Statement 4-119 (IRM 1.2.1.5.36) provides that the primary objective of the TE/GE program is regulatory, with emphasis on the continued qualification of exempt organizations and employee benefit plans, and continued compliance of governmental entities (federal, state, and local governmental entities, Indian tribal governments and tribal entities, and entities or organizations that issue tax advantaged bonds). The IRS selects and examines returns to:

    1. Promote the highest degree of voluntary compliance with the statutes governing qualification of plans and exemption of certain types of organizations from tax,

    2. Determine the extent of compliance and the causes of noncompliance with the tax laws by plans, organizations, and governmental entities.

  5. IRC 7602 gives examiners the authority to:

    1. Examine any books, papers, records or other data necessary to complete an examination (includes electronic media).

    2. Issue a summons for information necessary to complete an examination.

    3. Take testimony under oath to secure additional information needed.

    4. Ask about any offense connected to administering or enforcing the Internal Revenue laws.

  6. IRC 6201 - Assessment Authority, which falls under Chapter 63 - Assessment.

Responsibilities

  1. The Directors, EO/GE and EP, are the executives responsible for providing policy and guidance for field employees and ensuring consistent application of policy, procedures and tax law to effect tax administration while protecting taxpayers’ rights. See IRM 1.1.23, Tax Exempt and Government Entities Division, for additional information.

  2. The Directors, EO Examinations, GE, and EP Examinations reports to the Directors, EO/GE and EP respectively, and are responsible for the delivery of policy and guidance that impacts the field examination process. See IRM 1.1.23, Tax Exempt and Government Entities Division, for additional information.

  3. All examiners must perform their professional responsibilities in a way that supports the IRS Mission. This requires examiners to provide top quality service and to apply the law with integrity and fairness to all.

  4. Examiners and their managers should thoroughly acquaint themselves with the examination procedures and information contained in this IRM, as well as other resources.

Program Controls

  1. CP&C administers examination inventory control.

  2. The FAC coordinates the assignment of examination inventory.

  3. Two review groups make sure examiners conduct examinations per technical, procedural and administrative requirements:

    1. Mandatory Review / Technical.

    2. Special Review, see IRM 4.70.7, Special Review (SR) and Tax Exempt Quality Measurement System (TEQMS) Procedures.

  4. In order to ensure a consistent level of managerial engagement in the process of making key strategic decisions during an exam, the examiner submits requests for approval by their manager through RCCMS.

  5. The manager approves or rejects any request through RCCMS.

  6. The IRS is fully committed to protecting the privacy rights of taxpayers and employees. Privacy laws are included in the IRC, the Privacy Act of 1974, the Freedom of Information Act, and the IRS policies and practices. For more information about these laws, visit the IRS Freedom of Information | Internal Revenue Service.

    1. For questions about privacy, email *Privacy.

    2. For question about disclosure, email *Disclosure.

Acronyms and Abbreviations

  1. Acronyms Definition
    AIMS Audit Information Management System
    AMDISA Audit Management Display Information System
    ASED Assessment Statute Expiration Date
    ATAT Abusive Tax Avoidance Transactions
    Audit CAP Audit Closing Agreement Program
    BMF Business Master File
    BMFOLI Business Master File Online Information
    BOD Business Operating Division
    CA Coordinator Business Operating Division
    CAF Centralized Authorization File
    CAS Computer Audit Specialist
    CC Closing Code
    CCR Case Chronology Record
    CI Criminal Investigation Division
    CP&C Compliance Planning & Classification
    DC Disposal Code
    DLN Document Locator Number
    DOL Department of Labor
    EBSA Employee Benefits Security Administration
    EDS EP/EO Determination System
    EEE Employee Benefits, Exempt Organizations, and Employment Taxes Office of Associate Chief Counsel
    EEFax (e-fax) Enterprise Electronic Facsimile
    EFU Exam Functional Unit
    EIN Employer Identification Number
    EO Exempt Organizations
    EOCAC Exempt Organizations Closing Agreement Coordinator
    EP Employee Plans
    EPCU Employee Plans Compliance Unit
    ERISA Employee Retirement Income Security Act of 1974
    ESOP Employee Stock Ownership Plan
    FAC Functional Assignment Coordinator
    FAST Field Agent Support Team
    FICA Federal Insurance Contributions Act
    FMV Fair Market Value
    FSL/ET Federal, State, Local Government / Employment Tax
    FTS Fast Track Settlement
    GCM General Counsel Memo
    GE Government Entities
    GM Group Manager
    HCE Highly Compensated Employee
    IGM Interim Guidance Memo
    IRC Internal Revenue Code
    IDR Information Document Request
    IDRS Integrated Data Retrieval System
    IMF Individual Master File
    INOLES Inquiry On-line Entity
    IRA Individual Retirement Account
    IRM Internal Revenue Manual
    IRS Internal Revenue Service
    JCT Joint Committee on Taxation
    LB&I Large Business and International
    MF Master File
    MFT Master File Tax
    NMF Non-Master File
    NRU Non-Return Unit
    OSC Ogden Service Center
    PBGC Pension Benefit Guaranty Corporation
    PII Personally Identifiable Information
    PLR Private Letter Ruling
    POA Power of Attorney
    POD Post of Duty
    PPA Pension Protection Act of 2006
    RCCMS Reporting Compliance Case Management System
    RGS Report Generation Software
    RICS Returns Inventory Management System
    SB/SE Small Business and Self Employed
    SEP Simplified Employee Pension
    SRCR Substitute for Converted Return
    SFR Substitute for Return
    SIMPLE Savings Incentive Match Plan for Employees of Small Employers
    SNOD Statutory Notice of Deficiency
    SOL Statute of Limitations
    SR Special Review
    SRS Specialist Referral System
    SSA Social Security Administration
    SSN Social Security Number
    TAM Technical Advice Memorandum
    TC Transaction Code
    T.C. Tax Court
    TE/GE Tax Exempt and Government Entities
    TEGEDC TE/GE Division Counsel
    TEB Tax Exempt Bonds
    TEFRA Tax Equity and Fiscal Responsibility Act of 1982
    TEQMS Tax Exempt Quality Measurement System
    TIN Taxpayer Identification Number
    TP Taxpayer
    UBI / UBIT Unrelated Business Income / Unrelated Business Income Tax
    VCP Voluntary Compliance Preparer
    W&I Wage and Investment

Related Resources

  1. Examiners should consult the Knowledge Management Virtual Library to ensure proper issue development and consistent application of the law.

  2. To ensure that the IRM is always current, future revisions of the IRM will refer you to one of the books below for the correct codes to use in lieu of specifying an activity code, disposal code, source or status code. The IRM will specify the section of the document to reference and the type of activity, disposition, source and status code to look up.

    • Document 6379, Information Systems Codes FY 2023 Quick Reference for EO Employees

    • Document 6476, Information Systems Codes FY 2023 Quick Reference for EP Agents/Specialists

    • Document 11308, Information Systems Codes FY 2023 for GE Employees

      Note:

      You can also get the current version of the documents at our Business Systems Planning page.

Resolution vs. Settlement

  1. The authority to conduct examinations, resolve issues and determine tax liability is derived from Title 26, Internal Revenue Code, Subtitle F – Procedure and Administration, which includes but is not limited to:

    1. IRC section 7602 - Examination of books and witnesses, which falls under Chapter 78 - Discovery of Liability and Enforcement of Title.

      Note:

      IRC 7602 provides examiners with the authority to:

      • Audit any books, papers, records or other data necessary to complete an audit.

      • Take testimony under oath to secure additional information needed.

      • Issue summons for information necessary to complete an audit.

      • Ask about any offense connected to the administering or enforcing of the Internal Revenue laws.

    2. IRC section 6201- Assessment authority, which falls under Chapter 63 - Assessment.

    Note:

    The authority to resolve issues is derived from its authority to make determinations of tax liability under IRC 6201.

  2. Resolution: Managers have the broad authority to resolve issues based upon the application of the tax law to the facts and circumstances. Consideration and utilization of issue resolution tools can start at the earliest appropriate point and continue until the case is closed from examination’s jurisdiction. Using appropriate issue resolution tools can potentially reduce examination time, save resources and lessen the burden on both parties.

  3. Settlement:The IRS Independent Office of Appeals (Appeals) has the authority to settle cases based upon hazards of litigation. For example, in the event of litigation, there may be uncertainty as to how a court would interpret and apply the law or weigh the facts. Appeals utilizes techniques such as "mutual concession" and "split issue" settlements. Exam is not authorized to use these settlement techniques.

    Note:

    There are various delegation orders available for settlement of issues at the examination level. See IRM 1.2.2.5, Servicewide Policies and Authorities, Delegations of Authority for the Examining Process.

  4. Issues identified during an examination should be resolved at the lowest level possible. The group manager should be consulted on identified issues and proposed resolution to those issues as part of the on-going examination risk analysis.

  5. Issues may be resolved utilizing various issue resolution tools (correction programs) that are offered depending on your function. These programs may be used to resolve agreed and unagreed issues. It is important to check the requirements of these programs and discuss the issue with your group manager before offering it to the taxpayer.

  6. Available correction programs by function are:

    TE/GE Function Correction Program
    EP
    • EPCRS and Closing Agreements – see IRM 4.70.14.2.1.2.2, EP – EPCRS and Closing Agreements

    • Fast Track – see IRM 4.70.14.2.3, Fast Track Settlement Procedures

    • Correction of Eligible IRC 457(b) Non-Governmental Plan Failures – see IRM 4.70.14.2.1.2.3, EP Procedures for Correction of Eligible IRC 457(b) Non-Governmental Plan Failures

    EO
    • Exempt Organization Examinations Closing Agreements – see IRM 4.70.14.2.1.3.2, EO – Exempt Organizations Examinations Closing Agreements

    • Fast Track – see IRM 4.70.14.2.3, Fast Track Settlement Procedures

    • See below for ET Examination resulting in, Ad Hoc Closing Agreement, Classification Settlement Program, Tip Program and 3402(d) Tax Reduction

    FSL/ITG
    • Employment Tax Closing Agreements – see IRM 4.70.14.2.1.4.2, Employment Tax Closing Agreements

    • Ad Hoc Closing Agreement – see IRM 4.70.14.2.1.4.3, FSL/ET – AD Hoc Closing Agreement Procedures and Policy

    • Classification Settlement Program – see IRM 4.70.14.2.1.4.4, TE/GE – Classification Settlement Program

    • Tip Compliance Agreement – see IRM 4.70.14.2.1.4.5, TE/GE – Tip Compliance Agreements

    • IRC 3402(d) Tax Reduction – see IRM 4.70.14.2.1.4.6, TE/GE – IRC 3402(d) Tax Reduction Procedures

    • Fast Track – see IRM 4.70.14.2.3, Fast Track Settlement Procedures

    TEB
    • Closing Agreement – see IRM 4.70.14.2.1.5.6, TEB - Closing Agreement and IRM 4.70.14.2.1.5.9, TEB – Tax Exempt Bonds Closing Agreements

Agreed Resolution

  1. Agreed case resolution is achieved when the taxpayer and/or representative agree with the findings of the examination. The following are agreed resolutions:

    1. The examiner does not raise a tax or status/qualification issue. See IRM 4.70.14.4, Closing a Case for procedures on closing a "no change" case.

    2. A status/qualification issue is raised and is resolved under a correction or settlement program.

    3. The examiner solicits filing of returns due and/or payment of tax, interest and penalties.
      i. If the taxpayer and/or representative responds by filing the returns due and/or with payment of tax, interest and penalties; all parties are in agreement.
      ii. If taxpayer indicates an inability to pay the tax due at closing, this is still an agreed resolution. Alternative payment methods should be discussed. An installment agreement should be offered if the taxpayer meets the requirements. Form 9465, Installment Agreement Request, can be used to solicit a payment agreement.
      iii. If the taxpayer and/or representative agree with the findings, but do not wish to pay the deficiency immediately, this is still an agreed resolution. Explain that a statement for the deficiency plus interest will be mailed. Their cancelled check will be their receipt. Secure appropriate waivers and close the case.

    4. TE/GE functional agreed examination processing guidance is listed in the table below:

      Functional Unit Agreed Processing Guidance
      EP & EO 1. An agreed Discrepancy Adjustment is one for which:
      1. There is an agreed tax change. In this case the taxpayer agrees with the proposed tax change by returning a signed Form 4549-E The taxpayer sends additional information that results in a “no change.” In this case, either examiner or the taxpayer provides information that no adjustment is warranted.

        See IRM 4.70.15.5, for procedural guidance on agreed discrepancy adjustments.

      EP 1. An agreed Form 5500, IRC 403(b)/457(b), SEP, SIMPLE or SARSEP examination is one for which:
      1. The examiner does not raise a qualification issue. See IRM 4.70.14.4, Closing a Case, for procedures on closing a "no change" case.

      2. A qualification issue is raised but is resolved under the Employee Plans Compliance Resolution System (EPCRS) or through a Delegation Order 8-3 (DO 8-3) closing agreement.

      See the following sections for specific procedural guidance:
      • IRM 4.70.14.2.1.2.2, EP - EPCRS and Closing Agreements

      • IRM 4.70.14.2.1.2.3, EP - Procedures for Correction of Eligible IRC 457(b) Non-government Plan Failures

      2. An agreed Form 5330 and 990-T examination is one for which:
      1. The examiner does not raise issue with amounts reported on a filed return;

      2. The taxpayer agrees to adjustments on a filed return; or

      3. A delinquent return is filed and any required correction is complete.
        See IRM 4.70.14.2.1.2.4, Processing Agreed Forms 5330 and 990-T, for procedural guidance.

      EO An agreed Exempt Organization examination is one for which:
      1. The examiner does not propose any adverse status change (revocation, disqualification of a status 36 organization, or reclassification form public charity to a private foundation) or tax adjustment.

        Note:

        This includes cases where operational changes were made and did not result in a change to exempt status.

      2. The examiner proposes and the Taxpayer agrees to an adverse status change, tax adjustment, and/or worker classification issues.

      3. The Taxpayer makes correction under a closing agreement program, fast track settlement or classification settlement program.

        See the following sections for specific procedural guidance:

        • IRM 4.70.14.2.1.3 EO – Agreed Exempt Organization Examination Procedures

        • IRM 4.70.14.2.1.3.1 EO – Examination Results and Reports

        • IRM 4.70.14.2.1.3.2 EO – Exempt Organizations Examinations Closing Agreements

        • IRM 4.70.14.2.1.3.3 EO – Conversion of Returns •IRM 4.70.14.2.1.3.4 EO – Revocation or Termination of Organizations Covered by a Group Ruling

      Employment Tax (EO, FSL/ET & ITG) An agreed examination is one for which:
      1. The examiner does not propose any tax adjustments and/or change in worker classification.

      2. The examiner proposes and the Taxpayer agrees to tax adjustments and/or work classification determination.

      3. The Taxpayer participates in an agreement or settlement program.



      See the following sections for specific procedural guidance:
      • IRM 4.70.14.2.1.4, Employment Tax Agreed Case Processing

      • IRM 4.70.14.2.1.4.1, Employment Tax - Establishing Related, Prior and Subsequent Period Returns

      • IRM 4.70.14.2.1.4.2, Employment tax - Closing Agreements

      • IRM 4.70.14.2.1.4.3, FSL/ET – Ad-Hoc Closing Agreements Procedures and Policy

      • IRM 4.70.14.2.1.4.4, TE/GE - Classification Settlement Program

      • IRM 4.70.14.2.1.4.5, TE/GE - Tip Compliance Agreements

      • IRM 4.70.14.2.1.4.6, TE/GE - IRC 3402(d) Tax Reduction Procedures

      • IRM 4.70.14.2.1.4.7, Employment Tax - Report Writing

      • IRM 4.70.14.2.1.4.8, Employment Tax – Remittance Processing Procedures

      TEB An agreed Tax-Exempt Bond examination is one for which:
      1. The examiner concludes the bonds are in compliance.

      2. Operational changes were made and did not result in a change to bond qualification.

      3. A delinquent Form 8038 series or Form 8703 is received.

      4. An issuer agrees with proposed resolution of non-compliance determined in the examination and completed a closing agreement.

      See the following sections for specific procedural guidance:
      • IRM 4.70.14.2.1.5.2, TEB - No Change Examinations

      • IRM 4.70.14.2.1.5.3, TEB - Examinations Resulting in Change due to Correction of Operations

      • IRM 4.70.14.2.1.5.4, TEB - Rebate or Yield Reduction Payment Due

      • IRM 4.70.14.2.1.5.5, TEB - Annual Certification of a Residential Rental Project (Form 8703)

      • IRM 4.70.14.2.1.5.6, TEB - Closing Agreement

      • IRM 4.70.14.2.1.5.7, TEB - Unagreed Potential Noncompliance

      • IRM 4.70.14.2.1.5.8, TEB - Secured Delinquent and Late Files Returns and Forms

      • IRM 4.70.14.2.1.5.9, TEB - Tax Exempt Bonds Closing Agreements

Revenue Agent Report
  1. RAR Form 886-A, Explanation of Items, is mandatory for:

    1. EP:
      I. When proposing revocation or non-qualification.
      II. When proposing income or excise tax.
      III. When proposing a change to income or excise tax previously reported.
      IV. All unagreed cases.

    2. EO:
      I. Unagreed cases.
      II. Agreed revocation cases.
      III. Agreed reclassification of foundation status cases.
      IV. Agreed modification of operating foundation status cases.
      V. Other agreed issues where the explanation doesn’t fit in the space provided on the agreement form.

    3. FSL/ITG: Refer to the following sections for report writing instruction for employment tax examinations:
      I. IRM 4.70.14.2.1.4.7, Employment Tax Report Writing,
      II. IRM 4.23.10, Report Writing Guide for Employment Tax Examinations,
      III. IRM 4.24.20, Excise Tax Report Writing Guide,
      IV. IRM 4.10.8, Examination of Returns, Report Writing.

  2. Fully explain the examination issues and/or changes in the RAR. Include only items that are relevant to the issues in the RAR. Organize the RAR into the following sections:

    1. Issues – The issue section lists the questions that the report intends to answer. This section informs the reader about the issues or proposed changes.
      I. RARs may contain one or more issues, including alternative issues.
      II. Clearly state and number each separate issue.
      III. State alternative issues as options in the event that Mandatory Review, Appeals, or Counsel doesn’t uphold the primary issues.
      IV. Keep the issue statements simple. If the issue involves multiple considerations to arrive at the conclusion, break the statement into component issue statements. This method consists of tiered issue statements.

      Example:

      EP Example: During an examination of the plan year ending December 31, 2018, you determined that the plan didn’t comply with the top-heavy minimum contributions requirements and didn’t make distributions to participants who separated from service under the top-heavy vesting schedule. Issue one would be: "Whether minimum contributions per IRC 416(c)(2) were made for a top-heavy plan for the plan year ending December 31, 2018." Issue two would be: "Whether the accelerated vesting provisions under IRC 416(b) were applied to all plan participants or former participants who received distributions during the plan year ending December 31, 2018."

      Example:

      EO Example: A complex issue statement - Not the best way to present the issues. Are Z's payments to Y, the founder and president of X, a 501(c)(3) public charity, not reported on Form 1099 or W-2, subject to IRC 4958 ? A set of tiered issue statements - Best way to present the issues. Is X an applicable tax exempt organization for purposes of IRC 4958? Is Y, the founder and president of X, a disqualified person under IRC 4958? Are Z's payments to Y, not reported on Form 1099 or W-2, subject to IRC 4958?

    2. Facts – The fact section contains the facts identified during the examination. This section is to be devoid of bias or opinion. Provide a detailed explanation of the facts upon which each issue or change is based. Include facts relevant to both the government's position and the taxpayer's position. Don't attribute any reasoning for the taxpayer's actions in the fact pattern.


    I. Facts are defined as:
    • A thing done.

    • The quality of being actual.

    • Something that has actual existence.

    • A piece of information presented as having objective reality.



    II. Things to consider when writing the facts:
    • Is this fact supported by testimony or a document?

    • Is the statement neutral or does it show bias?

    • Have I attributed reasons for an action?

    • Are the calculations mine or the taxpayer’s?

    • Have I reported just the facts?

    • Was the statement written in a factual manner?

    • Will my statement of fact be disputed?



    III. Facts include:
    • Items written by the taxpayer or representative that don't include the taxpayer's arguments.

    • Any third-party records referencing the taxpayer.

    • Any items reported on a form submitted to the IRS (such as Form 1023, SS-4, 990, etc.)

    • Any tax computations performed by the taxpayer or representative, regardless of whether they are correct.

    • Any oral statements made by the taxpayer or representative, recorded in writing.

      Note:

      In the government's position section, address and dispute any item of information presented by the taxpayer or representative that is incorrect.

      Reminder:

      It’s important to specify the source of oral or written statements or calculations, e.g., "Taxpayer stated, XXXX" .



    IV. EP: Include in the RAR facts section a brief history of the plan and provide pertinent details surrounding the qualification issues. Cite any plan provisions relevant to the issues raised. For the top-heavy issues stated above, you’d describe the plan sections dealing with top-heavy contributions and accelerated vesting. Examples of information that would be included (as applicable to the issues) are:
    • The plan years under examination

    • Type of business of the plan sponsor

    • Date business started/incorporated

    • Ownership of business sponsoring the plan

    • Type of tax return filed by the plan sponsor and the tax year end

    • Effective date of plan

    • Type of plan

    • Latest determination letter

    • Number of plan participants

    • Plan participants affected

    • Contributions made to the plan for the years under examination

    • Specific applicable plan sections and

    • Other relevant case specific details.

    1. Law – The law section contains the list of legal references relied upon in the report. Set forth in a clear and concise manner the pertinent law, regulations, published ruling of the IRS, case law or other precedent. Cite all pertinent law regardless of whether it supports or opposes the government's position. Exercise care to ensure that cited law is current.

      I. You may cite the following documents: The Internal Revenue Code (IRC), Temporary and Final Regulations, Revenue Rulings, Revenue Procedures, Court Decisions and Congressional Committee Reports.

      Note:

      You can reference Proposed Regulations for interpretive purposes, but can’t cite them as authority.

      II. Do not cite General Counsel Memos (GCMs), Private Letter Rulings (PLRs), or the Internal Revenue Manual (IRM) as sources of authority in the RAR.
      III. To use a PLR, TAM or GCM in a case:
      • • Modify the issue statements to be similar.

      • Identify differences between the fact patterns.

      • Cite the law cited in the document.

      • Apply the analysis in the government’s position.

      • Incorporate its conclusion into the conclusion.

      IV. You don’t need to recite the law in full. Research the revenue rulings, revenue procedures, PLR, TAM, the field service advice (FSA), and GCM to find condensed cites. Copy and paste these cites into the law section, if available. Don't attribute the abbreviated cite to the particular document, unless citing the document itself as law.

      Note:

      IRM 4.10.7.2, Researching Tax Law, provides additional details about types of law you can cite and how to cite it.

    2. Government's Position – The government's position relates the facts to the cited law through a narrative discussion to support the IRS’s position.

      I. In the government's position, prepare and present:
      • A separate argument for each issue.

      • A conclusion as to the relevant facts.

      • Any tax computations.

      • Interpretations of the law with respect to the issues.

      • The suggested outcome.

      • An initial rebuttal to the taxpayer's position, if known.

      II. When preparing the report:
      • Copy and paste the issue statements into the start of the government’s position.

      • Address the specific issue on its own merits before moving onto the next issue.

      • Remember to incorporate the facts and law applicable to that issue.

      III. EP: List in this section, the date on which the plan failed to qualify and explain why EPCRS was not used.

    3. Taxpayer's Position – In this section, reflect the taxpayer's position including any rebuttals the taxpayer has made on the government's position. If the taxpayer hasn’t provided a position on the issues, write a simple statement to the effect that the taxpayer has not provided a response.

    4. Rebuttal/Conclusion – Include a rebuttal if the taxpayer provides a position on the issues during the examination or in response to the draft RAR. Briefly, restate the government’s position as a conclusion in all cases. Don’t restate the lengthy analysis presented in the government's position. State the proposed result and any impact, such as taxes to be paid, returns to be filed and the effective date of revocation or reclassification, as applicable.

    5. Alternative Position - Consider whether to develop an alternative position. Present the alternative position at the end of the RAR after the conclusion statement on the primary position. Label it as “Alternative Position” and follow the same issue, facts, law, taxpayer’s position, government’s position and conclusion format.

      Note:

      EO - If proposing revocation and the Form 990-T, Exempt Organization Business Income Tax Return, is also open for examination, develop the alternative position for the Form 990-T. See IRM 4.70.14.2.1.3.3.22, EO - Revocations and Disqualifications - Alternative Positions. In all other revocation situations, indicate in your workpapers that you considered positions, such as UBIT.

  3. Do not include information concerning different types of tax or issues such as revocations/non-qualification in the same RAR.

    1. EP: In general, do not include Form 1040, Form 1120, or Form 5330 information in the RAR for the revocation/non-qualification, because they involve separate legal entities. If you open a:

      I. Discrepancy adjustment of a related Form 1040 and/or 1120 discrepancy adjustment, prepare a separate RAR(s) and a separate examination files.
      II. Form 5330 examination, prepare a separate RAR and a separate examination file.

      Note:

      Do not include the above information in the administrative record.

      Note:

      See IRM 4.70.15.7, Unagreed Case Procedures, for unagreed Form 1040/1120 discrepancy adjustments, and IRM 4.70.14.2.4.2.3, Unagreed Forms 5330 and 990-T. See Employee Plans Examination Exhibits for an example of a detailed RAR covering several possible qualification issues.

  4. Name the RAR using the TE/GE RCCMS Naming Convention and save it in the RCCMS Office Documents folder. See IRM 4.70.12.5.2, Workpaper Format and TE/GE RCCMS Naming Convention.

  5. A corrected report should be prepared as follows:

    1. Across the top of the corrected report, write "Corrected Report" .

    2. In the other information or remarks section write, "This report supersedes report dated (date)."

      Note:

      The taxpayer’s signature is only required on the corrected report if the change is in the government’s favor, i.e., more tax or less refund. If the taxpayer disagrees with the corrected report, unagreed procedures are applicable. Consider each year separately with no netting of tax periods. New waivers may need to be solicited even though the net effect of the corrections may be in favor of the taxpayer.

    3. In the original report, note across the top, "This report superseded by report dated (date)" .

    4. Include the original and corrected reports in the RCCMS case file.

    5. Note on the 3198-A Special Handling checksheet in RCCMS "Corrected Report" .

EP- Agreed Form 5500, IRC 403(b)/457(b), SEP, SIMPLE or SARSEP examination resolution
  1. Most qualification issues discovered on EP examinations are resolved under EPCRS. EPCRS guidelines are covered in IRM 4.70.14.2.1.2.2, EP - EPCRS and Closing Agreements, and Rev. Proc. 2021-30.

  2. When qualification issues can’t be resolved through EPCRS, they are either:

    1. Resolved through a DO 8-3 Closing Agreement, or

    2. Processed as an unagreed case. See IRM 4.70.14.2.4, Unagreed.

  3. Determine if the issue is an issue requiring Mandatory Technical Advice. Certain issues such as violations of the exclusive benefit rule under IRC 401(a)(2) (for plans that fall under Title I of ERISA) require mandatory technical advice.

    Note:

    See Rev. Proc. 2023-1 (as updated annually) and IRM 4.70.13.6.7.2, Technical Advice Memorandum (TAM) Procedures, for a complete list of issues requiring mandatory technical advice

    .

EP – Addressing Issues that Effect Plan Qualification
  1. When you discover an issue during an examination of a plan that could potentially result in a plan revocation or non-qualification, discuss the issue with your group manager before formally advising the taxpayer that the IRS is proposing disqualification of the plan.

    1. The purpose of this discussion with your group manager is to confirm that you’re properly analyzing the facts, to determine which issues you should pursue and to determine whether we can resolve the issues through EPCRS. See IRM 4.70.14.2.1.2.2, EP - EPCRS and Closing Agreements.

    2. You shouldn’t proceed with the proposed revocation/non-qualification until you and your group manager have determined that the issue can’t be resolved through EPCRS.

    3. Audit CAP is available to correct egregious failures.

  2. When you determine a qualification issue exists, in most cases, you should expand the examination to include additional years.

    Additional Years Defined
    Subsequent year Review the subsequent year unless it hasn’t been filed. Pursue a substitute for return when Forms 5500 series return is due but not yet filed.
    Prior years Establish prior years if you review them. It is possible to have change closure in one year and no change closure in another year.
    Affected Years Establish all years affected on AIMS/RCCMS. The group manager must make sure additional years are established if correction is secured in those years or if the EP examiner reviewed records to verify compliance. Sometimes, this may lead to an 02 closure in a prior year.

    Caution:

    If you review records, you must issue a closing letter.

    Note:

    See IRM 4.70.13.9.7.1, for procedures to open an examination of a related Form 5500 that has been filed.

    Note:

    If a Form 5500 return is due but hasn’t been filed, solicit a delinquent return from the plan sponsor.

    Note:

    See IRM 4.70.13.9.7.1.3, for procedures to establish a related year for an NRU plan.

  3. Document managerial involvement and guidance on the CCR.

  4. Use the CCR (or similar document) to record in clear, legible form, a factual accounting of all conferences and/or telephone conversations you had with the taxpayer or taxpayer's representative (representative).

    1. Since the administrative record in declaratory judgment cases (which includes proposed revocation/non-qualification cases) consists only of the documentation that was submitted in writing and exchanged between the parties, it is vital that you formally document all discussions and conferences for the record and share them with the taxpayer/representative.

    2. If you want pertinent portions of the CCR or similar documentation included in the administrative record, you must send them to the taxpayer/representative in letter format. The pertinent portions should include, but are not limited to, any discussions you had with the taxpayer or representative that are relevant to the examination scope, affirmation of tax liability or the plan’s qualified status.

  5. After you fully develop the relevant issues, present proposals for resolution to the taxpayer/representative in light of the information provided to date.

    1. This allows the taxpayer/representative an opportunity to agree with your proposals, make changes to resolve the issues, present additional facts for consideration, and/or present his/her position.

    2. Make every effort to resolve the issues at the lowest possible level.

    3. Advise the taxpayer/representative that their additional facts won’t be considered a part of the administrative record, unless they submit them to the IRS in writing.

  6. If the plan qualification issue can be resolved through EPCRS or through a DO 8-3 closing agreement, offer the taxpayer the opportunity to enter into negotiations for a closing agreement.

    1. See Rev. Proc. 2021-30 for EPCRS.

    2. See IRM 4.70.14.2.1.2.2.1, EPCRS - Self Correction Program (SCP).

    3. See IRM 4.70.14.2.1.2.2.2, EP - EPCRS Closing Agreements.

    4. See IRM 4.70.14.2.1.2.2.3, EP - DO 8-3 Closing Agreements.

  7. When you have a qualification issue, you must clearly explain the qualification issues to the taxpayer in writing by issuing a preliminary Revenue Agent’s Report (RAR).

    1. Note that the preliminary RAR should satisfy parts "a" through "d" of the final RAR, but should be clearly notated as a "Draft" or "Preliminary" copy. See IRM 4.70.14.2.1.1, Revenue Agent Report.

    2. Realize that the preliminary RAR is important for two reasons:
      i. It’s written documentation that the IRS clearly discussed (and cited adequate authority) specific issues with the taxpayer.
      ii. It places the document in the administrative record for declaratory judgment purposes.

    3. Mail the preliminary RAR with Letter 1477, Information Document Request Cover Letter – EP and EO, to the taxpayer and give them sufficient time to provide a response before you close the case unagreed to Mandatory Review. Use selectable paragraph 4, which provides, "Thank you for the information you provided; however, we need additional information. Provide the information requested on the enclosed Form 4564, Information Document Request, by the above response due date."

    4. Generate a Form 4564, Information Document Request to go with the Letter 1477 and the Form 886-A, Revenue Agents Report, clearly marked as "Draft" or "Preliminary." Alternatively, send a properly completed Form 4564, Information Document Request and the Draft 886-A without a cover letter to address the qualification issue.

    5. Customize the wording contained in the "Description of documents requested" section of the Information Document Request to explain the sharing of the potential qualification issues and the opportunity to supply any information or explanations that may clarify or resolve an issue by the stated due date. The same concept of sharing a draft or preliminary RAR before issuance of the 30-day letter also applies to initial communications for Form 5330 examinations, and Form 1040 / 5329 discrepancy adjustments.

  8. If the qualification issues can’t be resolved, propose plan revocation/non-qualification and process the case unagreed, following the procedures IRM 4.70.14.2.4.2.1, EP - Unagreed Form 5500 Examination Procedures.

EP – Tax Effect of Plan Revocation/Non-Qualification
  1. Disqualification of a plan in any given year causes the plan to be disqualified in that year and in all subsequent years.

    1. In general, once a plan is disqualified, it remains non-qualified until the qualification issues is corrected and the plan is re-qualified through a closing agreement.

    2. A plan may be disqualified in a year for which the Form 5500/1041 statute has already expired. Although the IRS can’t assess tax in a barred year, the consequences of disqualification continue for all subsequent years and IRS can assess tax in subsequent years for which the statute is still open.

    3. The IRS's ability to pursue a qualification issue in any year is not impacted by the Form 1041 statute of limitations. The expiration of the statute of limitations for Form 1041 for any given year doesn’t prevent the IRS from pursuing a qualification issue in that year (see Christy and Swan Profit Sharing Plan v. Commissioner, T.C. Memo 2011-62).

      Note:

      Protect statute of the 1041 tax return when proposing to disqualify a qualified plan until either:
      A Form 1041 is secured and TE/GE forwards the case for closure, or,
      A referral to the appropriate EFU using F5666 is forwarded. See: IRM 4.70.12.3.7, Statute of Limitations and Statute Control Procedures, for instructions on protecting the statute of limitations.

  2. The tax effect of revocation/non-qualification includes the following:

    1. Trust assets’ realized earnings are taxable each year the plan is not qualified (if the assessment of tax is not barred by statute). Trust earnings must be reported on Form 1041, which the trustee must file annually, on a calendar year basis.

    2. HCE income tax - if the plan is disqualified for failure to meet IRC 401(a)(26) (participation failure) or IRC 410(b) (coverage failure), each highly compensated employee (HCE) must include in income his/her entire vested accrued benefit (or account balance) not yet included in income per IRC 402(b)(4).

    3. Nonforfeitable contributions are taxable - If the plan is disqualified for any reason, plan contributions allocated in a given year to any plan participant (HCE or NHCE) in a defined contribution plan, (in a defined benefit plan the increase in the present value of the accrued benefit) are taxable on the plan participant’s Form 1040 to the extent to the extent they become nonforfeitable in that year per IRC 402(b)(1).

      Reminder:

      Normally, discrepancy adjustments are limited to only the HCEs. However, you and your group manager may determine that an NHCE discrepancy adjustment is appropriate.

      Note:

      If a participant is not fully vested, amounts that become vested in a subsequent year will be taxable in the subsequent year to the extent they become vested.

    4. Forfeitable contributions are non-deductible - In a defined contribution plan, contributions allocated to participant accounts aren’t deductible on the plan sponsor’s tax return (for example, Form 1120) to the extent they are forfeitable by the participant.

    5. Contributions are non-deductible - In a defined benefit plan, in most cases, none of the contributions made are deductible on the plan sponsor’s tax return (for example, Form 1120), because separate accounts are not maintained in a defined benefit plan. If there’s only one participant, the employer can deduct the contribution to the extent the participant includes the contribution into income.

      Note:

      The employer can deduct the amount of the employer’s contribution in the non-qualified year to the extent that the amount is includible in the employees participating in the plan gross income, only if separate accounts are maintained for each employee where there is more than one employee (IRC 404(a)(5) and 26 CFR 1.404(a)-12).

    6. Ineligible rollover distributions - distributions made from the plan are ineligible for rollover to another qualified plan or to an IRA, and therefore, are taxable to the individual on his/her Form 1040 in the year of the distribution per IRC 402(b)(2).

    7. Excise tax on ineligible rollovers - Any funds rolled into an IRA from a plan determined to be not qualified under IRC 401(a) are subject to excise tax on excess contributions under IRC 4973.

      Note:

      IRC 4973 excise tax is due each year until the excess contributions are distributed from the IRA.

    8. Rollovers from non-qualified to qualified plan taints the qualified plan - Any funds rolled from a non-qualified plan to a qualified plan can potentially cause the recipient plan to be non-qualified.

    9. FICA taxes due - Employer contributions allocated to each participant’s account in a defined contribution plan become subject to FICA taxes.

  3. Compute the tax effect of the revocation/non-qualification for all open years, beginning with the year under examination and going forward and include a copy of the tax calculations in the case file with the RAR when you close the case.

    Note:

    With your manager’s approval, you may also consider prior years in your calculations.

EP – EPCRS and Closing Agreements
  1. You may resolve qualification issues discovered on examination via the Self-Correction Program (SCP) or closing agreements according to the Employee Plans Compliance Resolution System (EPCRS).

  2. SCP is designed to allow the plan to retain its qualified status for:

    1. Insignificant issues found on examination.

    2. If the operational failures is significant, SCP is available only if the correction is completed or substantially completed by the date the plan or the sponsor is notified of a pending examination. Substantially completed generally means that: the correction is completed for 65% of all participants affected before the sponsor is notified of your exam, and is completed thereafter in a diligent manner or during the correction period the failure is identified, correction initiated and completed within 120 days after the last day of the correction period.

    3. SCP is only available if the taxpayer has practices and procedures in place to promote compliance.

      Note:

      See Rev. Proc. 2021-30 Part IV for a description of SCP.

  3. Qualification issues may be resolved through different types of closing agreements:

    1. Audit Closing Agreement Program (Audit CAP) Closing Agreements – Designed to allow the plan to retain it’s qualified status and developed under the EPCRS principles outlined in Rev. Proc. 2021-30. Audit CAP is available for plans under IRC section 401(a), 403(b), SEPs, SARSEPs and SIMPLE IRAs, for correction of all qualification failures found on examination that haven’t been corrected under SCP or VCP. See Rev. Proc. 2021-30.

    2. DO 8-3 Closing Agreements – Designed to resolve issues that do not fall under EPCRS. In most cases, the taxpayer(s) and the Commissioner formally agree that the plan under examination is not qualified, officially making the proposed revocation or proposed non-qualification an “agreed revocation” or “agreed nonqualification.” These closing agreements often include income tax, penalties and interest as part of the sanction, and in some limited instances, can be used to resolve excise tax matters.

  4. If the plan qualification issue can’t be resolved through SCP, offer the taxpayer the opportunity to enter into negotiations for a closing agreement. See IRM 4.70.14.2.1.2.2, EP - EPCRS Closing Agreements.

    Note:

    Find additional information on EPCRS on the Retirement Knowledge Management Base site or contact your group manager for help.

EP – Self Correction Program (SCP)
  1. The EPCRS SCP allows a plan sponsor to correct plan errors without contacting the IRS or paying a fee.

  2. Find important resources on SCP on the Retirement Knowledge Management Base site:

    1. Rev. Proc. 2021-30

    2. EPCRS Self-Correction Program

    3. Self-Correction Program Desk Guide

    4. Self-Correction Program Checksheet

  3. To be eligible for SCP, the plan sponsor or administrator must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance with the law.

    Note:

    Having a plan document alone doesn’t constitute evidence of established procedures.

  4. Plan sponsors may fix certain operational failures and plan document failures through SCP as described in Part IV of Rev. Proc. 2021-30. Plan sponsors satisfy the SCP requirements for an:

    1. Operational Failure if the plan sponsor of a qualified plan (an IRC 401(a) plan), a 403(b) Plan, a SEP, or a SIMPLE IRA Plan satisfies the requirements of Rev. Proc. 2021-30 Section 7.02, and either section 8 (for insignificant Operational Failures) or section 9 (for significant Operational Failures).

    2. Eligible Plan Document Failure if the plan sponsor of a qualified plan or a 403(b) Plan satisfies the requirements of section 7.03 and section 9.

  5. As soon as you discover operational failures that affects the plan qualification, you must fully develop the facts surrounding the failures before discussing the case with your group manager.

  6. After you develop the facts, review and become familiar with the requirements of SCP. The Self-Correction Program Desk Guide is a great resource for understanding SCP procedures. If you determine that:

    1. SCP is appropriate to resolve the failures, before the plan sponsor corrects the operational failures, prepare the Self-Correction Program Checksheet for review and approval by your group manager.

    2. The failure is ineligible to be corrected under SCP, contact your group manager to determine whether the failures can be resolved under the Audit CAP procedures.

  7. A key factor in SCP is the method of correction of the failure. Determine whether or not correction of the failure is in accordance with Appendix A or B of Rev. Proc. 2021-30.

  8. Follow these procedures if the plan sponsor uses a correction method in accordance with Rev. Proc. 2021-30 Appendix A or B:

    Step Responsible Employee Required Action
    1 Group Manager If the case is otherwise eligible for SCP, and the plan sponsor is using a proposed correction methods strictly in accordance with Rev. Proc. 2021-30 Appendix A or Appendix B, you may approve the correction method for the case being closed under SCP.

    Note:

    The plan’s eligible operational failure is that the plan sponsor didn’t follow the plan document and correction of this failure is to retroactively follow the plan document and put the participants in the exact position they would be had no violation had occurred. You may approve the case for SCP and don’t need the Manager, EP Mandatory Review’s approval.

    2 Group Manager Confirm that all years affected were established on AIMS and RCCMS. This means all years the examiner reviewed are established.
    3 Group Manager Approve the SCP proposal by signing the EP examiner prepared Self-Correction Program Checksheet, return a copy to the EP examiner and forward a copy the Area Manager within five business days of receipt.

    Caution:

    You can’t close the case until after five days from when you sent the checksheet to the Area Manager

    .
    4 Examiner If there are no other issues outstanding, verify that the agreed correction has been fully completed, record in the CCR ( ) that you’ve verified correction, and close the case.
    5 Examiner Close the case using:
    1. Letter 1744 containing a statement specifically indicating the operational failure was resolved under SCP.

    2. Disposal code 404 in RCCMS (SCP - Self Correction), and follow the closing procedures in IRM 4.70.14.4, Closing A Case.

  9. Follow these procedures if the correction method is not in Rev. Proc. 2021-30 Appendix A or Appendix B:

    Step Responsible Employee Required Action
    1 Group manager If the plan sponsor is using a proposed correction method that isn’t strictly according to Rev. Proc. 2021-30 Appendix A or B, sign the Self-Correction Program Checksheet within five business days of receiving it from the EP examiner, and secure email to the manager, EP Mandatory Review for approval.

    Exception:

    You don’t have to send an SCP checksheet to Mandatory Review and can approve the SCP if the correction of the operational failure is to follow the plan document and put the participants in the exact position they would’ve been, had no violation occurred.

     

    Example:

    The plan sponsor has an eligible operational failure of not following the plan document and corrects it by retroactively following the plan document and putting the participants in the exact position they would be had no violation occurred. You can approve the case for SCP and don’t need the manager, EP Mandatory Review’s approval.

    2 Mandatory Review Respond to the group manager/examiner within seven business days of receiving the checksheet with a recommendation of an acceptable correction method or that the examiner resolve the issues through Audit CAP.

    Reminder:

    In certain cases, Mandatory Review may determine, after discussions with the group manager/examiner, and in order to achieve consistency, that the case is inappropriate for SCP and recommend resolving the failures under the Audit CAP procedures.

    Reminder:

    The area manager resolves any disagreement between the group manager/examiner and Mandatory Review on the correction methods or the appropriateness of SCP.

    3 Examiner When you receive the approved SCP checksheet as agreed to by your manager, you should present the correction methods to the plan sponsor and/or POA within seven days.
    4 Examiner/Manager If the plan sponsor or POA disagree with the recommended correction method, notify your manager, who will help you as needed, to reach an agreement on an acceptable correction method. If the parties still don’t agree on the correction method, the group manager will discuss the issue with the area manager with case jurisdiction.
    5 Examiner If the issues can’t be resolved through SCP under this section, consider an Audit CAP closing agreement. See IRM 4.70.14.2.1.2.2, EP - EPCRS and Closing Agreements.

    Note:

    If correction is not secured using a closing agreement, close the case unagreed. See IRM 4.70.14.2.4.2.1, EP - Unagreed Form 5500 Examination Procedures.

    6 Examiner When all issues are resolved under SCP, verify that the agreed correction has been fully completed, record in the CCR (Form 5464) that you verified correction, and prepare the case for closing.
    7 Group Manager When closing the case under SCP, send a copy of the SCP Checksheet to the area manager for their review. Hold the case five business days before closing the case.
    8 Examiner When you close the case under SCP:
    1. Issue the appropriate closing letter (Letter 1744, Letter 1744A or Letter 174B as applicable) with a statement specifically indicating the plan sponsor resolved the operational failures under SCP.

    2. Use disposal code 404 in RCCMS (SCP - Self Correction), and follow the closing procedures in IRM 4.70.14.4, Closing A Case.

EP – EPCRS Closing Agreements
  1. Audit CAP closing agreements are available to:

    1. Plans under IRC 401(a), IRC 403(b), SEPs, SARSEPs and SIMPLE IRAs, for correction of all qualification failures examiners find on examination that haven’t been corrected under SCP or VCP.

      Caution:

      IRC 457 plans are not eligible for correction using an EPCRS Audit CAP closing agreement. A DO 8-3 closing agreement must be used to correct IRC 457 plan failures.

    2. Correct egregious failures.

      Note:

      See Rev. Proc. 2021-30 Part II, Section 4.10.

      Caution:

      Audit CAP may not be available to correct diversion or misuse of plan assets or abusive transactions. See Rev. Proc. 2021-30 Part II, Sections 4.11 and 4.12 respectively.

  2. Find important resources on Audit CAP on the Retirement Knowledge Management Base site:

    1. Rev. Proc. 2021-30

    2. Audit CAP Desk Guide

      Note:

      EP R&A examiners may find the R&A CAP Desk Guide on the Determinations Shared Drive.

    3. Audit CAP Checksheet

    4. Audit CAP MPA

  3. Examiners: Follow these initial Audit CAP processing procedures:

    Caution:

    Discuss all potential EPCRS resolutions with your group manager before you discuss them with the taxpayer.

    1. Fully develop the issues before you discuss the facts with your group manager.

    2. Prepare the Audit CAP Checksheet listing case information.

    3. Spell out correction methods in writing, including any proposing retroactive amendments.

      Note:

      This may involve directing the plan sponsor to amend the plan retroactively.

    4. Determine the Maximum Payment Amount (MPA). See the Audit CAP MPA Worksheet.

  4. Send the completed Audit CAP Checksheet, Audit CAP MPA Worksheet, and any relevant work papers to your group manager.

  5. Group manager: follow these procedures:

    1. Rev. Proc. 2021-30 Appendix A & B Failures: Within five business days from receiving the Audit CAP Checksheet, contact the examiner to discuss the issues for the failures, proposed correction methods, and the sanction. Prepare the CAP Sanction Memo (See Exhibit 4 of the Audit CAP Desk Guide) and return it to the examiner (with a copy to the area manager) with the approved Audit CAP Checksheet within five business days of receipt.

    2. Rev. Proc. 2021-30 Non-Appendix A & B Failures: Within five business days from receiving the Audit CAP Checksheet, forward the checksheet to the Manager, EP Mandatory Review (EP Exam) or EP R&A Quality Assurance (EP R&A Examiners)

      Note:

      Mandatory Review will return the checksheet to the group manager within seven business days outlining the proposed correction methods. Return the CAP Sanction Memo and correction methods to the examiner within three business days of when you received it from Mandatory Review (with a copy to the area manager).

      Reminder:

      The area manager with jurisdiction will resolve any disagreements between Mandatory Review and the group on the recommended sanction and/or the correction method(s).

    3. Plan Document Failures: You may approve prototype late or non-amenders and do not have to send them to Mandatory Review. Also, you do not have to send nonamender cases coordinated with or approved by EP Determinations to Mandatory Review.

    4. For Operational Failures for not following the terms of the plan document and related corrections made by retroactively following the terms of the plan document, putting the participants in the exact position they would be had no violation occurred, you do not have to send to Mandatory Review.

  6. EP examiner:

    1. Follow the procedures in the Audit CAP Desk Guide or R&A CAP Desk Guide (for R&A Examiners).

    2. Discuss the qualification failures discovered and the option of resolving the failures with the taxpayer/POA.

      Note:

      If the taxpayer doesn’t agree on both the corrections and sanction, document the case chronology record and the workpapers with the reason an agreement was not reached and close the case unagreed per IRM 4.70.14.2.4.2.1, EP - Unagreed Form 5500 Examination Procedures.

    3. Prepare a draft closing agreement.

      Reminder:

      Example agreement templates are located on the Retirement Knowledge Management base.

    4. EP Exam: Send the draft agreement to your manager.

      Note:

      The group manager will help prepare the closing agreement.

    5. EP R&A: Send the draft agreement to the Area Manager.

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  8. Examiner: When you receive approval from your manager and/or Mandatory Review, send to the taxpayer/POA, the following:

    1. Letter 1595

    2. One copy of the draft closing agreement

    3. Audit CAP Instructions for Execution of Closing Agreement

    4. F3244-A ACH Transfer Instructions

  9. If the taxpayer/POA requests changes to the template closing agreement language, get the group manager’s approval.

    Note:

    Area TEGEDC is available to review and approve any changes to the agreement’s standard language.

  10. Secure documentation that the plan sponsor has corrected the qualification issues before you send the final closing agreement to the taxpayer/POA.

  11. Send one copy of the final closing agreement to the taxpayer/POA using Letter 1595 or Letter 1595-B along with execution and payment instructions (if appropriate).

  12. You may receive the signed closing agreement from the taxpayer in hard copy (via mail) or electronic via EEFax, TDC, or secured email.

    Note:

    You can accept them by EEFax if you have contacted the taxpayer by phone or in-person and documented the case chronology record with the contact date and noted that the taxpayer wishes to send the closing agreement by E.

  13. Tax Examiner: Follow these steps only for electronic payments made through pay.gov.

    1. When payments are submitted through pay.gov, use pay.gov/agency to access data/documents needed to process the sanction payment.

    2. You’ll receive an email when payments are received with the pay.gov tracking ID number.

    3. Make sure that the payment has been validated and give the EP examiner/group manager the deposit ticket number that they must insert on the Form 3210 to the Kansas City Submissions Processing Center in place of a check number.

    4. Send the following items to the EP Examiner working the case:
      i. Form 3244-A pay.gov that was completed by the taxpayer
      ii. Detailed record entitled "ACH Transaction Detail"

  14. EP Examiner/group manager: When you receive the executed closing agreement and sanction (in the form of a cashier’s check, certified check made payable to the U.S. Treasury or ACH payment) from the plan sponsor, inspect both for errors.

    Note:

    If the representative signs the closing agreement, there must be a valid Form 2848 specifically authorizing him/her to do so.

    1. If you discover any errors, return the documents and the monetary sanction to the plan sponsor for correction using Letter 1595-B.

    2. If there are no errors with the documents or the sanction payment, scan and EEFax or email the executed closing agreement, the check and completed Letter 1595-D to the area manager for signature.

      Note:

      The plan years listed on Letter 1595-D are the plan years covered by the closing agreement.

  15. Area manager/designee: Within five business days:

    1. Sign the closing agreement and Letter 1595-D.

    2. Secure email the signed closing agreement and Letter 1595-D to the EP examiner and group manager.

  16. Group manager/examiner: Process the check within one business day of receiving the signed agreement from the area manager.

    1. Follow your group’s procedures for payments and remittances via overnight delivery, including using the log book.

    2. Prepare the following package:
      i. Form 3210 with package contents listed
      ii. Cover memorandum
      iii. A fully executed copy of the closing agreement
      iv. Form 5734
      v. Form 3244-A (if a physical check was received) or Form 3244-A pay.gov (if electronic pay)
      vi. Remittance (check or ACH Transaction Detail)

      Note:

      Examples of the items listed above can be found at Audit CAP Resources.

    3. Send the package listed above to the Manual Deposit Unit located at the Kansas City Submissions Processing Center:

    If the payment was made using: Then send package using:
    A physical check Next day, express mail
    An electronic payment Encrypted email

    Note:

    See Employee Plans Examination Exhibits, Contact Information for the physical address and email address to use.

  17. Examiner: Within three business days of receiving the fully executed closing agreement from the area manager, send a fully executed copy of the closing agreement to the plan sponsor/POA with Letter 1595-D.

  18. Examiner: Save all documents forms and letters in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention. See IRM 4.70.12.5.2, TE/GE RCCMS Naming Convention.

  19. Examiner: Prepare the examination for closing. Include the following entries on the RCCMS Closing Record:

    • General Tab - Disposal Code - Enter 106 – Closing Agreement.

    • Details Tab – Closing Agreement Result - Enter the amount of the closing agreement monetary sanction.

      Note:

      If more than one year is on RCCMS, enter the amount of the sanction on the earliest year and for each of the subsequent years enter $1.

    • General Tab - ARDI Code - Enter 1- Fully Paid.

  20. Prepare and mail the applicable closing letter per IRM 4.70.14.4.3.2, Functionally Unique Letters and Procedures.

  21. Close the case as an agreed case per IRM 4.70.14.4, Closing A Case, and its subsections.

EP – DO 8-3 Closing Agreements
  1. TE/GE Directors are delegated the authority "to enter into and approve a written agreement with any person relating to the Internal Revenue tax liability of such person (or of the person or estate for whom he or she acts) for a taxable period or periods ended before the date of agreement and related specific items affecting other taxable periods" . (Delegation Order (DO 8-3)).

  2. DO 8-3 closing agreements are used to resolve issues that aren’t permitted through EPCRS.

    Note:

    The Audit CAP Desk Guide has a section on DO 8-3 Closing Agreements.

  3. In most DO 8-3 closing agreements, the taxpayers and the Commissioner formally agree that the plan under examination is not qualified, officially making the proposed revocation or proposed non-qualification an "agreed revocation" or "agreed non-qualification."

    1. The taxpayer is legally forgoing their right to an Appeals hearing and their right to petition the Tax Court.

    2. When a DO 8-3 closing agreement is fully executed by the taxpayer and the IRS, the case becomes an agreed case in every respect, just like a case resolved under EPCRS.

      Note:

      In very limited situations, excise tax and/or unrelated business income (UBI) issues may be resolved through a DO 8-3 closing agreement; however, you must obtain pre-approval from the Director, EP Examinations.

  4. Examiners and managers are required to coordinate DO 8-3 closing agreements with Tax Exempt and Government Entities Division Counsel (TE/GEDC), as noted in the steps below.

  5. EP Examiner: Before making a submission for a DO 8-3 agreement, make sure that you took proper actions to protect the applicable statute of limitations for all relevant tax returns, such as Forms 1040, 1120, 1065 and 5330.

  6. When doing a DO 8-3 closing agreement, follow EPCRS closing agreement procedures in IRM 4.70.14.2.1.2.2, EP - EPCRS and Closing Agreements, with these exceptions:

    1. The Director, EP Examinations (for EP R&A: Director, Employee Plans Rulings and Agreements) signs the closing agreement for the IRS.

    2. You must get approval from your group manager, area manager, and the Director, EP Examinations (for EP R&A: Director, Employee Plans Rulings and Agreements) before you propose a DO 8-3 agreement.

      Note:

      You may discuss the D.O. 8-3 program as a potential option, but the specific terms and proposed resolution need to be cleared through management before offering it to the taxpayer.

    3. Return a fully executed closing agreement with Letter 1595-D.

    4. When closing agreements are fully executed, use closing Letter 1745 or Letter 1745-A, as applicable.

  7. Contact the group manager to discuss resolving the case under DO 8-3.

  8. Group Manager: Within five business days of the discussion above, contact your area manager to discuss the facts of the case. If the area manager disagrees with the processing of the case under a DO 8-3 closing agreement, inform the examiner that it is not an option.

  9. EP Examiner: When the area manager decides that a DO 8-3 closing agreement is proper:

    1. Calculate all applicable taxes, penalties and interest (including Form 4549-E).

    2. Draft the DO 8-3 Transmittal Checksheet. See exhibit 20 of the Audit CAP Desk Guide.

    3. Prepare an Executive Summary (Includes: background, facts, issues, resolution and must address penalties (especially if not assessing).

      Note:

      Includes the case background, facts, issues, specific legal citations, proposed resolution. It must address the assessment/non-assessment of penalties. Do not include exhibits or attachments. The executive summary itself should have all the information needed to support the DO 8-3 request.

    4. Prepare the draft DO 8-3 closing agreement. Include all responsible parties in the draft. Summarize the errors and proposed resolution. Name the violated statutory and regulatory requirements, but do not recite them. Ensure all parties to the agreement are also signatories to the agreement.

      Note:

      Ask your group manager for sample DO 8-3 closing agreements or find an example on the EPCRS Knowledge Management base site.

    5. Secure email the Form 4549-E, DO 8-3 transmittal check sheet, executive summary, and draft DO 8-3 closing agreement to your group manager for approval. Do not include any other documents.

  10. Group manager: For DO 8-3 closing agreements for IRC 457(b) plans, contact the FSL/ET Program Manager as early as possible in the process for comment if there is an open, concurrent examination of the sponsor or if any proposed changes will affect employment taxes.

  11. Group manager: If you agree with resolving the case through a DO 8-3 closing agreement, within five business days of receiving the documents listed in item 9 from the examiner:

    1. Review the DO 8-3 agreement and executive summary.

    2. Sign the transmittal.

    3. Secure email the four documents to your area manager with your recommendation.

  12. Area manager: If you agree with the recommendation, review the draft DO 8-3 and executive summary. Forward the draft DO 8-3 closing agreement, Form 4549-E, and executive summary to the assigned contact points in TE/GE Division Counsel by sending the request to *CC TEGEDC Employee Plans Counsel Assistance.

  13. TEGEDC review: TEGEDC reviews the DO 8-3 closing agreement and executive summary for legal sufficiency and substantial legal error. TEGE DC does not review the entire case. The TEGEDC review is limited to the issues that the DO 8-3 agreement proposes to resolve. TE/GE DC may approve the closing agreement package or return it to the examiner and group manager for further development.

  14. Area manager: Upon receipt of TEGEDC’s approval of the agreement and executive summary, sign the transmittal and send it, along with the executive summary, Form 4549-E, and draft DO 8-3 closing agreement, to the functional assignment coordinator (FAC) and the Director, EP Examinations. Do not include more than the four just-listed documents unless otherwise directed by the FAC.

  15. Director, EP Examinations or the FAC (for EP R&A: Director, EP R&A): either sign and return the transmittal check sheet accepting the draft closing agreement or respond to the area manager with any questions or concerns.

  16. All EP Examinations employees: Use these letters in the DO 8-3 process:

    1. Letter 1595 - to mail draft closing agreements to the taxpayer/representative for review and signature.

    2. Letter 1595-B - to return a closing agreement to the taxpayer/representative because of improper payment or improper execution.

    3. Letter 1595-D - to mail fully executed DO 8-3 closing agreements back to the taxpayer/representative.

    4. Letter 1745 - as the closing letter for the 5500 examination when a DO 8-3 closing agreement is secured and the IRS determined the plan is disqualified from inception and remains disqualified.

      Note:

      Use Letter 1745-A when you’re coordinating the examination with SB/SE or LB&I.

  17. You may accept the signed closing agreements from the taxpayer by mail, fax, or secure mail. See Letter 1595 for details.

    Note:

    You can accept them by EEFax, if you have contacted the taxpayer by phone or in-person and documented the CCR with the contact date and noted that the taxpayer wishes to send the closing agreement by EEFax.

  18. Group manager: When the taxpayer/POA returns the signed closing agreement and verification of the sanction payment (Form 3244-A) to the examiner:

    1. Notify the FAC and the Director, EP Examinations that you’re sending a closing agreement for countersignature.

    2. Send via secure email the closing agreement, the cover memorandum, verification of the sanction payment and the transmittal check sheet to the Director, EP Examinations and the FAC.

  19. The Director, EP Examinations or FAC (for EP R&A: Director, EP R&A): return the fully executed closing agreement within five business days to the group manager and examiner via secure email.

  20. Group manager/examiner: Process the check within one business day of receiving the signed agreement from the Director, EP Examinations or the FAC.

    1. Follow your group’s procedures for payments and remittances via overnight delivery, including using the log book.

    2. Prepare and forward a closing agreement package per IRM 4.70.14.2.1.2.2.2(16), EP – EPCRS Closing Agreements.

      Note:

      See Employee Plans Examination Exhibits, Contact Information for the physical address and email address to use.

  21. Group manager/examiner: Once you receive the signed closing agreement, email a copy of the agreement, the remittance (ACH transaction detail) and Form 3244-A to: *cfo.cfm.pay.gov.closing.agreements.racs.anmf@irs.gov

  22. EP examiner: mail the following to the taxpayer/representative:

    1. Letter 1595-D along with a copy of the fully executed closing agreement.

    2. Closing Letter 1745 or Letter 1745-A, as applicable, if the DO 8-3 agreement is secured, we determined the plan is disqualified from inception and it remains disqualified.

EP – Electronic Payments of Closing Agreement Sanctions
  1. Taxpayers should pay the sanction electronically in lieu of a check on pay.gov.

    1. Answer the question – “Was the closing agreement the result of an employee plans audit or determination letter application as "yes" .

    2. Input the social security number or business EIN as listed in the closing agreement.

    3. Click the "Continue to the Form" button to get to the F3244-A.

    4. Complete the highlighted portions of the on-line Form 3244-A.

      Note:

      Give the taxpayer the Form 3244-A pay.gov instructions.

    5. Submit the payment.

  2. The taxpayer receives a tracking number when they complete the submission process. They must record the tracking number and provide this number to the EP examiner with the executed closing agreement.

  3. EP examiner: include the tracking number in lieu of the check when you send the closing agreement package to your group manager per IRM 4.70.14.2.1.2.2.2, EP – EPCRS Closing Agreements.

EP - Procedures for Correction of Eligible IRC 457(b) Non-Government Plan Failures
  1. When you examine an IRC 457 plan and determine that the plan doesn’t satisfy the eligible plan requirements under IRC 457(b), generally correction is not available. See Issue Resource Guide, IRC 457 Examination Guidelines.

  2. If the facts and circumstances of a 457 plan failure lead you to seek an alternative to treating an eligible 457(b) top-hat plan as an ineligible 457(f) plan, you can consider a closing agreement under Delegation Order 8-3.

  3. Do not offer or discuss resolutions using a DO 8-3 closing agreement until your manager, area manager and Director EP Examination have all approved a proposed agreement.

  4. Follow the procedures in IRM 4.70.14.2.1.2.2.3, EP – DO 8-3 Closing Agreements, to propose use of a DO 8-3 closing agreement to your manager, area manager and Director, EP Examinations.

  5. If the case is resolved through a DO 8-3 closing agreement, use Letter 1744-E to close the examination. The "Form Number" in the header of the letter should be "Non-Return Unit" . The first sentence in the body of the letter should be revised to read, “"We have completed our examination of your plan for the above year(s)."

  6. If the manager, area manager, and Director, EP Examinations do not approve resolving the issue via a DO 8-3 closing agreement, apply the ineligible plan rules per IRC 457(f). See Issue Resource Guide, IRC 457 Examination Guidelines.

EP - Processing Agreed Forms 5330 and 990-T
  1. This section provides procedures for examining and closing agreed Form 5330, and Form 990-T exams.

  2. Form 5330, or 990-T examinations are generally initiated:

    1. Form 5330:
      I. During a Form 5500 series (Form 5500, Form 5500-SF, and Form 5500-EZ) exam.
      II. A DOL referral.
      III. A filed Form 5330 may be assigned without the related Form 5500.
      IV. EPCU secures a delinquent Form 5330 during a compliance check.

    2. Form 990-T:
      I. During the examination of a Form 5500 series return when it is discovered that the trust assets have produced income that is taxable under IRC 511 as UBI.
      i. IRC 512(a)(1) defines UBI as the gross income derived from any unrelated trade or business regularly carried on, less the deductions which are directly connected with the carrying on of the trade or business.
      ii. IRC 513(a) defines an unrelated trade or business as any trade or business, the conduct of which is not substantially related to the exercise of the purpose for the trust’s exemption under IRC 501(a).
      iii. IRC 513(b) defines an unrelated trade or business for purposes of a trust under IRC 501(a) to be any trade or business regularly carried on by such trust or by a partnership of which the trust is a member.
      iv. Some examples of an exempt trust engaging in UBI are:
      a. Investing as a limited partner in a partnership carrying on an unrelated trade or business
      b. Purchasing securities on margin
      c. Investing in a partnership set up to invest in securities
      d. When an S Corporation maintains an ESOP and the ESOP fails IRC 409(p), Schedule K-1 income flowing to the ESOP is UBI
      II. The determination of a trade or business is based on a facts and circumstances basis. The regulations under IRC 513 provide examples and guidance on what constitutes a trade or business.
      i. Some examples of an unrelated trade or business are:
      a. An organization involved in real estate construction and development invests some of its retirement plan trust assets in land adjacent or near its own development projects. After the subdivision and improvement of the land, it’s sold with the belief that any gains will not be subject to taxation. If these sales are carried on in a regular and continuous manner, the trust could be in the real estate business and therefore subject to UBI taxation under IRC 511.

      Note:

      To discover such activities, review the trust’s books and records, any real estate closing statements, deeds or public records.


      b. Rental of personal property (other than personal property leased with real property) is another example of UBI. The leasing of automobiles, office machines, computers, signs and vending machines are some examples of personal property that would constitute UBI.

      Note:

      Any personal property (especially vending machines) in the trust would be an indication of UBI and should be carefully reviewed.


      c. The trust could invest in real estate and use the land for farming, but income from the farmed land would be considered UBI. Such income is often part of the "other income" as shown on the 5500 return.

      Note:

      All "other income" of a trust should be fully analyzed.


    III. IRC 512(b) provides exceptions and limitations on UBI to exempt qualified retirement trusts.
    i. Some examples of exceptions to UBI are:
    a. Dividends, interest and annuities. All dividends, interest and annuities from regularly carried on trade or business and all deductions connected are not unrelated business income.
    b. Royalties. An example of an exempt royalty would be if a trust owns real estate and another person drills for oil on the site. The other person incurs all of the costs for the drilling and excavation and pays a royalty to the trust. Such royalties would not be UBI to the trust. However, if the trust had paid 50% of the development cost for a 50% ownership in the regularly carried on trade or business, the income would be deemed UBI to the trust.
    c. Gains or losses from the sale of property. Gains and losses from the sale, exchange, or disposition of property are generally not unrelated business income to the trust. This exception does not apply to stock in trade or other property of a kind which would be includible in inventory if on hand at the close of the taxable year, or property held primarily for sale to customers in the ordinary course of the trade or business.
    d. Rents. Income derived from the rental of real property, as part of a regularly carried on trade or business, is excluded from UBI to the trust. Rental income from personal property is subject to UBI. When both real and personal property are rented there are specific rules that apply. See 26 CFR 1.512(b)-1(c).
    e. Net operating losses. The net operating loss deduction provided in IRC 172 is allowed as a deduction when calculating unrelated business taxable income.
    IV. Many qualified retirement trusts invest in commingled investments such as partnerships, joint ventures, pooled trusts, common trusts, real estate investment trusts (REIT) or some other type of combined investment. This gives the plan sponsor an opportunity to diversify the trust assets.
    i. These types of investments may or may not be subject to UBI depending on the facts and circumstances.
    a. Partnerships. Trusts can invest as either limited partners or general partners. The income derived by the trust is deemed to be of the same character and from the same source as if the trust, rather than the partnership, is the original recipient of the income. Therefore, a trust’s share of any partnership income is treated by the trust as if it is carrying on the trade or business of the partnership. The partnership income passes through the partnership to the trust. This applies to limited partnerships as well as general partnerships.
    1. For example, assume the trust is a partner in a partnership that specializes in REITs. The partnership's business is to research and then buy shares of REITs. Therefore, the income to the trust derived from the investment in the partnership is deemed to be income from an investment in a REIT. As noted below, a trust’s investment income from a REIT is not considered to be UBI. In this example, any income the trust receives from the partnership would not be UBI.

    2. A taxpayer may argue that an investment in a limited partnership is a passive investment and that any income would not be UBI since the trust has no active involvement in the management of the partnership. Rev. Rul. 79-222 explains that an investment by a trust in a limited partnership carrying on an unrelated trade or business will result in UBI.

    3. Additional information on partnership investments can be found in Rev. Rul. 74-197 and 26 CFR 1.512(c)-1.
    b. Pooled Trusts. Although a pooled trust is exempt from taxation, it may be subject to UBI. The tax is imposed at the trust level and is not taxed again when the UBI is distributed to the participating trust.
    c. Common Trusts. These are essentially the same as pooled trusts except that common trusts must have a bank as the trustee.
    d. Real Estate Investment Trusts (REITs). Rev. Rul. 66-106 and 26 CFR 1.856-1(e) provide that a trust's investment in a REIT is essentially the same as an investment in stock of a corporation. Therefore, any distributions from the profits or earnings from a REIT are deemed to be treated as dividends. Dividends are not treated as UBI to the trust. Therefore, income received by a trust from a REIT is not considered to be UBI.

    V. Unrelated debt-financed income, as defined in IRC 514, can be deemed to be UBI and subject to taxation. IRC 514(b)(1) defines debt-financed property as any property held to produce income and on which there is acquisition indebtedness at any time during the year.
    i. Examples of exclusions from debt-financed income:
    a. Debt-financed income that has already been taxed as a regularly carried on unrelated trade or business is not UBI. This is to prevent double taxation to the trust.
    b. Debt-financed income related to the use of an Exempt Loan made to an ESOP is not UBI. Per IRC 514(b)(1)(A)(i), any income derived from property which is substantially related to the purpose of the trust’s exemption would not be debt-financed income. Rev. Rul. 79-122 clarifies the exclusion of ESOP plans from being subject to debt-financed income.
    c. Acquisition indebtedness incurred by a qualified plan in acquiring or improving any real property is not UBI, provided that all of the conditions of IRC 514(c)(9) are satisfied. Refer to the conditions contained in IRC 514(c)(9) to see if this exemption applies.
    ii. IRC 514(c)(1) defines acquisition indebtedness as the outstanding amount of:
    a. The indebtedness incurred by the trust in acquiring or improving property;
    b. The indebtedness incurred before the acquisition or improvement of property if such indebtedness would not have been incurred but for such acquisition or improvement; and
    c. The indebtedness incurred after the acquisition or improvement of property if such indebtedness would not have been incurred but for such acquisition or improvement and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition or improvement.

    iii. Income from stocks purchased on margin would be debt-financed income.
    iv. Any acquisition indebtedness incurred by a partnership flows through to the exempt trust the same way unrelated business taxable income flows through.
    v. See 26 CFR 1.514(a)-1 and Schedule E of Form 990-T for guidance in calculating debt-financed income.

    Note:

    In addition to the information contained in this IRM, you will find helpful information covering UBI and unrelated debt financed income in Pub 598.

  3. The Taxpayer that has the tax issue files Forms 5330 and 990-T.

    1. Form 5330:

      Excise Tax Taxpayer
      IRC 4971 Employer responsible for contributing to or under the plan. Each member of a controlled group shall be jointly and severally liable.
      IRC 4972 Employer making the contributions.
      IRC 4973(a)(3) Owner of the custodial account treated as an annuity contract under IRC 403(b)(7)(A).
      IRC 4975 Disqualified person who participates in the prohibited transaction.
      IRC 4978 Employer or the eligible worker-owned cooperative, that made the written statement described in IRC 664(g)(1(E) or in IRC 1042(b)(3).
      IRC 4979 The Employer.
      IRC 4979(A) For allocations described in IRC 4979(A)(a)(1) or (2), the Employer sponsoring such plan, or the eligible worker-owned cooperative.
      For allocations or ownership described in IRC 4979(A)(a)(3) or (4), the S-Corporation the stock in which was so allocated or owned.
      IRC 4980 Employer maintaining the plan.

    2. Form 990-T: A Form 990-T filed for UBI generated by trust assets should be filed by the trust using the trust EIN, not the plan sponsor’s EIN. If the trust does not have a EIN, have the taxpayer complete and file a Form SS-4 or complete the application online at irs.gov to obtain one for the trust. See IRM 4.70.14.2.1.2.4.13, EP - Obtaining a Trust EIN.

      Note:

      A Form 990-T sent to Ogden with an EIN that is used for any other purpose than for the filing of Form 990-T for the trust will not process at the Service Campus. The return will reject and a new trust EIN will have to be assigned causing a delay in the processing of the Form 990-T.

  4. An agreed examination is one where the taxpayer has:

    1. Form 5330:
      1. Filed Form 5330 reporting the correct amount of tax, and
      2. In the case of a prohibited transaction (IRC 4975) or minimum funding (IRC 4971), made correction.

      Exception:

      If IRC 4971(b) tax is waived as permitted by Delegation Order 7-7-1, the case may be closed agreed if Forms 5330 are filed and reflect the correct amount of IRC 4971(a) tax for all years for which tax is due. See IRM 4.70.14.2.1.2.4.7, EP - Waiver of the 100% 4971(b) Excise Tax, for eligibility and procedures to waive the additional tax under IRC 4971(b).

      Reminder:

      The taxpayer does not need to pay the additional excise tax assessed for the case to be considered agreed.

    2. Form 990-T:
      1. Form 990-T is secured from the taxpayer reflecting the correct amount of tax,
      2. A signed Form 870-EP is secured reflecting an agreed upon change to the tax previously reflected on a filed Form 990-T return, or
      3. The examiner determines that no additional tax is due on a previously filed Form 990-T return that he or she examined.

      Note:

      The tax doesn’t need to be paid for a case to be "agreed" .

  5. See IRM 4.70.14.2.4.2.3, EP - Unagreed Forms 5330 and 990-T, (and subsections thereunder) for processing requirements for unagreed Forms 5330 and 990-T secured as part of the exam process.

EP - Form 5330 and 990-T Filing Requirements
  1. Forms 5330 are filed to report excise tax under Chapter 43. The most common taxes are:

    1. Failure to meet minimum funding standards (IRC 4971)

    2. Nondeductible contributions to qualified employer plans (IRC 4972)

    3. Excess contributions to IRC 403(b)(7)(A) custodial accounts (IRC 4973(a)(3))

    4. Prohibited transactions (IRC 4975)

    5. Certain dispositions by ESOPs (IRC 4978)

    6. Certain excess contributions (IRC 4979)

    7. Certain prohibited allocation of employer stock in an ESOP that failed to meet the requirements of IRC 409(p) (IRC 4979A)

    8. Certain reversions of plan assets (IRC 4980)

  2. Forms 990-T are filed to report UBI generated by trust assets.

EP – Form 5330 and 990-T Due Dates
  1. The due date for filing a Form 5330 depends on the particular Chapter 43 excise tax involved. The table below indicates the due date by IRC section.

    Excise Tax Form 5330 Due Date Examples
    IRC 4971 Later of:
    • The last day of the 7th month after the employer’s tax year end, or

    • 8 1/2 months after the last day of the plan year that ends with or within the employer’s tax year.

    The employer's tax year ends March 31, and the plan is on a calendar year. If the applicable plan year ends 12/31/2019, the corresponding tax year would end 3/31/2020. The Form 5330 is due October 31, 2020.
    IRC 4972, IRC 4973(a)(3),IRC 4975, IRC 4976, IRC 4978, and IRC 4979A Last day of the 7th month after the end of the tax year of the employer or other person who must file the return. If the employer (or other person required to file the return) has a tax year of December 31, 2019, the Form 5330 is due on July 31, 2020. If the employer (or other person required to file the return) has a fiscal tax year ending October 31, 2019, the Form 5330 is due on May 31, 2020.
    IRC 4977 Last day of the 7th month after the end of the calendar year in which the excess fringe benefits were paid to the employees of the employer.  
    IRC 4979 Last day of the 15th month after the close of the plan year to which the excess contributions or excess aggregate contributions relate. Excess contributions were made to a plan for the plan year ending December 31, 2019. The Form 5330 for such excess contributions is due by March 31, 2020.
    IRC 4980 Last day of the month following the month in which the reversion occurred. Trust assets reverted back to an employer on May 16, 2019 from a plan having a plan year ending on December 31st. The Form 5330 is due for the reversion on June 30, 2020.
    IRC 4980F Last day of the month following the month in which the failure occurred.  

    Note:

    Effective in 2024, Form 8868, Application for Extension of Time To File an Exempt Organization Return or Excise Taxes Related to Employee Benefit Plans, is used for a filer to request an extension of time to file Form 5330. Form 5558, Application for Extension of Time To File Certain Employee Plan Returns, is no longer used for an extension of time to file Form 5330. If approved, the taxpayer may be granted an extension of up to 6 months after the normal due date of Form 5330.

    Caution:

    Form 8868 does not extend the time to pay taxes

  2. The final regulations under 26 CFR 54.6011-3 require that any employer or individual required to file an excise tax return on Form 5330 must file the excise tax return electronically using the IRS Modernized e-File (MeF) System through an IRS Authorized e-filing Provider for taxable years ending on or after December 31, 2023, if the filer is required to file at least 10 returns of any type with the IRS during the calendar year that the Form 5330 is due. See T.D. 9972 for more information.

  3. Form 990-T is due on the 15th day of the fourth month following the close of the taxable year of the trust.

    Note:

    The taxpayer may file Form 8868, Application for Extension of Time To File an Exempt Organization Return or Excise Taxes Related to Employee Benefit Plans, to request an extension of time to file. If approved, the taxpayer may be granted an extension of up to 6 months after the normal due date of Form 990-T.

EP – General Procedures for Form 5330 and 990-T Exams
  1. See IRM 4.70.13, Executing the Examination, for exam techniques and guidelines that apply to all types of cases. A few basics include -

    1. Securing and reviewing source documents substantiating the applicability of or additions to income, excise or UBI tax.

    2. Use Form 5773-A, or its equivalent, and workpapers to document the exam findings regarding potential tax and penalty issues.

    3. The procedures found in IRM 4.70.11.2.2.1, RCCMS, apply to Form 5330 and 990-T exams.

    4. The procedures found in IRM 4.70.11.3.1, Case Suspense for Federally Declared Disaster, Significant Fire, or Terrorist or Military Action, and the subsections thereunder, apply to Form 5330 and 990-T exams.

  2. Provide complete and accurate tax and penalty calculations to the taxpayer and POA. See IRM 4.70.13.12, Penalties Consideration for guidance.

  3. For a return not yet due, the examiner must:

    1. Notify the taxpayer of the requirements to file and pay the applicable tax when due.

      Note:

      If the taxpayer files the return not yet due with the examiner, see IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

    2. If the taxpayer does not file the return, prepare Form 5666 for a future year referral and send it to Classification. Form 5666 can be sent by email or by regular mail. See Employee Plan Examination Exhibits for Classification’s contact information.

    3. If the taxpayer voluntarily files the return, verify its accuracy and mail it to the campus (Ogden Service Campus or Kansas City Service Campus). See Employee Plan Examination Exhibits, for the mailing address and stop number.

      Note:

      If a discrepancy is found, notify your manager and discuss whether an examination of the return is warranted. The discussion and outcome must be documented in the CCR.

  4. For claims filed on a Form 5330, or 990-T; follow the procedures in IRM 4.70.17, Claims and Abatements.

EP – Initial Contact with the Taxpayer
  1. In most instances, Form 5330, and 990-T exams are initiated based on information discovered during a related Form 5500 exam.

  2. Once the examiner and group manager agree that the information discovered warrants a Form 5330, or 990-T to be filed, the applicable taxpayer must be notified in writing of that decision.

    Reminder:

    The applicable taxpayer is not always the same as the 5500 taxpayer.

    1. Use Letter 1477 to inform the taxpayer that a Form 5330, or 990-T is due to be filed. If you have sufficient information, attach Form 886-A (RAR) with the pertinent facts, law, government position, tax calculations and IRC 6651(a) penalty calculations (if applicable). If additional information is needed, attach an IDR.

      Note:

      When the issue involves a prohibited transaction that has not been corrected, the RAR should include an explanation of the assertion of IRC 4975(b) tax.

      Similarly, when the issue involves a funding deficiency that has not been corrected, the RAR should include an explanation of the assertion of IRC 4971(b) tax.

      Exception:

      In some situations, the assessment of 4971(b) may be waived.

      See IRM 4.70.14.2.1.2.4.7, EP - Waiver of the 100% 4971(b) Excise Tax, for eligibility and procedures to waive the additional tax under IRC 4971(b).

    2. Request the taxpayer file Forms 5330, or 990-T for all years due and open by statute.

      Note:

      If the return is not yet due, refer to IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

    3. If additional tax is proposed on a previously filed Form 5330, or 990-T, and the manager has agreed to put the return under exam, use Letter 6031 to inform the taxpayer an examination has commenced. Use Form 870-EP to secure agreement of the additional tax. See Employee Plan Examination Exhibits for an example of a completed Form 870-EP.

      Note:

      For purposes of UBI in a trust, Form 870-EP is signed by a trustee of the trust.

    4. If the taxable period extends into a taxable year for which a Form 5330 is not yet due, notify the taxpayer of the requirements to file the return and pay the tax for such taxable year. See IRM 4.70.13.9.5.3.1, Securing Forms 5330 and 990-T Not Yet Due.

    5. Include a penalty calculation sheet when penalties are being imposed. The failure to file and failure to pay penalties under IRC 6651(a) are applicable to delinquent Forms 5330 and 990-T.

      Reminder:

      IRC 6651(a) penalties are the only penalties applicable to a delinquently filed Form 5330.

      Note:

      See IRM 4.70.13.12.3, Common Penalties, for more information on IRC 6651(a) penalties.

    6. Solicit tax payment with applicable IRC 6651(a) penalties to stop interest from accruing further.

    7. Send Pub 1, Your Rights as a Taxpayer, with the letter.

    8. Send a copy of the letter to any authorized POA.

  3. The examiner must call the taxpayer (and POA) to discuss the issue(s) raised and, if applicable, opening of the exam. The call should take place -

    1. No earlier than fourteen calendar days or ten business days (whichever is longer) after the letter referenced in item a. is mailed, and

    2. No later than fifteen business days after the letter is mailed.

      Note:

      The taxpayer must be given ample time to receive the letter before the examiner calls.

EP – Overview of Establishing Forms 5330 and 990-T on RCCMS and AIMS
  1. You no longer need to establish delinquent Forms 5330, Forms 5329, or Forms 990-T that you accept as filed on RCCMS and AIMS. You will still need to process the accepted as filed delinquent returns to the service center, but you will not need to establish these returns for examination on RCCMS and AIMS. In instances where you don’t need to examine a secured return as you can accept it as filed, then after processing it to the Service Center, you only need to save a copy of the accepted return, the acknowledged Form 3210 received from the service center, or comparable record of confirmed receipt document (i.e., EEFax confirmation) in RCCMS.

  2. Record the receipt of the return by completing the electronic RCCMS 3198-A Special Handling checksheet in the RCCMS compliance activity of the primary examination return.

  3. Properly note in your workpapers that you accepted the returns as filed. Use the RCCMS 3198-A Special Handling checksheet to record the number and types of return secured in RCCMS to let CP&C capture the fact that you secured a return and accepted it without having to establish a related examination or create a Form 5329 discrepancy adjustment.

  4. Delinquent Forms 5330, or 990-T received from the taxpayer that you are proposing adjustments to (not accepted as filed) are processed in accordance with IRM 4.70.13.9.5.2, EP Processing Delinquent Forms 5330 and 990-T.

  5. Forms 5330, or 990-T received from the taxpayer for years not yet due are processed in accordance with IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

  6. In the instance a Form 5330 or 990-T was put under exam, Agreed Forms 5330 are processed in accordance with IRM 4.70.14.2.1.2.4, EP - Processing Agreed Forms 5330 and 990-T.

  7. Establish a Substitute for Return (SFR) as soon as the examiner and manager believe the taxpayer will not voluntarily file the return(s) due. Form 5330 and 990-T Substitute for Returns can now be established electronically using RCCMS. It is no longer necessary to mail the paper substitute for return package to the Ogden Service Center. The SFR return(s) will be established using RCCMS after entity module verification. Follow the procedures in IRM 4.70.13.9.8.7, EP Processing Form 5330 or 990-T Substitute for Return.

  8. When examining a Form 5330, or 990-T return previously filed by the taxpayer (such as a claim or when the tax reported is erroneous), conduct IDRS research.

    Form Under Exam IDRS Research
    Form 5330 or 990-T
    1. Obtain a transcript (BMFOLT and BMFOLR prints) using the taxpayer’s EIN/SSN for the applicable year (Form 5330 = MFT 76) (Form 990-T = MFT 34) Verify the filed status of the return and the amount of tax assessed. The return was processed on BMF if a TC "150" is present and dollar amounts are reflected.

    2. Verify the statute date on IDRS is accurate and considers the statute control items discussed in IRM 4.70.14.2.4.2.3.2, EP – Consideration of Statute of Limitations for Forms 5330, and 900-T

    3. In addition to checking BMFOLT, IDRS command code TXMOD should also be used to verify the type of tax reported.

      Note:

      When researching a Form 5330 with an EIN, do not put a file source (no "P" or "N" ) after the EIN.

      Note:

      When researching a Form 5330 with an SSN, use a file source of "V" after the SSN (for example, XXX-XX-XXXV).

EP – Processing Agreed Forms 5330 and 990-T
  1. A delinquent Form 5330, or 990-T is considered "agreed" when:

    1. Form 5330, or 990-T is filed,

    2. The amount of tax reported is correct (or Taxpayer agrees to your adjustment), and

    3. Correction is made (if the issue is minimum funding or a prohibited transaction).

      Note:

      For purposes of IRC 4971, a case will also be processed as an agreed case for a specific year if the taxpayer files Form 5330 and reports the correct amount of IRC 4971(a) and IRC 4971(b) tax, even if the funding deficiency has not been corrected.

  2. Follow the procedures in IRM 4.70.14.2.4.2.3, EP - Unagreed Forms 5330 and 990-T, if tax is due but the taxpayer refuses to:

    1. File Form 5330, or 990-T for any tax required to be reported on these forms.

    2. File Forms 5330 and correct the funding deficiency in the case of IRC 4971 tax.

      Exception:

      See IRM 4.70.14.2.1.2.4.7, EP - Waiver of the 100% 4971(b) Excise Tax, for eligibility and procedures to waive the additional tax under IRC 4971(b).

    3. File Form 5330 and correct the prohibited transaction in the case of IRC 4975 tax.

  3. Entity Module Verification– The examiner is responsible for securing an INOLES print to determine if an entity module is present.

    Note:

    The case will not establish on RCCMS and AIMS until an entity module has been established.

    1. When obtaining an INOLES print for an SSN, use a file source of "V" after the SSN (for example, INOLESXXX-XX-XXXXV).

    2. When obtaining an INOLES print for an EIN, do not use a file source (for example, INOLESXX-XXXXXXX).

    3. If INOLES produces a screen with at least the taxpayer’s name and address, an entity module has been established on the BMF or IMF.

    4. If INOLES produces a blank screen, the BMF or IMF entity has not been established.

      Note:

      This happens frequently with an SSN.

  4. If there is no entity module on the BMF, prepare Form 4442 as soon as possible to establish a module.

    1. EEfax or email the completed Form 4442 to the EP AIMS Coordinator. See Employee Plans Examination Exhibits for contact information and IRM 4.70.13.9.5.2.2, EP Preparation of Form 4442, for Form 4442 instructions.

    2. The TE/GE Closing Group will notify the examiner by EEFax or email when the Form 4442 is processed.

  5. Once a delinquent return is received from the taxpayer, process it in accordance with IRM 4.70.13.9.5.2, EP Processing Delinquent Forms 5330 and 990-T.

    1. You do not need to establish delinquent Forms 5330, Forms 5329, or Forms 990-T that you accept as filed on RCCMS and AIMS. You will still need to process the accepted as filed delinquent returns to the service center as outlined in IRM 4.70.13.9.5.2, EP Processing Delinquent Forms 5330 and 990-T for Forms 5330, but you will not need to establish these returns for examination on RCCMS and AIMS.

    2. In instances where you don’t need to examine a secured return because it is accepted as filed, then after processing it to the Service Center, save a copy of the accepted return, the acknowledged Form 3210 received from the service center, or comparable record of confirmed receipt document (i.e., EEFax confirmation) in RCCMS.

    3. Record the receipt of the return by completing the electronic RCCMS 3198-A Special Handling checksheet in the RCCMS compliance activity of the primary examination return.

    4. Also, properly note in your workpapers that you accepted the returns as filed. Use the RCCMS 3198-A Special Handling checksheet to record the number and types of return secured in RCCMS to let CP&C capture the fact that you secured a return and accepted it without having to establish a related examination or create a Form 5329 discrepancy adjustment.

  6. Periodically request a BMFOLT or IMFOLT print to confirm that the return has been processed and posted.

    Note:

    A transaction code (TC) 150 indicates the return posted.

    Note:

    It normally takes four to eight weeks for the OSC to process and post a return once received.

  7. The manager will email the approved Form 5500, 5330 and 990-T Request Form, (the Form) to Classification at tege-cpc-classification@irs.gov. Classification will establish the Form 5330 or 990-T on RCCMS and AIMS upon receipt of the Form.

    Note:

    After a TC 150 is reflected on the account, the Form should be completed by the examiner and forwarded to the group manager.

    See Employee Plans Examination Exhibits for the Form.

    Note:

    Within a few days, the AIMS account and RCCMS activity will be reflected in the group’s organization code.

    Note:

    The case must fully establish on RCCMS and AIMS before closed to the TE/GE Closing Group.

  8. Process Forms 5330, or 990-T received from the taxpayer for years not yet due in accordance with IRM 4.70.13.9.5.2.1, EP Securing Forms 5330 and 990-T Not Yet Due.

  9. To close agreed delinquent secured from the taxpayer, follow IRM 4.70.14.2.1.2.4.8, EP - Closing Agreed Form 5330 and 990-T Exams.

EP – Waiver of the 100% 4971(b) Excise Tax
  1. On a case-by-case basis and when circumstances warrant, all or part of the excise tax under 4971(b) (the "b" tax), may be waived by a delegated official.

  2. After all relevant information and documentation is considered, the group manager can request approval from the appropriate official to waive all or part of the "b" tax. The group manager will use the IRC 4971(b) Tax Waiver Approval Memo for this purpose. See Employee Plans Examination Exhibits for the IRC 4971(b) Tax Waiver Approval Memo.

  3. The delegated official is either the EP Examination Area Manager or the Director, EP Examinations and is determined by the amount of the unpaid minimum required contribution as follows:

    • For amounts equal to or less than $5 million, the delegated official is the EP Examination Area Manager.

    • For amounts greater than $5 million but less than $50 million, the delegated official is the Director, EP Examinations.

  4. When IRC 497(b) tax is waived in this manner, document the CCR and include the signed IRC 4971(b) Tax Waiver Approval Memo in your exam workpapers.

EP – Closing Agreed Form 5330 and 990-T Exams
  1. Forms 5330 exams are considered agreed when:

    1. Form 5330, or 990-T is filed,

    2. The amount of tax reported is correct (or Taxpayer agrees to your adjustment), and

    3. Correction is made (if the issue is minimum funding or a prohibited transaction).

      Note:

      For purposes of IRC 4971, a case will also be processed as an agreed case for a specific year if the taxpayer files Form 5330 and reports the correct amount of IRC 4971(a) and IRC 4971(b) tax, even if the funding deficiency has not been corrected.

      Note:

      Follow the procedures in IRM 4.70.17, Claims and Abatements, when working a claim.

  2. Prepare Form 5773-A and workpapers to document exam procedures and findings and save them in the RCCMS Office Documents folder.

  3. Prepare a closing letter that covers all Form 5330 years examined.

    1. Use:

      Form Closing Letter
      5330 or 990-T
      • Letter 6049 when the exam results in no change to the tax reported on a filed return.

        Note:

        Letter 6049 is the normal closing letter used to close a delinquent Form 5330 or 990-T picked up in conjunction with a Form 5500 exam and is to be mailed from the group

        .

      • Letter 2086 when the exam results in no change to the tax reported on the filed Form 5330, but additional restorative correction is made.

      • Letter 2087 when a signed Form 870-EP is secured reflecting an agreed upon change to the tax previously reflected on a filed return. The letter can also be used if a delinquent return is secured and you have additional comments that you want to convey to the taxpayer.

    2. All closing letters will be mailed out by the exam group.

    3. Scan and save a copy of the closing letter in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention.

  4. Use the following disposal codes:

    Disposal Codes Conditions
    AIMS 02 (RCCMS = 107), No Change When:
    • A previously filed return is examined and there is no change to the tax liability, or

    • A timely filed return is secured and there is no change to the tax liability reported

    AIMS 03 (RCCMS = 102), Agreed Tax Change The tax has been corrected on a previously filed return and the taxpayer agreed to the changes by signing a Form 870-EP or by amending a return.
    AIMS 06 (RCCMS = 208), Delinquent Return Secured A delinquent return was secured.
  5. Close the agreed Form 5330, or 990-T exam case file(s) and any related Form 5500 series returns to the TE/GE Closing Group in Brooklyn when the RCCMS files are received from Classification and the return has fully posted on AIMS.

    Note:

    The case must be fully established on RCCMS and AIMS before it is closed to the TE/GE Closing Group.

    Note:

    Save an AMDISA print showing full establishment on AIMS in RCCMS

    .

  6. You no longer need to establish delinquent Forms 5330, Forms 5329, or Forms 990-T that you accept as filed on RCCMS and AIMS. You will still need to process the accepted as filed delinquent returns to the service center, but you will not need to establish these returns for examination on RCCMS and AIMS.

  7. In instances where you don’t need to examine a secured return as you can accept it as filed, then after processing it to the Service Center, you only need to save a copy of the accepted return, the acknowledged Form 3210 received from the service center, or comparable record of confirmed receipt document (i.e., EEFax confirmation) in RCCMS.

  8. Record the receipt of the return by completing the electronic RCCMS 3198-A Special Handling checksheet in the RCCMS compliance activity of the primary examination return. Use the RCCMS 3198-A Special Handling checksheet to record the number and types of return secured in RCCMS to let CP&C capture the fact that you secured a return and accepted it without having to establish a related examination or create a Form 5329 discrepancy adjustment.

  9. For cases which are put under exam, prepare the RCCMS tabs in accordance with IRM 4.70.14.2.1.2.4.9, EP - Preparation of RCCMS Tabs for Agreed Form 5330 and 990-T Exams.

  10. As applicable, the following documents must be scanned and saved into the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention:

    • Form 10329

    • Form 872

    • Form 870-EP

    • Copy of the return mailed to the campus

    • A copy of the check for payment of tax, penalties or interest

    • Form 2848 or Form 8821

    • All correspondence received from the taxpayer or POA

    • Any other paper documents necessary to document the examination trail

  11. Save all copies of workpapers, forms and letters that you prepare, in the RCCMS Office Documents folder using the TE/GE RCCMS Naming Convention.

    Note:

    Documents scanned into RCCMS should be the final version of that document that includes the date and signature, if applicable.

    For example, if the examination closing letter is scanned into RCCMS, it must be a copy that includes the date the letter was mailed and the signature of the Director, EP Examinations.

  12. The closing letter will be mailed out by the group manager (or designee).

    Note:

    Make sure the letter is dated and contains the signature of the Director, EP Examinations.

  13. Close the case on RCCMS with the "Update AIMS" box checked. The case will be updated to status 51 by the group manager (or designee) when it is closed from the group.

  14. Close all agreed Forms 5330, or 990-T on RCCMS and AIMS to the TE/GE Closing Group in Brooklyn.

EP – Preparation of RCCMS Tabs for Agreed Form 5330 and 990-T Exams
  1. Validate cases for closure in the RCCMS closing record using the table below.

    Note:

    All items highlighted in red are required to be completed.

    Note:

    Refer to IRM 4.5.2, TE/GE Examined and Non-Examined Closures, and Document 6476 for additional Information.

    RCCMS TAB ITEM EXPLANATION
    General Penalty Reason Code No entry unless penalties previously assessed are being abated. See IRM Exhibit 4.5.2-2, TE/GE Penalty Reason Codes, of IRM 4.5.2, TE/GE Examined and Non-Examined Closures for applicable codes.
    General Disposal Code 102= "Agreed Tax Change" 107= "No Change"
    208= "Delinquent Return Secured"
    General ARDI Code An entry is required if the disposal code is "102" or "208" .
    General Closing With Make the appropriate selection in the drop down menu, but in most cases select "electronic prints"
    Details Examiner’s Time Time must be entered in whole hours and in tenths of hours.
    Details Technique Code 6- Office correspondence exam
    7 – Field exam - limited scope
    Details Examiner’s Name Last Name, First Name
    Details Delinquent Return Code If disposal code is 208 and entry is required.
    Individual/Business (1 of 3) Agreement Date Insert the date the signed Form 870-EP is received (if applicable).
    Individual/Business (1 of 3) Assessment Information Tax Enter transaction code (TC) 300 and $0 if no additional tax is being assessed above the amount reported by the taxpayer on the return secured by the examiner. If additional tax is being assessed on Form 870-EP above what was reported on a previously filed return, enter TC 300 and the additional amount of tax being assessed.

    Note:

    If you previously forwarded an agreed delinquent return that the taxpayer voluntarily filed with you to the campus, the tax assessment would have been made at the Service Campus when the return was processed.

    In order to avoid double assessment, do not reflect an additional tax amount.

    Note:

    With Form 870-EP, assessments are made by the TE/GE Closing Group.

    Individual/Business (1 of 3) Assessment Information Penalties If Form 870-EP is signed by the taxpayer and IRC 6651 penalties are being assessed, enter TC 160 with the corresponding amount for the IRC 6651(a)(1) penalty, and TC 270 with the corresponding amount for the IRC 6651(a)(2) penalty.

    Note:

    If a delinquent return is secured and forwarded, the Service Campus will automatically assess the IRC 6651 penalties unless the examiner provides instructions to the contrary in the "Other Instruction" section of the RCCMS 3198-A Special Handling checksheet accompanying the delinquent return when it is mailed to the Service Campus.

    Note:

    If the Service Campus erroneously assesses IRC 6651 penalties, they can be abated by entering TC 161 (for IRC 6651(a)(1)) and TC 271 (for IRC 6651(a)(2)), as applicable, with the corresponding amounts.

    Individual/Business (1 of 3) Reference Number If additional tax is being assessed on a previously filed return (i.e., you entered TC 300 with an additional tax assessment), then a reference number (manual abstract code) should be listed here with the additional amount of tax being assessed. See the table in paragraph (2) for applicable reference numbers.
    Individual/Business (1 of 3) Interest Leave blank. Interest will be assessed by the Service Campus.
    Individual/Business Delinquent For disposal
    (2 of 3) Return Amount Code 208, enter the amount of tax on Form 5330.
  2. Examples of reference numbers are:

    Reference Number Condition
    159 Prohibited transaction (IRC 4975(a))
    224 Prohibited transaction (IRC 4975(b))
    160 Excess Contributions to Certain Tax-Favored Accounts and Annuities (IRC 4973(a)(1))
    161 Nondeductible employer contributions (IRC 4972)
    162 Excise Tax on Certain Accumulations in Qualified Retirement Plans (IRC 4974)
    163 Minimum funding (IRC 4971(a))
    225 Minimum funding (IRC 4971(b))
    164 Excess contributions (IRC 4973)
    200 Disqualified Benefits (IRC 4976)
    201 Excess Fringe Benefits (IRC 4977)
    202 Certain ESOP Distributions
    203 ESOP prohibited allocations (IRC 4979A)
    204 Reversions (IRC 4980)
    205 Excess Contributions (IRC 4979)
    209 ESOP Dispositions (IRC 4978)
    226 Liquidity Shortfall (IRC 4971(f)(1))
    227 Liquidity Shortfall (IRC 4971(f)(2))
    228 Notice Failure - Benefit Accrual Reduction (IRC 4980(f))
EP – Consideration of Statute of Limitations for Forms 5330, and 900-T
  1. Except for prohibited transactions, the statute of limitations (SOL) for assessment of taxes expires three years from the later of the due date of the return, or the date the return is filed (See IRC 6501(a)).

    1. Generally, for any tax other than IRC 4975 excise tax and UBIT, there will not be a SOL date when a return is not filed.

    2. A return is deemed filed on its due date if filed on or before its due date.

  2. Forms 5330 filed for IRC 4975 excise tax:

    1. The three-year statute of limitations for assessment of taxes begins on the later of:
      a. The date the related Form 5500 series return is filed, or
      b. The date due, if the prohibited transaction is sufficiently disclosed (See IRC 6501(l)(1)).

      Note:

      The statute of limitations for prohibited transactions is extended to six years if the prohibited transaction is not adequately disclosed on the related Form 5500.

      Note:

      See Employee Plans Examination Exhibits for a matrix to help compute the statutes under IRC 4975.

    2. Involving a discrete act (one-time occurrence, such as a sale), even though the taxes are imposed annually, there is only one period of limitations applicable to all the tax attributable to the prohibited transaction. Therefore, the filed or due date to be used in determining the statute of limitations date is limited to that of the initial Form 5500 return filed for the period in which the discrete act occurred.

    3. For a prohibited transaction that is considered a continuing transaction, such as a loan or lease, the situation is different.
      a. In addition to the original transaction, a new transaction is deemed to occur on the first day of each subsequent taxable year of the disqualified person.
      b. The filing of the Form 5500 return for the year in which the prohibited transaction first occurred starts the running of the statute of limitations for purposes of the tax on the actual transaction occurring in that plan year.
      c. The filing of the Form 5500 return for each subsequent plan year starts the running of the statutes for transactions deemed to reoccur in subsequent years.

  3. Forms 990-T reporting UBIT:

    1. The three-year statute of limitations for assessment of taxes begins:
      1. If the trust files a Form 990-T, the statute of limitations begins to run on its filing date.
      2. If the Form 990-T is not filed, the statute of limitations starts to run based upon the Form 5500 return if:
      i. The plan administrator files the Form 5500 series return, and
      ii. The Form 5500 discloses sufficient information to reveal the existence of UBI.

    2. If the trust reported UBI on the Form 5500 series return, and the amount of omitted gross income from unrelated business activity is greater than 25% of the reported gross income from unrelated business activity, the statute of limitations period is six years from the date the Form 5500 series return was filed. See IRC 6501(e).

      Note:

      Before you pursue a six-year statute, secure the approval of your manager and TEGEDC.

    3. If the Form 990-T is not filed, and the criteria in item (a)(2) above are not met, the statute of limitations does not begin running.

    4. If the trust files Form 990-T and the amount of omitted gross income from unrelated business activity is greater than 25% of the reported gross income from unrelated business activity, the statute of limitations period is six years from the date the Form 990-T return was filed.

      Note:

      Before you pursue a six-year statute, secure the approval of your manager and TEGEDC.

    5. See IRM 4.70.12.3.8.9, Securing Consents for Form 990-T, for guidance on completing Form 872-H, Consent to Extend the Time to Assess Tax on a Trust, to extend the statute of limitations for Form 990-T.

      Note:

      Form 872-H can be accepted by fax if taxpayer contact has been made and the case history documents the date of contact and the desire of the taxpayer to submit the consent to extend the time to assess tax.

  4. In cases where the taxpayer omitted more than 25% of the excise tax due (other than prohibited transactions and UBIT), the statutory period to assess tax is six years from the later of:

    1. The date the return is filed, or

    2. Deemed filed.

      Note:

      See IRC 6501(e)(3).

  5. Consult TEGEDC before pursuing a six-year statute of limitations. Document discussions and responses with Counsel in the CCR.

  6. Make sure the statute of limitations reflected in the RCCMS Compliance Activity, General tab (1 of 2), is completed and is correct. BMF and IMF will automatically calculate a statute of limitations date for a Forms established on AIMS. However, the calculated date cannot be relied upon to reflect the normal statute date for prohibited transactions or SFRs established for all other taxes.
    1. Presently, statute of limitation dates for all Forms are calculated on BMF and IMF as three years from the later of: The date the Form is filed, or the date due.
    2. Forms 5330 reporting IRC 4975 excise tax:
    1. BMF incorrectly calculates the statute of limitations date for prohibited transactions since there is no linkage to the Form 5500 series return statute date.

    Note:

    The problem exists because the prohibited transaction statute of limitation date is based on the filing of the Form 5500 in which the prohibited transaction occurred or is deemed to have occurred, and not the filing of the Form 5330.


    2. If a single Form 5330 contains both IRC 4975 excise tax and another type of excise tax (for example, IRC 4971), use the statute of limitations date for IRC 4975 since it will expire sooner.
    3. All SFRs other than Forms 5330 for IRC 4975 excise tax: IMF and BMF incorrectly calculate a 3-year statute date for SFRs. When a return has not been filed by the Taxpayer, the statute of limitations has not begun to run. Update the statute of limitations to alpha code "EE" per IRM 4.70.12.3.7.7, Use of Alpha Codes, when no return has been filed and the statute of limitations has not begun to run.

    Note:

    The year reflected should be six years from the date the SFR posted. For example, if the SFR posted on 10/21/2020, the statute date should be 10/EE/2026.

  7. If AIMS and/or RCCMS reflects an incorrect statute date, notify your manager and update the statute of limitations through RCCMS with the "Update AIMS" box checked.

    Note:

    If statute date reflected in RCCMS but different than the statute date reflected on AIMS, update of the statute date on AIMS must be done manually so that it agrees with RCCMS.

  8. When the statute date is less than or equal to 270 days, complete the RCCMS Statute Validation Process:

    1. Check the "Statute Valid" check box in the RCCMS Compliance Activity, General tab (1 of 2).

    2. Select "Actions" , "Request Statute Validation" , complete the "Comment" box and submit the request for your manager’s approval.

  9. Follow the statute control procedures discussed in IRM 4.70.12.3.8, EP Statute Control Procedures.

EP – Forms 5330, or 990-T Established on AIMS and RCCMS in Error
  1. Sometimes Forms 5330, or 990-T are established on AIMS and RCCMS in error (for example, the taxpayer provides additional information which shows that tax is not due.)

  2. If a Form 5330, or 990-T is established in error on AIMS:

    1. To delete the incorrect AIMS account, prepare Form 10904, Request for Record Deletion from AIMS, as follows:

      Field: Entry:
      Name of Taxpayer: Input the plan name.
      Name Control: Input the four-digit name control.
      Taxpayer Identification Number: Input the EIN for the record being deleted.
      Plan Num.: Input the plan number for the record being deleted.
      Tax Period: Input the plan year for the record being deleted.
      Disposal Code: Select disposal code "33" .

      Note:

      If the return has not posted (there is no TC 150 posting), make sure the box next to AM424D is checked.

      Other: Select "Error Account" ; Select "AIMS" .
      Reason for Request: Input a brief explanation of the requested correction.

      Note:

      See Employee Plans Examination Exhibits for an example of a completed Form 10904.

    2. Secure group manager and Area Manager approval on an electronic Form 10904.

    3. Post the approved Form 10904 in the RCCMS Office Documents folder.

    4. Secure AMDISA, INOLES and BMFOLT/IMFOLT prints for the account being deleted and save them in the RCCMS Office Documents folder.

    5. The group manager (or designee) will update the case to status 51 on AIMS and RCCMS when it is closed.

    6. Close the examination on RCCMS (disposal code 901) and AIMS (disposal code 33) to the TE/GE Closing Group, requesting status "56" (Form 10904).

    7. The EP AIMS Coordinator will delete the account when the RCCMS record is received.

EP – Referrals to the Department of Labor
  1. For cases involving uncorrected minimum funding deficiencies or uncorrected prohibited transactions, the examiner will prepare a DOL referral package and forward it at the earliest possible time in the audit cycle.

  2. The examiner will provide the group manager with the following items:

    1. Completed Form 6212-B.

      Note:

      Include a concise summary of the issue(s) referred on Line 12 "Remarks" of Form 6212-B.

    2. Any relevant information pertaining to the issue referred, including a copy of the RAR if there is an unagreed IRC 4971, IRC 4975 issue or a proposed revocation.

      Note:

      None of the Form 6212-B attachments are sent to DOL-EBSA, unless Classification receives a written request from DOL-EBSA for the information.

      Classification will release relevant information as required by IRC 6103(l)(2).

  3. The group manager or designee will send approved referrals to the FAC/EP DOL Coordinator. See Employe Plans Examination Exhibits, for addresses.

  4. See IRM 4.70.11.15.6, Referrals to Other Agencies.

EP – Obtaining a Trust EIN
  1. Solicit the trust EIN from the plan sponsor.

    Note:

    If the trust does not have an EIN, the plan sponsor must complete Form SS-4 and file or fax it to the appropriate the IRS office listed on the instructions.

    Alternatively, the taxpayer can apply for an EIN for the trust online at irs.gov.

  2. If the plan sponsor provides a trust EIN, secure a BMFOLI print to make sure the EIN is not being utilized to file returns other than trust returns (e.g., Form 990-T or Form 1041).

    Note:

    A Form 990-T sent to Ogden with an EIN that is used for any other purpose than for the filing of Form 990-T for the trust will not process at the Service Campus. The return will reject and a new trust EIN will have to be assigned causing a delay in the processing of the Form 990-T.

  3. If the trust does not have an EIN and the plan sponsor will not obtain one, obtain one by faxing Form 4442 to the EO Entity Unit at Ogden Campus. The e-fax number is 855-306-0953. See Employe Plans Examination Exhibits for an example of a completed Form 4442.

  4. Obtaining a new EIN for the trust in a manner described in item (3) above will automatically establish an entity module.

EP – Requests for Waivers or Exemption from IRC 4971/4975 Excise Taxes
  1. During the exam of a Form 5330 or Form 5500 series return involving an accumulated funding deficiency or prohibited transaction, the employer or disqualified person may request or currently have pending:

    1. A waiver of the funding deficiency before the IRS.

    2. An administrative exemption from the prohibited transaction requirements before DOL.

  2. These types of cases may be subject to mandatory technical advice procedures and require coordination with the Employee Benefits, Exempt Organizations, and Employment Taxes Office of Associate Chief Counsel (EEE Counsel) in Washington, D.C.

    Note:

    See IRM 4.70.13.6.7.2, Technical Advice Memorandum (TAM) Procedures.

  3. Waiver of the liquidity shortfall (as defined in IRC 430(j)(4)) excise tax under IRC 4971(f)(4) may need to be coordinated with EP Rulings and Agreements in Washington, DC.

  4. EEE Counsel considers requests for waivers of the minimum funding standards under the following circumstances:

    1. For a defined contribution plan accompanied by a request for a determination letter on the effect of an amendment necessary to satisfy section 3 of Rev. Rul. 78–223, IRB 1978–1 C.B. 125 (the case is subject to mandatory technical advice).

    2. For a defined benefit plan, or a request for a waiver ruling for a defined contribution plan which is not accompanied by a request for a determination letter on the effect of an amendment necessary to satisfy section 3 of Rev. Rul. 78–223. Forward the waiver request to EP Technical in Washington, D.C. for consideration by an actuary.

  5. As described in IRM 4.70.14.2.1.2.4.7, EP – Waiver of the 100% 4971(b) Excise Tax, the IRS may waive part or all of the tax under IRC 4971(b).

  6. Under ERISA section 3003, the IRS may grant waivers of taxes under IRC 4975.

    Example:

    A taxpayer may request such a waiver if DOL has negotiated a settlement of a prohibited transaction but the settlement does not constitute correction within the meaning of IRC 4975(i) and the regulations under that section.

  7. All cases involving a taxpayer’s request for the abatement or waiver of taxes under IRC 4975 are subject to mandatory technical advice. See IRM 4.70.13.6.7.2, Technical Advice Memorandum (TAM) Procedures, for instructions on processing Technical Advice cases.

  8. Cases involving prohibited transaction exemption requests with DOL are coordinated with DOL by the FAC/EP DOL Coordinator. This includes, for example, cases in which either the conditions of the exemption were not met or the facts were materially misrepresented in obtaining the exemption.

    Note:

    See Employe Plans Examination Exhibits, for addresses.

  9. If DOL grants an exemption on a prohibited transaction, the IRS may not impose taxes under IRC 4975 on that transaction. If the IRS assessed tax before DOL granted the exemption, the tax must be abated.

  10. Complete the exam to the extent possible and place the case in informal suspense in the group until such waiver or exemption request is approved or denied. See IRM 4.70.11.3, Case Suspense, regarding suspense cases.

  11. See the following revenue procedures for additional guidance: Rev. Proc. 2023-1, Rev. Proc. 2023-2, Rev. Proc. 2023-3, Rev. Proc. 2023-4, Rev. Proc. 2000-17, Rev. Proc. 2004-15, and Rev. Proc. 81-44. The first four listed are revised annually, usually in January.

EO – Agreed Exempt Organization Examination Procedures
  1. An agreed Exempt Organization examination is one for which:

    1. The examiner does not propose any adverse status change (revocation, disqualification of a status 36 organization, or reclassification form public charity to a private foundation) or tax adjustment.

    2. The examiner proposes and the Taxpayer agrees to an adverse status change and/or tax adjustment.

    3. The Taxpayer makes correction under a closing agreement program, fast track settlement or classification settlement program.

EO – Examination Results and Reports
  1. This IRM section focuses on issuing examination reports and the proper use of examination related letters for examiners. It also provides a comprehensive list of examination results for which reports and letters are issued.

EO - Types of Examination Results
  1. Close each examined return under EO jurisdiction using one of the examination results listed below:

    • No change.

    • Change due to correction of operations.

    • Revocation of tax-exempt status (IRC 501(c) or (d) organizations only) (IRC 7428 case.)

    • Reclassification of foundation status (IRC 501(c)(3) and IRC 4947(a)(1) organizations only) (IRC 7428 case).

    • Disqualification of tax-exempt status - Status 40 organizations (IRC 7428 case).

    • Disqualification of tax-exempt status - Status 36 organizations (IRC 7428 case).

    • Disqualification of tax-exempt status - IRC 501(c)(12) or IRC 501(c)(15) (IRC 7428 case).

    • Closing agreement.

    • Termination of tax-exempt status.

    • Change in tax.

    • Allowance of a claim in full.

    • Allowance of a claim in full (surveyed claim).

    • Disallowance of a claim in full or in part.

    • Disallowance of a claim in full or in part, plus additional tax or penalty.

    • Withdrawal of claim

    • Allowance of an abatement request in full

    • Disallowance of an abatement request in full or in part • Disallowance of an abatement request in full or in part, plus additional tax or penalty

    • Withdrawal of abatement request

      Note:

      Each change in tax or status must be either agreed or unagreed (except auto-revocations and terminations).

      Unagreed changes are further classified as either "with" or "without" the taxpayer's protest for appeal.

  2. No Change – An examination resulting in no change to exempt status, foundation status, or tax liability.

  3. Change due to Correction of Operations – Examinations of primary returns, where the taxpayer took corrective actions during the examination to correct operational or other compliance issues that did not result in a change to exempt status.

  4. Change Cases – Cases in which the examination results in a change (or adjustment) in the organization's status or tax liability. Change cases are agreed, excepted agreed, unagreed with protest, or unagreed without protest. Tax changes can be partially agreed.

  5. Agreed Change or Agreed Disallowance – The taxpayer signs a waiver and acceptance form agreeing to the changes in tax or status (or to any disallowance of a claim or abatement). An allowance of a claim or abatement in full as requested by the taxpayer without additional adjustments and without a signed waiver form is deemed to be an agreed change. In the case of two-tier Chapter 42 excise taxes (IRC 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, or 4958), a case remains unagreed until the act, or failure to act, giving rise to the tax is fully corrected.

  6. Excepted Agreed Change – The taxpayer agrees to proposed changes in tax or status by signing a waiver, but the examination results are subject to review, such as changes to exempt status and foundation status. A signed waiver:

    • Waives the statutory restriction upon assessment and collection of the deficiency of tax.

    • Waives the ability to contest the assessment in the United States Tax Court (unless an additional deficiency is proposed).

    • Stops the running of interest 30 days from the date of receipt if the tax isn't assessed within the 30-day period.

    • Doesn’t preclude assertion of a further deficiency.

    • Doesn’t preclude a request for further consideration of the issues by the taxpayer.

      Note:

      The return is "excepted" from application of the case reopening criteria.

      See IRM 4.10.8.5, Excepted Agreed Cases.

      Example:

      You propose a revocation on a Form 990 examination of an IRC 501(c)(7) organization, and the revocation is agreed. All revocations are subject to Mandatory Review because Mandatory Review must concur with the revocation before finalizing it. The Form 990 examination is excepted-agreed.

      Example:

      You propose a revocation on a Form 990 examination that is unagreed, but the organization agreed to additional UBIT by signing Form 4549 in the event Mandatory Review or Appeals sustains the exemption. Because you cannot finalize the agreed UBIT issue due to a pending revocation issue, treat the Form 990-T examination as excepted-agreed. Therefore, the Form 990-T case file will ride with the Form 990 file to Mandatory Review.

      You must address an open Form 990-T examination as an alternative issue in a revocation RAR, whether the alternative Form 990-T issue was agreed or unagreed. See also IRM 4.70.14.2.1.3.3.22, EO - Revocations and Disqualifications - Alternative Positions.

  7. Partially Agreed Change – At least one change issue is agreed and at least one change issue is unagreed, with respect to a specific type of tax (income, employment, or excise). Secure a signed waiver for the agreed issue for immediate processing by Mandatory Review, while the organization possibly contests the remaining issues in Appeals or in court. Partially agreed cases also include agreed changes in exempt status or foundation status, but the resulting tax isn't agreed. In the case of two-tier Chapter 42 excise taxes (IRC 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, or 4958), a case remains unagreed until the act or failure to act giving rise to the tax is fully corrected.

    Example:

    You propose changes to the UBIT for operation of a concession stand in a bingo hall, sales of pull-tabs, and you propose a change to the gaming excise tax on the sale of the pull-tabs. The organization agrees to the concession stand and gaming excise tax issues but files a protest to Appeals over the sale of pull-tabs.

    Example:

    An organization agrees to the revocation of its exempt status but doesn't agree to your conclusion that the contributions received were program service revenue.

    1. Partially agreed cases are considered excepted agreed cases. You must first process the agreed issue in an agreed report. Upon confirmation from the EO closing unit that the agreed issue is posted, proceed with the unagreed portion of the report using normal unagreed closing procedures.

    2. The Agreed Report: An agreed report will be processed as a partial closure of AIMS. A partial closure will allow an adjustment to be made to the tax module without closing the AIMS database. In the case of an income tax, prepare the agreed report as follows:
      i. Prepare Form 4549-A using only the agreed adjustments.
      ii. The additional tax computed will be reflected on Form 870.
      iii. Indicate "Agreed Issues" on the top of the Form 4549-A.
      iv. Make a copy of the Form 4549-A and the signed Form 870 for the case file as a workpaper documenting the calculation of the tax.

    3. Prepare and Process the Agreed Report:
      i. On the 3198-A Checksheet in RCCMS, note "Partial Assessment Requested" and in the Other Instructions section, "Return via fax when completed."
      ii. On the closing record in RCCMS, check partial assessment.
      iii. The report created in the previous paragraph.
      iv. Copy of the front page of the tax return with a BMFOLT transcript.

    4. Upon receiving proof of processing by fax from the EO closing unit, prepare the unagreed report.

    5. The Unagreed Report: The unagreed report will process toward a full closure of AIMS. In the case of an income tax, prepare the unagreed report and closing documents as follows:
      i. Prepare a second Form 4549-A showing both agreed and unagreed adjustments.
      ii. However, show the agreed adjustments by placing an asterisk (*) in front of the letter in Line 1 of Form 4549-A for each agreed adjustment.
      iii. The "Total Tax Per Return or as Previously Adjusted" on Line 3 of Form 4549-A will include the tax on the agreed adjustments.
      iv. The "Total Adjustments" , Line 2 of Form 4549-A, will not include the agreed adjustment amounts.
      v. The "Other Information" section of Form 4549-A will contain the following statement, "The adjustments with an asterisk have been agreed. The taxpayer is in agreement with the adjustment(s) indicated as agreed, and the applicable agreed deficiency is being assessed and is included in Total Tax as Previously Adjusted" .
      vi. Issue the second report to the taxpayer with the appropriate 30-day letter (Letter 3614 for UBIT and other EO income taxes).

    6. In the case of excise and ETs, use the appropriate report forms corresponding to Form 4549-A and 870 used for income taxes. See report forms in Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases.

    7. Final disposition of the case will require:
      i. A second RCCMS closing record will follow normal closing procedures.
      ii. A second 3198-A Special Handling checksheet in RCCMS for the case file indicating "Partial Agreement Case - Agreed Tax Previously Assessed" .

  8. Unagreed Change or Unagreed Disallowance – A change in tax or status (or a disallowance of a claim or abatement request) without a taxpayer’s signed waiver and acceptance form. In the case of two-tier Chapter 42 excise taxes (IRC 4941, 4942, 4943, 4944, 4945, 4951, 4952, 4955, or 4958), a case remains unagreed until the act, or failure to act, giving rise to the tax is fully corrected. Unagreed cases are either with or without protest. A taxpayer’s failure to respond to a 30-day letter defaults to unagreed without protest treatment. Unagreed without protest cases are subject to Mandatory Review, except:

    • Non-worker classification ET adjustments.

    • Gaming excise tax adjustments.

    • Disallowance of abatement requests.

EO - No Change
  1. Follow the instruction in IRM 4.70.14.4, Closing a Case, to close a no change case.

EO - Change Cases - Proposing Adjustments
  1. Proposed adjustments apply to adjustments to status or tax. For purposes of this manual, proposed adjustments include disallowance of claims and abatements.

  2. You’re required to prepare a RAR for proposed adjustments. You can prepare an initial examination report, see IRM 4.70.14.2.1.3.1.32, EO – Initial Examination Reports, or a formal examination report. Initial examination reports don’t apply to declaratory judgment cases.

  3. The transmittal letter for the RAR solicits agreement to the proposal. For formal examination reports, this letter is a 30-day letter, which also informs an organization of their right to appeal.

  4. There are many variations of reports depending on the type of tax or status change. See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements and Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for the many variations.

  5. You must distinguish an examination report from a final closing letter that officially closes the examination. Final closing letters are issued by GMs.

    1. A final closing letter will follow after the taxpayer replies or fails to reply to the 30-day letter.

    2. In some cases the 30-day letter becomes a final closing letter if the organization fails to reply to the 30-day letter. This is the case for miscellaneous excise taxes, and non-worker classification ETs.

    3. You will generally issue a final closing letter if the organization agrees with your adjustment (not applicable for declaratory judgment cases).

    4. Mandatory Review or Appeals will issue a final closing letter for unagreed adjustment and declaratory judgment cases. These final closing letters generally take the form of a 90-day letter or statutory notice of claim disallowance if they agree with your position.

  6. Fully develop the issues of your examination prior to preparing any RAR. Address your issues in the RAR in the order of significance.

    Example:

    Examiner C has one report proposing revocation that addresses a political activity issue and the issue of not operating in furtherance of an exempt purpose. Examiner C spent most of her time addressing the political activity issue. The exempt purpose issue was incidental to the political activity issue. Examiner C must first present and address the political activity issue in the report.

  7. The RAR should contain all the information necessary to ensure a clear understanding of the issues, the applicable law, and conclusions. The RAR, unlike workpapers, is a legally binding document and when executed, serves as the basis for tax law enforcement action. Prepare the RAR accurately and completely.

  8. Reports are accompanied with a waiver and acceptance form, also known as agreement forms. These forms require a taxpayer's signature if they agree with the proposed adjustment:

    Form Number/Purpose Title
    Form 870 use:
    • To secure agreement to a deficiency or overassessment.

    • With formal reports presented with Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed).

    Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment
    Form 870-E use to secure agreement for IRC Chapter 42 excise taxes Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment
    Form 2297 use for every claim disallowance. Waiver of Statutory Notification of Claim Disallowance. See IRM 4.10.8.11.2.2.1, Claims for Refund - Forms.
    Form 2504 use to secure agreement on ET adjustments, involving non IRC 7436 issues. Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment Tax Adjustments Not Subject to IRC 7436). See IRM Exhibit 4.23.10-6.
    Form 2504-E use to secure agreement on gaming excise taxes. Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment. See IRM 4.24.20.
    Form 2504-S use to secure agreement on ET adjustments not subject to IRC 7436 where no worker classification issues were addressed during the examination. Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment Tax Adjustments Not Subject to IRC 7436; Worker Classification or Section 530 Issues Not Addressed in this Exam). See IRM Exhibit 4.23.10-7.
    Form 2504-T use to secure agreement on ET adjustments for adjustments subject to IRC 7436. Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment Tax Adjustments Subject to IRC 7436). See IRM Exhibit 4.23.10-8.
    Form 3363 use for every claim disallowance. Acceptance of Proposed Disallowance of Claim for Refund or Credit. See IRM 4.10.8.11.2.2.1, Claims for Refund - Forms.
    Form 4549 use with initial report for agreed income tax cases. Income Tax Examination Changes.
    Form 4549-E use to secure agreement in discrepancy adjustment cases. Income Tax Discrepancy Adjustments.
    Form 5384 use:
    • To secure agreement on excise tax cases.

    • When examining Form 720, 720-X, 2290, 730, 11-C, 8849 and any other miscellaneous excise tax form.

    Excise Tax Examination Changes and Consent to Assessment & Collection. See IRM Exhibit 4.24.20-1.
    Form 6018 use for IRC 7428 declaratory judgment cases. Consent to Proposed Action.
    Form 886-A use for:
    • Unagreed cases.

    • Revocation cases.

    • Reclassification of foundation status cases.

    • Reclassification of operating foundation status cases.

    Explanation of Items.
    Form 4549-A use to explain unagreed income tax change cases. Income Tax Examination Changes (Unagreed and Excepted Agreed).
    Form 4549-B use as a continuation sheet for Form 4549 or Form 4549-A. Income Tax Examination Changes.
    Form 4621 use to summarize excise tax adjustments under IRC:
    • Chapter 41 and 42.

    • IRC 507(c), IRC 170(f)(10)(F) and IRC 664(c)(2).

    Exempt Organizations - Report of Examination (Proposed Tax Changes. See IRM 4.70.14.2.1.3.1.7, EO - Form 4621 and Form 4621-A.
    Form 4621-A use for:
    • Revocations.

    • Reclassifications of foundation status.

    • Reclassification of operating foundation status.

    • Disqualification of IRC 501(c)(12) or 501(c)(15) organizations.

    Exempt Organizations - Report of Examination (Proposed Status Change)
    See IRM 4.70.14.2.1.3.1.7, EO - Form 4621 and Form 4621-A.
    Form 4666 use as:
    • A cover and reference sheet.

    • Summarizes Federal Insurance Contributions Act (FICA), Railroad Retirement Tax Act (RRTA), income tax withholding and Federal Unemployment Tax Act (FUTA) adjustments.

    Summary of ET Examination. See IRM Exhibit 4.23.10-1.
    Form 4667 use to summarize the FUTA adjustments. Examination Changes - FUTA. See IRM Exhibit 4.23.10-2.
    Form 4668 use to reflect the additional tax or overassessments for FICA, RRTA, and income tax withholding. ET Examination Changes Report. See IRM Exhibit 4.23.10-3.
    Form 4668-B use to reflect adjustments of back-up withholding and income tax withholding reported on Form 945. Report of Examination of Withheld Federal Income Tax for Withholding Reported on Form 1099 and Form W2-G. See IRM Exhibit 4.23.10-4.
    Form 4883 use for:
    • Excise tax adjustments under IRC 41 and 42.

    • IRC 170(f)(10)(F).

    Exempt Organizations Excise Tax Audit Changes.
    Form 5385 use:
    • As an excise tax report for unagreed cases.

    • With Form 2504 when submitting the 30-day package to the taxpayer and use with examining Form 720, 720-X, 2290, 730, 11-C and 8849 and any other excise tax form.

    Excise Tax Examination Changes. See IRM Exhibit 4.24.20-1.

EO - Form 870 and Form 870-E
  1. Issue Form 870 Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, in a formal examination report to secure agreement on income taxes. Use Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed) with it.

  2. Use Form 870-E, Waiver of Restriction on Assessment and Collection of Deficiency and Acceptance of Overassessment, to secure agreement for excise taxes under IRC Chapter 42.

  3. When needing more than one line to reflect proposed recommendations for a year (such as multiple penalties) or the examination covers more than four years, you may have more than one Form 870 or 870-E in the case file.

EO - Form 6018
  1. Issue Form 6018, Consent to Proposed Action, for any change in the exemption or other status of the organization. See Exhibit 4.70.14-6, EO Status 36 Case: Form 6018 Instructions.

    1. Status changes include those subject to declaratory judgment (Lines 1 - 9), and those not subject to declaratory judgment on Line 10 of the form.

    2. For declaratory judgment cases, execution of the form serves only to memorialize the intent of the taxpayer at the time of signing the form.

    3. Memorialization of the intent to agree isn't legally binding and doesn't waive the organization’s declaratory judgment rights.

  2. Write up all proposed status changes on cases subject to declaratory judgment similar to an unagreed case, even if the organization executed a Form 6018.

  3. Declaratory judgment cases include:

    • Revocation of IRC 501(c) organizations that received a ruling or determination letter granting tax-exempt status.

    • Disqualification of a Status 36 organization for specified tax years.

    • Disqualification of an IRC 501(c)(12) organization that failed its 85 percent member income test for specified tax years.

    • Disqualification of an IRC 501(c)(15) organization that failed its gross receipts test for specified tax years.

    • Reclassification of PF status under IRC 509(a).

    • Modification of operating foundation status.

    • Reclassification as a non-operating foundation under IRC 4942(j)(3).

    • Reclassification of public charity status.

    • Reclassification as a type of IRC 509(a)(3) status.

      Reminder:

      You can’t reclassify a PF to public charity status. See IRC 507.

  4. In cases where there are two or more declaratory judgment issues, such as revocation of IRC 501(c)(3) status and reclassification to a PF, use one Form 6018.

  5. Under no circumstances will the IRS personnel alter a waiver after securing a signature from the organization, nor will the IRS request the organization to execute a blank waiver.

  6. Don’t solicit Form 6018 unless fully advising an organization of its appeal rights. You must include a positive statement to this effect in the workpapers.

EO - Form 4549, Form 4549-A, Form 4549-B, Form 4549-E
  1. Form 4549, Income Tax Examination Changes, is used for cases that result in:

    1. Agreed income tax changes. Use the form for initial examination reports only, when you reasonably expect agreement.

    2. Adjustments to income or deduction items don't affect or warrant a change in tax liability or refundable credits on the return examined. In such cases, notify the taxpayer of, or secure his agreement to any adjustments, which affect subsequent year returns of the taxpayer.

      Example:

      An examination results in an adjustment to a net operating loss (NOL) that doesn't cause an additional tax liability, but may affect subsequent year returns. The disposal code for closing the examination would be 01 (RCCMS - 210).

  2. If there are multiple issues or multiple years and some of them are agreed, encourage the taxpayer to enter into an agreement for the agreed issues or years by signing Form 4549.

  3. Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed), is used:

    1. To explain unagreed and excepted agreed income tax change cases.

    2. In a formal report and when unsure of the taxpayer's agreement.

    3. With Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment.

  4. Form 4549 and 4549-A are designed to cover three years. Regardless of the number of years examined, prepare one set of explanations. When reasons for an adjustment vary from year to year, detail them in one explanation. If examining more than three years, show additional years on Form 4549-B, Income Tax Examination Changes.

  5. When multiple year examinations result in tax changes for some years and no tax change for other years, use Form 4549 or 4549-A (as applicable) for all years examined. Use a separate column for each no-change year and enter "None" on lines 2, 14, and 16.

EO - Form 4621 and Form 4621-A
  1. Use Form 4621, Exempt Organizations - Report of Examination (Proposed Tax Changes), as a summary report for these cases:

    1. Excise tax changes under IRC Chapter 41 and 42.

    2. IRC 507(c) termination tax.

    3. IRC 170(f)(10)(F).

    4. IRC 664(c)(2).

  2. Prepare this summary report in agreed and unagreed cases.

  3. Use Form 4621-A, Exempt Organizations - Report of Examination (Proposed Status Changes), as the summary report for:

    • Revocations.

    • Reclassification of foundation status.

    • Reclassification of operating foundation status.

    • Disqualifications of Status 36 organizations for specified tax years.

    • Disqualifications of IRC 501(c)(12) or IRC 501(c)(15) organizations for specified tax years.

      Caution:

      Modifications are unavailable for PFs seeking to convert to publicly supported organizations. PFs must terminate their status under IRC 507.

      Note:

      In cases where there are two or more status issues, such as revocation of a IRC 501(c)(3) and reclassification to a PF, use one Form 4621-A. The RAR can address both issues.

  4. Prepare this summary report in agreed and unagreed cases.

EO - Form 4883
  1. Use Form 4883, Exempt Organizations Excise Tax Audit Changes (Chapter 41, Chapter 42 and Section IRC 170(f)(10)(F) Excise Taxes), to set forth adjustments and calculate the tax for EO excise tax changes:

    Internal Revenue Code section: Reported on:
    Chapter 41 taxes under IRC 4911 and IRC 4912 Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC
    IRC 4940 and IRC 4948 taxes Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation
    IRC 4941 to IRC 4945 private foundation excise taxes Form 4720
    IRC 4951 and IRC 4952 taxes related to black lung trusts Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Person
    IRC 4952 tax on political expenditures of IRC 501(c)(3) organizations Form 4720
    IRC 4958 tax on excess benefit transactions Form 4720
    IRC 501(c) termination tax for private foundations A letter to the Manager, EO Determinations
    IRC 170(f)(10)(F) tax on premiums paid for personal benefit contracts Form 4720

  2. Use Form 4883 for excise taxes imposed on:

    • PF or other exempt organization.

    • Disqualified persons.

    • Self-dealers.

    • Organization managers.

    • Foundation managers.

  3. Don’t use Form 4883 for gaming excise taxes. See IRM 4.24.6.2.3, Excise Examinations with Wagering Issues, for report writing procedures in gaming excise tax cases.

EO - Installment Agreements
  1. You may offer an installment agreement to a taxpayer who is unable to pay the full amount owed if he/she is eligible. See eligibility criteria at IRM 4.20.4.2(6).

  2. Send Form 9465, Installment Agreement Request, to the taxpayer with the 30-day letter package or after you have received the taxpayer's reply to the 30-day letter.

  3. If the statute is imminent, secure Form 872 to ensure sufficient time to process the case.

  4. If a taxpayer submits a request for an installment agreement:

    1. Stamp the receipt date on the request.

    2. Complete Form 3177, Notice of Action for Entry on Master File, with TC 971 AC 043, Pending Installment Agreements.

    3. Fax or secure email Form 3177 to the FAST within 24 hours of the taxpayer's request.

    4. Forward the request to the appropriate Campus Center address identified in the Form 9465 instructions.

  5. Keep a copy of all forms in the work papers for information purposes.

  6. Close the discrepancy adjustment case. The Campus collection function will contact the taxpayer about "setting up" an installment agreement.

  7. Input the appropriate ARDI code for the installment agreement on the RCCMS closing record. Check the installment agreement box on the 3198-A Checksheet in RCCMS in the Mandatory Review section.

  8. See IRM 4.20.4, Examination Collectibility, Installment Agreements, for more information on installment agreements.

  9. If the taxpayer has filed bankruptcy, take the appropriate steps to protect the government’s interest. See IRM 4.27, Bankruptcy, for further guidance.

EO - Partially Agreed Cases
  1. A partially agreed case contains more than one issue of which at least one issue is agreed and at least one issue is unagreed. Partially agreed cases are considered excepted agreed cases.

    1. You must first process the agreed issue in an agreed report.

    2. Upon confirmation from the EO closing unit that the agreed issue is posted, proceed with the unagreed portion of the report using normal unagreed closing procedures.

  2. The Agreed Report: An agreed report will be processed as a partial closure of AIMS. A partial closure will allow an adjustment to be made to the tax module without closing the AIMS database. In the case of an income tax, prepare the agreed report as follows:

    1. Prepare Form 4549-A using only the agreed adjustments.

    2. The additional tax computed will be reflected on Form 870.

    3. Indicate "Agreed Issues" on the top of the Form 4549-A.

    4. Make a copy of the Form 4549-A and the signed Form 870 for the case file as a workpaper documenting the calculation of the tax.

  3. Prepare and Process the Agreed Report Package: Send the agreed report to the EO closing unit as a package that consists of the following:

    • On the 3198-A Speical Handling checksheet in RCCMS, annotated "Partial Assessment Requested" and in the Other Instructions section, "Return via fax when completed."

    • RCCMS, create a closing record for the partial agreed assessment. On the General Tab, ensure to check the box indicating this is a “Partial” agreement closing record.

    • The report created in the previous paragraph.

    • Copy of the front page of the tax return with a BMFOLT transcript.

  4. Upon receiving proof of processing by fax from the EO closing unit, prepare the unagreed report.

  5. The Unagreed Report: The unagreed report will process toward a full closure of AIMS. In the case of an income tax, prepare the unagreed report and closing documents as follows:

    1. Prepare a second Form 4549-A showing both agreed and unagreed adjustments.

    2. However, show the agreed adjustments by placing an asterisk (*) in front of the letter in Line 1 of Form 4549-A for each agreed adjustment.

    3. The "Total Tax Per Return or as Previously Adjusted" on Line 3 of Form 4549-A will include the tax on the agreed adjustments.

    4. The "Total Adjustments," Line 2 of Form 4549-A, will not include the agreed adjustment amounts.

    5. The "Other Information" section of Form 4549-A will contain the following statement, "The adjustments with an asterisk have been agreed. The taxpayer is in agreement with the adjustment(s) indicated as agreed, and the applicable agreed deficiency is being assessed and is included in Total Tax as Previously Adjusted."

    6. Issue the second report to the taxpayer with the appropriate 30-day letter (Letter 3614 for UBIT and other EO income taxes).

  6. In the case of excise and ETs, use the appropriate report forms corresponding to Form 4549-A and 870 used for income taxes. See report forms in Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases.

EO - Types of Status and Tax Changes
  1. Examinations can result in several types of adjustments, including but not limited to:

    • Revocations (declaratory judgment case).

    • Disqualifications (declaratory judgment case)

    • Reclassifications of Foundation Status (declaratory judgment case).

    • Modifications of operating foundation status (declaratory judgment case).

    • Terminations.

    • Change in income taxes - UBIT or political organization income tax under IRC 527(b).

    • Change in income taxes - discrepancy adjustments.

    • Change in income taxes - converted returns.

    • Change in proxy taxes.

    • Change in Chapter 41 or 42 excise taxes.

    • Change in gaming taxes.

    • Change in ETs.

  2. See IRM 4.70.14.2.4.1, EP & EO Declaratory Judgment Cases and the Administrative Record.

  3. See IRM 4.70.15, Discrepancy Adjustments, for discrepancy adjustments.

  4. See IRM 4.70.14.2.1.3.3, EO - Conversion of Returns.

EO – Revocations
  1. Proposed revocations are a change in status. Propose a revocation when the organization doesn't meet the requirements for the tax-exempt status granted to it by ruling or determination letter.

    Note:

    A revocation for purposes of these procedures doesn’t include an automatic revocation under IRC 6033(j), which requires a survey after assignment closing.

    See IRM 4.70.14.4.11.2, EO Automatically Revoked Organizations.

  2. Use the following letters and forms for proposed revocations:

    Examination Result Type of Report Report Forms and Letters
    Revocations -
    • IRC 501(c)(3)

    • IRC 501(c)(9)

    • IRC 501(c)(17)

    with an effective date
    Formal examination reports only, issued by group
    • Letter 3618, 30-day letter Pub. 1

    • Form 6018, at Line 1

    • Form 4621-A

    • Form 886-A, Pub. 1

    • Pub 892

    • Pub 3498

    Final closing letter issued by Mandatory Review or Appeals
    • 90-day FADL

    Revocations - All other IRC 501(c) or (d) for specified tax years Formal examination reports only, issued by group
    • Letter 3618, 30-day letter

    • Form 6018, at Line 2

    • Form 4621-A

    • Form 886-A

    • Pub 892

    • Pub 3498

    Final closing letter issued by Mandatory Review or Appeals
    • 90-day FADL

  3. If an organization fails to qualify for tax-exempt status, send the 30-day proposed revocation letter and RAR to the organization. Hold the case for up to 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply or If the taxpayer fails to reply to a formal examination report and:

    You sent the report... You may...
    More than 30 days ago In some tax cases issue Letter 923, Letter Extending Time to File Protest, or Letter 923-E, Letter Extending Time to File Protest Excise See Notes 1, 2, and 3.
    37 days ago (45 days if you issued Letter 923 or a comparable letter) Close the case to Mandatory Review as unagreed without protest with DC 10 (RCCMS - 604) or DC 55 (RCCMS - 605). See Exception.

    Note:

    1. Letter 923 and Letter 923-E apply to Form 990-T income taxes and gaming excise taxes respectively.

    Note:

    2. For both Letters 923 and Letter 923-E, you must insert the GM's information in the contact section. The GM must approve the issuance of Letter 923 or Letter 923-E.

    Note:

    3. You may prepare a comparable letter to Letter 923 and Letter 923-E for other tax cases. The GM has discretion over issuance of the letter.

    Exception:

    Close ET cases (other than worker classification issues) and gaming excise tax cases to the EO closing unit, unless otherwise subject to Mandatory Review.

  4. For IRC 501(c)(3) revocations only, follow the instructions for IRC 6104(c) notification of certain states in IRM 4.70.14.4.11.8.2, IRC 6104(c) Disclosures: Proposed and Final Revocations.

  5. A revocation is agreed only if the organization signs Form 6018. A signed Form 6018 for a revocation isn’t legally binding and only serves to memorialize the agreement.

    • A signed Form 6018 doesn’t waive the organization’s right to seek declaratory judgment.

    • You’re still required to close the case to Mandatory Review even if Form 6018 is signed.

    • Mandatory Review is still required to issue a 90-day FADL if Form 6018 is signed.

  6. If the organization doesn’t agree with the proposed revocation, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

  7. Because revocations are declaratory judgment cases:

    • You must have an administrative record file and if the case is unagreed, a complete administrative record index.

    • You will not issue a final closing letter on the primary return examination.

  8. Refer to the following references:

    • See also Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for the various report forms and letters.

    • Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process. See IRM 4.70.14.2.1.3.1.13(8), EO – Reclassification of Foundation Status, for effective date in IRC 7805(b) relief cases.

    • See IRM 4.70.14.2.1.3.3, EO – Conversion of Returns. for revocation procedures in the context of converted returns and bringing an organization current on tax obligations for the affected tax years.

    • See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record.

    • See IRM 4.70.14.2.1.3.1.29, EO – Inadequate Records – Revocation, for revocation due to inadequate records.

  9. Close all revocations to Mandatory Review (not auto-revocations). Use the following disposal codes on the primary return closing record unless a higher priority DC applies:

    • DC 09 (RCCMS - 211) for agreed revocations.

    • DC 07 (RCCMS - 601) for unagreed revocations with protest.

    • DC 55 (RCCMS - 605) for unagreed revocations without protest.

    • DC 15 (RCCMS - 602) for unagreed revocations of church.

EO - Reclassification of Foundation Status
  1. Proposed foundation reclassifications are a change in status. If an IRC 501(c)(3) organization or IRC 4947(a)(1) NECT doesn't qualify for the foundation status under which it is classified, propose a reclassification of foundation status.

  2. A reclassification of foundation status is an adverse status change subject to mandatory review.

    • You can’t reclassify a PF to a publicly supported organization. PFs must terminate their PF status under IRC 507.

    • You can’t reclassify an organization to an exempt operating foundation described under IRC 4940(d)(2). Organizations must request that status using procedures in Rev. Proc. 2019-2, Rev. Proc. 2019-1, I.R.B. 230, (updated annually).

  3. A reclassification of foundation status is subject to declaratory judgment under IRC 7428. Rev. Proc. 2019-5, section 10, 2019-01 IRB 230, (updated annually). It includes:

    • Reclassification from one type of publicly supported organization to another type.

    • Reclassification from a publicly supported organization to a PF.

    • Reclassification from a private operating foundation to a non-operating foundation.

    • Reclassification from a type I or II supporting organization to a type III supporting organization, within IRC 509(a)(3).

    • Reclassification from a functionally integrated type III supporting organization to a non-functionally integrated type III supporting organization, within IRC 509(a)(3).

  4. Except as indicated in paragraphs (5) and (6), a reclassification of a foundation status is generally effective when the organization fails to qualify for the existing foundation status. If the organization ceased to qualify for the foundation status during a year prior to the year of examination, obtain approval from the GM before expanding the examination. If the examination is not expanded to the prior tax years, the effective date of foundation reclassification is the first day of the first tax year under examination.

    1. For public charity reclassifications under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi), and IRC 509(a)(2), verify the amounts on Form 990 Schedule A, Public Charity Status and Public Support.

    2. If the calculation is incorrect, re-do the schedule.

    3. Determine whether the organization meets the public support test.

    4. If the organization fails a public support test for any two consecutive years beginning with its fifth year of existence, the effective date of reclassification is the first day of the second consecutive tax year the organization failed the public support test.

    5. For special rules that apply to reclassifications of IRC 509(a)(1) and IRC 170(b)(1)(A)(vi), and IRC 509(a)(2) charities, IRM 4.70.14.2.1.3.1.13, EO - Reclassification of Foundation Status.

  5. In the case of reclassifying a IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) organization to a PF, reclassification is effective only if the organization:

    • Has been in existence for more than five years,

    • Fails the public support test for any two consecutive tax years beginning with its fifth year of existence and

    • Doesn’t otherwise qualify for another exclusion from PF status (such as IRC 509(a)(3)).

  6. In the case of reclassifying a IRC 170(b)(1)(A)(vi) or IRC 509(a)(2) organization to a PF, the effects are as follows:

    1. Reclassification of this type is effective the first day of the second consecutive tax year the organization fails the public support test.

    2. The organization will be a PF for that first tax year for IRC 507, IRC 4940 and IRC 6033 purposes only.

    3. For all succeeding tax years, the organization will be PF for all purposes.

  7. Reclassifying a public charity to a PF constitutes a conversion of Form 990 to a tax return, Form 990-PF. Conversions are covered by IRM 4.70.14.2.1.3.3, EO - Conversion of Returns. Basic instructions on reclassifying a publicly supported organization to a PF are as follows:

    • Prepare a formal examination report for the foundation reclassification issue in the Form 990 examination. See paragraph (8).

    • Either solicit Form 990-PF if the foundation reclassification is agreed, or prepare a Substitute For Return (SFR) reporting IRC 4940 tax initially established on NMF for a Form 990-PF adjustment. See instructions at IRM 4.70.14.2.1.3.3, EO – Conversion of Returns, for converted returns.

    • After considering paragraph (6)b above, determine whether other Chapter 42 excise taxes apply.

    • If other Chapter 42 excise taxes reportable on Form 4720 or 4720-A must be imposed, follow report procedures in IRM 4.70.14.2.1.3.1.6,EO – Form 4549, Form 4549-A, Form 4549-B, Form 4549-E.

      Note:

      Regarding Form 990-PF at the second bullet above, if you prepare an SFR, establish Form 990-PF (MFT 44) on AIMS Non-Master File and on RCCMS in order to propose a deficiency for the IRC 4940 tax. Follow the formal report procedures. This process is generally the same for converted Forms 1120 /1041, replacing Form 990-PF for Form 1120/1041 wherever it occurs, and replacing "foundation reclassification" for "revocation" wherever mentioned. Don’t refer any PF, exempt or taxable, to Small Business/Self-Employed (SB/SE).

  8. Effective Date in IRC 7805(b) Relief Cases:

    1. IRC 7805(b) provides discretionary authority to determine the extent to which any ruling may apply without retroactive effect. IRC 7805(b) relief applies to:

      • Revocations.

      • Determinations of liability for UBI.

      • Determinations of liability for excise taxes.

      • Private letter rulings.

      • Technical advice issues.

    2. When an entity receives a determination letter or ruling, and later loses exemption due to a change in facts or law, revocation is effective the first day of the first tax year in which the change occurs. Under these circumstances, there is no need to request application of IRC 7805(b) relief.

    3. When an entity erroneously receives a determination letter or ruling due to an omission or misstatement of material facts, the effective date of revocation is the first day of the first tax year. In this case, don’t recommend relief under IRC 7805(b). It’s generally not available.

    4. When an entity erroneously receives a determination letter or ruling due to the IRS misinterpretation of the law, recommend IRC 7805(b) relief.

    5. The following table recaps the situations described above:

      Entity’s Determination Letter revoked due to: Revocation effective date: IRC 7805(b) Applicability:
      Change in tax law or organization alters its operation after initial recognition of exemption First day of first tax year in which organization altered its operations or the law changed Not necessary, but taxpayer may request a TAM if disputing whether it altered its operations
      Omission or misstatement of material facts by the applicant organization Retroactive to the first day of the first tax year Not Available
      Misinterpretation of law by IRS Determined by IRC 7805(b) relief Applies. Recommend requesting relief

    6. You or the organization may raise the question of IRC 7805(b) relief.

      Note:

      In revocation cases, advise the organization of the provisions of IRC 7805(b).

  9. Use the following letters and forms when preparing a formal report for reclassifying a foundation or public charity status:

    Examination Result Type of Report Report Forms and Letters
    Reclassification of foundation or public charity status - with an effective date Formal reports only, issued by group
    • Letter 3620, 30-day letter

    • Form 6018, Lines 4 through 9

    • Form 4621-A

    • Form 886-A

    • Pub 892

    • Pub 3498

    Final closing letter, issued by Mandatory Review or Appeals
    • 90-day FADL

  10. If the organization’s foundation status must be changed, send a 30-day letter (Letter 3620) and RAR to the organization. Hold the case for up to 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

  11. A foundation reclassification is agreed only if the organization signs Form 6018. A signed Form 6018 isn’t legally binding for foundation reclassifications and only serves to memorialize the agreement.

    • A signed Form 6018 doesn’t waive the organization’s right to seek declaratory judgment.

    • You are still required to close the case to Mandatory Review even if Form 6018 is signed.

    • Mandatory Review is still required to issue a 90-day FADL if Form 6018 is signed.

  12. If the organization doesn’t agree with the proposed foundation reclassification, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

  13. Because reclassifications of foundation status are declaratory judgment cases:

    • You must have an administrative record file, and if the case is unagreed, a complete administrative record index.

    • You will not issue a final closing letter on foundation reclassification issue.

  14. If you are examining a non-operating foundation contending to be an operating foundation on Form 990-PF

    Private Operating Foundations
    If the EO: Then:
    Qualifies as an operating foundation for the tax year (and will continue to so qualify)
    • Verbally notify the organization that it can submit a request to EO Determinations in Cincinnati on Form 8940 to receive a determination letter granting private operating foundation status.

    • Don’t modify the foundation status. Instead, the foundation can continue to claim operating foundation status on Form 990-PF so long as it actually meets the requirements on a year-by-year basis.

    Is not an operating foundation
    • Solicit an amended Form 990-PF and if necessary, solicit a delinquent Form 4720 (or establish an SFR and propose an excise tax adjustment).

    • If you secure a substantially correct amended Form 990-PF, and determine there is no change to the organization’s exempt status, describe the change due to correction of operations based on the secured amended return on Form 886-A as an attachment to closing Letter 1744.

    • Prepare Form 5666 for a future examination. See IRM 4.70.13.9.6, Amended Returns Procedures, for processing amended returns.

    Reminder:

    Consider the existence of fraud before soliciting any return.

  15. Refer to the following references:

    • See also Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

    • See IRM 4.70.14.2.1.3.3.1, EO - Proposed Adverse Status Change.

    • See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record.

  16. Close all foundation reclassifications to Mandatory Review. Use the following disposal codes on the primary return closing record unless a higher priority disposal code applies:

    1. DC 17 (203) for agreed reclassifications of foundation status.

    2. DC 07 (601) for unagreed reclassifications of foundation status if protested.

    3. DC 10 (604) for unagreed reclassifications of foundation status without protest.

    4. DC 15 (602) for unagreed reclassifications of foundation status of a church.

EO – Disqualifications
  1. Disqualification (or denial) of tax-exempt status applies to certain organizations under EO examination jurisdiction who have not applied for tax-exempt status or have not received a ruling or determination letter granting such status. Proposed disqualifications are a change in status. There are three types:

    • Disqualification of organizations treated as tax-exempt that self-declared their tax-exempt status on a filed Form 990, (Status 36 organizations) for specific tax years.

    • Disqualification from tax-exemption of IRC 501(c)(12) or IRC 501(c)(15) organizations because they failed their respective 85 percent member income test or gross receipts test for specific tax years.

    • Disqualification of organizations treated as tax-exempt under IRC 501(c)(3) without a ruling or determination letter, such as an organization claiming to be a church or a small organization with gross receipts normally not more than $5,000 per year.

  2. Treat disqualification of IRC 508(c) organizations that don’t apply for tax-exempt status and fail to qualify for exemption as revocations for all purposes (such as disposal code, etc.) for:

    1. Churches, their integrated auxiliaries, and conventions or associations of churches.

    2. Subordinate organizations in a group exemption ruling. See Treas. Reg. 1.508-1(a)(3).

    3. Other organizations not required to apply for tax-exempt status under IRC 508(c).

  3. Status 36 organizations are treated as exempt under IRC 501(c) because the exempt status was declared on a filed Form 990. However, Status 36 doesn’t include IRC 501(c)(3), 501(c)(9), 501(c)(17) and 501(c)(29), organizations, because those organizations are required to apply for tax-exempt status.

  4. A Status 36 organizations are IRC 501(c) organizations (other than IRC 501(c)(3), IRC 501(c)(9), and IRC 501(c)(17)) that declare tax-exempt status by filing Form 990 or 990-EZ, and that would otherwise be a taxable entity. They are characterized by:

    • Not having submitted a Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code and

    • Not having received a favorable ruling or determination letter granting tax-exempt status.

    • IRC 501(c)(4) organizations may also declare tax-exempt status by filing Form 8976. If they fail to meet the qualification of tax-exempt status, disqualify them for the examined tax years for which they declared exemption.

    • See IRM 4.70.14.2.1.3.1.31, EO - Status 36 Organizations.

  5. Because the IRS never recognized a Status 36 organization as tax-exempt, there is no ruling or determination letter to revoke if the organization fails to qualify for exemption. You must therefore determine whether the self-declaring organization qualifies for tax-exempt status for the specified tax years exemption is declared.

  6. Use the following letters and forms when preparing a formal report for disqualifications:

    Examination Result Type of Report Report Forms and Letters
    Disqualifications - Status 36 organizations for specified tax years Formal reports only, issued by the group.
    • Letter 3618, 30-day letter

    • Form 6018, at Line 3

    • Form 4621-A

    • Form 886-A

    • Pub 892

    • Pub 3498

    Final closing letter, issued by Mandatory Review or Appeals
    • 90-day FADL

    Disqualifications - IRC 501(c)(12) and IRC 501(c)(15)for specified tax years Formal reports only, issued by the group.
    • Letter 4700, 30-day letter

    • Form 6018, Line 3

    • Form 4621-A

    • Form 886-A

    • Pub 892

    • Pub 3498

      Final closing letter, issued by Mandatory Review or Appeals
    • 90-day FADL

  7. If an organization doesn’t meet the requirements for exemption for the specified tax years under IRC 501(c), send a 30-day letter (Letter 3618 or Letter 4700) and a RAR to the organization. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO - Formal Examination Reports.

  8. A disqualification is agreed only if the organization signs Form 6018. A signed Form 6018 isn’t legally binding for a disqualifications and only serves to memorialize the agreement.

    • A signed Form 6018 doesn’t waive the organization’s right to seek declaratory judgment.

    • You are still required to close the case to Mandatory Review even if Form 6018 is signed.

    • Mandatory Review is still required to issue a 90-day FADL if Form 6018 is signed.

  9. If the organization doesn’t agree with the proposed disqualification, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

  10. Because disqualifications are declaratory judgment cases:

    • You must have an administrative record file and if the case is unagreed, a complete administrative record index.

    • You will not issue a final closing letter on the primary return examination.

  11. Refer to the following references:

    • See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

    • See IRM 4.70.14.2.1.3.3, EO – Conversion of Returns, for disqualification procedures in the context of converted returns and bringing an organization current on tax obligations for the affected tax years.

    • See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record.

    • See IRM 4.70.19, Church Tax Inquiries and Examinations Under IRC 7611.

  12. Close all disqualifications to Mandatory Review. Use the following disposal codes on the primary return closing record unless a higher priority disposal code applies:

    1. DC 13 (501) for agreed disqualifications if you are referring the organization to SB/SE or Large Business and International (LB&I) (no converted return process).

    2. DC 04 (205) or 05 (207) for agreed disqualifications if you are enforcing income taxes through a converted tax return process.

    3. DC 07 (601) for unagreed disqualifications if protested.

    4. DC 10 (604) for unagreed disqualifications without protest.

    5. DC 15 (602) for unagreed disqualification of a church not recognized as tax-exempt (church without a ruling or determination letter).

EO - Termination of Exempt Status
  1. Only an organization can terminate its own existence. An organization can terminate its existence in the following ways:

    • A corporate EO files articles of dissolution with the state.

    • A corporate EO files articles of merger with the state.

    • An association adopts a board resolution terminating the association.

    • Beneficiary interests (such as charitable interests) terminate in the case of a trust.

    Note:

    Refer to Pub 4779, Facts about Terminating or Merging Your Exempt Organization.

  2. While organizations voluntarily terminate their existence in accordance with state law, examinations terminate the tax-exempt status by issuing a termination letter after reviewing the following evidentiary documents:

    1. Files a Final Return.
      o Organization managers are responsible for filing final returns, subject to penalty under IRC 6652(c)(2)(B) for failing to file a final return upon written demand. See 90-day Demand Letter 5325. You can’t recognize a termination of an exempt organization until you review the final return if the organization is required to file one.

      Exception:

      Under IRC 6033(b)(1), a church, integrated auxiliary of a church, or a convention or association of churches, are not required to file a final return. Also, organizations described in Treas. Reg. 1.6033-2(g)(1) as supplemented by Rev. Proc. 95-48, 1995-2 C.B. 418, Rev. Proc. 96-10, 1996-1 C.B. 577, and Rev. Proc. 2011-15, 2011-3 I.R.B. 322, are excepted from filing annual information returns.


      o The final return will cover the period from the beginning of the EO’s fiscal year through the date of termination. In order to have the return processed prior to the end of the EO’s fiscal year, prepare Form 2363-A to update the EO’s fiscal year-end to the month of termination.
      o Final returns are due the 15th day of the 5th month after the dissolution or termination is completed.

      Exception:

      An EO can’t file a final Form 990-N before the close of the tax year during which it terminated. You can verbally remind the organization it must file a final return or Form 990-N if so eligible.


      o An IRC 509(a)(3) organization must file a final Form 990 or 990-EZ, even if it is described in Rev. Proc. 95-48 and Rev. Proc. 96-10.

      Exception:

      IRC 509(a)(3) supporting organizations, the gross receipts of which are normally not more than $5,000, that supports an IRC 501(c)(3) religious organization are not required to file an annual information return, but must file Form 990-N.


      o A secured final return must be complete and substantively correct before recognizing a termination.
      □ A final return is not correct if the organization files a return that it is not eligible to file, such as Form 990-EZ.
      □ A Schedule N is required for a final Form 990 or 990-EZ.
      □ A terminating organization that files a substantively incorrect or incomplete final return without reasonable cause can be subject to penalties or revocation.

    2. Submits a Written Statement of Disposition of Assets.
      o A principal officer of an EO may submit a written statement of disposition of assets to the examiner or in a final return. You can’t recognize a termination of an exempt organization until you review the written statement of disposition of assets.
      o Refer to the Instructions to Schedule N, Form 990 or 990-EZ for guidance on the type of information needed.
      o For the following IRC sections, verify that the assets were distributed as required by the specific subsection:
      □ IRC 501(c)(3).
      □ IRC 501(c)(9).
      □ IRC 501(c)(12).
      □ IRC 501(c)(16).
      □ IRC 501(c)(19).
      □ IRC 501(c)(22).
      □ IRC 501(c)(27).
      □ IRC 501(e).
      □ IRC 501(f).
      o Valid distributions for IRC 501(c)(3) include distributions:
      □ For exempt purposes within the meaning of IRC 501(c)(3).
      □ To a state or local government for public purposes.
      □ To the federal government.
      □ To an organization or organizations exempt under IRC 501(c)(3).

      Note:

      Consider the special distribution considerations for PFs.


      o If any final distributions are improper, solicit correction. If no correction is made, consider revocation of tax-exempt status. For example, if the assets weren't distributed properly, tell the EO to recover the assets. Ask the EO to redistribute them properly.
      If the EO You are to
      Recovers and redistributes the assets Secure documentation of the redistributions
      Refuses to attempt to recover the assets Propose revocation for the year (or years) in which the distributions were made
      Tries to but can’t recover the assets Secure a written, signed statement by an officer of the actions taken by the EO. Discuss with your manager as to proposing revocation or accepting the termination.

      o Improper distributions may be taxable income to recipients. If taxable, verify if they were reported on Forms 1099. If not reported, secure the delinquent information returns. Prepare a penalty file if you decide to impose penalties.
      o Verify if the income was reported on the recipient's tax return. If not, propose a discrepancy adjustment. See IRM 4.70.15, Discrepancy Adjustments. For those recipients who are not yet required to report the income, prepare a referral (Form 5666) to SB/SE for a current year examination.

      Note:

      If you use Form 5346 for this purpose, it won’t be declined.

      Note:

      If the organization was exempt under IRC 501(c)(3) or 501(c)(4), you can pursue intermediate sanctions.

    3. Submits a Dissolution Document. The organization may submit a dissolution document either to the examiner or in a final return. You can also obtain dissolution documents from certain state websites. You can’t recognize termination of an exempt organization until you review the dissolution documents. o Appropriate dissolution documents for terminations vary based on the type of entity.

      If the EO is... Then secure...
      a corporation, that has filed Articles of Dissolution with the state a complete copy of the Articles of Dissolution, and proof of filing with the state, such as a "date-filed" stamp. If incorporated in multiple states, obtain the documents for each state.

      Note:

      Some states require all taxes be paid before dissolution. Check the state's requirements.

      an association a resolution signed by at least two officers of the entity. The resolution must state the date of dissolution.
      a trust a copy of the court order dissolving the trust. If there is no court order, a resolution signed by at least two trustees. The resolution must state the date of dissolution.
      an organization chartered by a parent organization in a group exemption ruling See IRM 4.70.14.2.1.3.4.2, Terminations

      Note:

      Organizations excepted by law from filing a return or a notice under IRC 6033 need not file a final return.

  3. Only organizations recognized as tax-exempt under IRC 501(c) or IRC 501(d) can receive a letter terminating their exempt status.

  4. Verify whether a termination claimed by an EO actually occurred.

  5. If the EO was automatically revoked, survey the return under examination. See IRM 4.70.14.4.11.2, EO Automatically Revoked Organizations.

  6. If you are unable to locate the EO, follow Unable-to-Locate Scenario Guidance Table. See Exhibit 4.70.14-17, EO Unable-to-Locate Scenario Guidance Table.

  7. If an EO claims to terminate while the examination is in process, continue the examination to closure like any other case.

    • If the examination results in a change in tax or status, issue a report of examination to the last known authorized officer like any other case

    • If there are no changes to tax or status, you may verbally notify the organization that they must file a final return by the 15th day of the 5th month after termination. Close the case as a no change if there are no additional compliance issues during the year under examination.

    • If there are no changes to tax or status, and the organization manages to provide the three evidentiary documents in paragraph (2) before you close the case, you may issue a termination letter.

  8. If the EO properly terminated:

    1. Issue the termination Letter 5426, Final Termination Closing Letter or Letter 5426-A, Termination Closing Letter.

      Note:

      Corporations "administratively dissolved" by the state where reinstatement is possible are not terminated.

    2. Prepare Form 2363-A, to update the EOBMF to Status 20, Termination.

    3. Prepare the 3198-A Special Handling checksheet in RCCMS. Enter "Termination" in "Other Instructions" at the bottom of the form. On the blank line to the right of "Other Instructions" in the "Special Features" section, enter "IRC 6104(c) Notification Requirements" for IRC 501(c)(3) cases.

    4. At closure, use RCCMS DC 212, Termination, unless a higher priority disposal code applies.

  9. Close the case to the EO closing unit.

    Reminder:

    Make sure you secured the three evidentiary documents in paragraph (2). Termination cases without these documents will be returned to the groups.

  10. Some organizations are terminated by the Ogden Campus due to filing inactivity (EOBMF Status 20). That contrasts with an organization’s voluntary termination of its existence in paragraph (1). Terminations by Ogden Campus are reversible if the organization later becomes active.

EO - Termination - Final Returns
  1. Organization managers are responsible for filing final returns, subject to penalty under IRC 6652(c)(2)(B) for failing to file a final return upon written demand. See 90-day Demand Letter 5325. You can’t recognize a termination of an exempt organization until you review the final return if the organization is required to file one.

    Exception:

    Under IRC 6033(b)(1), a church, integrated auxiliary of a church, or a convention or association of churches, are not required to file a final return.

    Also, organizations described in Treas. Reg. 1.6033-2(g)(1) as supplemented by Rev. Proc. 95-48, 1995-2 C.B. 418, Rev. Proc. 96-10, 1996-1 C.B. 577, and Rev. Proc. 2011-15, 2011-3 I.R.B. 322, are excepted from filing annual information returns.

  2. In those cases where a final return hasn’t been filed, you must secure the final return. A PF must file a final return on Form 990-PF.

  3. The final return will cover the period from the beginning of the EO’s fiscal year through the date of termination. In order to have the return processed prior to the end of the EO’s fiscal year, prepare Form 2363-A to update the EO’s fiscal year-end to the month of termination.

  4. Final returns are due the 15th day of the 5th month after the dissolution or termination is completed.

    Exception:

    An EO can’t file a final Form 990-N before the close of the tax year during which it terminated. You can verbally remind the organization it must file a final return or Form 990-N if so eligible.

  5. An IRC 509(a)(3) organization must file a final Form 990 or 990-EZ, even if it is described in Rev. Proc. 95-48 and Rev. Proc. 96-10.

    Exception:

    IRC 509(a)(3) supporting organizations, the gross receipts of which are normally not more than $5,000, that supports an IRC 501(c)(3) religious organization are not required to file an annual information return, but must file Form 990-N.

  6. A secured final return must be complete and substantively correct before recognizing a termination.

    1. A final return is not correct if the organization files a return that it is not eligible to file, such as Form 990-EZ.

    2. A Schedule N is required for a final Form 990 or 990-EZ.

    3. A terminating organization that files a substantively incorrect or incomplete final return without reasonable cause can be subject to penalties or revocation.

EO - Termination - Disposition of Assets
  1. A principal officer of an EO may submit a written statement of disposition of assets to the examiner or in a final return. You can’t recognize a termination of an exempt organization until you review the written statement of disposition of assets.

  2. Refer to the Instructions to Schedule N, Form 990 or 990-EZ for guidance on the type of information needed.

  3. For the following IRC sections, verify that the assets were distributed as required by the specific subsection:

    • IRC 501(c)(3).

    • IRC 501(c)(9).

    • IRC 501(c)(12).

    • IRC 501(c)(16).

    • IRC 501(c)(19).

    • IRC 501(c)(22).

    • IRC 501(c)(27).

    • IRC 501(c)(e).

    • IRC 501(c)(f).

  4. Valid distributions for IRC 501(c)(3) include distributions:

    1. For exempt purposes within the meaning of IRC 501(c)(3).

    2. To a state or local government for public purposes.

    3. To the federal government.

    4. To an organization or organizations exempt under IRC 501(c)(3).

      Note:

      Consider the special distribution considerations for PFs.

      See IRM 4.70.14.2.1.3.1.18, EO – Termination – Disposition of Assets Involving Private Foundations, and the Exempt Organizations Technical Resource Guide, made available on EO Knet Sharepoint site.

  5. If any final distributions are improper, solicit correction. If no correction is made, consider revocation of tax-exempt status. For example, if the assets weren't distributed properly, tell the EO to recover the assets. Ask the EO to redistribute them properly.

    If the EO: You are to:
    Recovers and redistributes the assets Secure documentation of the redistributions
    Refuses to attempt to recover the assets Propose revocation for the year (or years) in which the distributions were made
    Tries to but can’t recover the assets Secure a written, signed statement by an officer of the actions taken by the EO. Discuss with your manager as to proposing revocation or accepting the termination.

  6. Improper distributions may be taxable income to recipients. If taxable, verify if they were reported on Forms 1099. If not reported, secure the delinquent information returns. Prepare a penalty file if you decide to impose penalties.

  7. Verify if the income was reported on the recipient's tax return. If not, propose a discrepancy adjustment. See IRM 4.70.15. For those recipients who are not yet required to report the income, prepare a referral (Form 5666) to SB/SE for a current year examination.

    Note:

    If you use Form 5346 for this purpose, it won’t be declined.

    Note:

    If the organization was exempt under IRC 501(c)(3) or 501(c)(4), you can pursue intermediate sanctions.

EO - Termination - Disposition of Assets Involving Private Foundations
  1. A PF may submit a written statement on the disposition of assets to the examiner or in a final return. You can’t recognize a termination of a PF until you review a written statement of disposition of assets. Remaining assets of a PF may be distributed in the following ways:

    • Making what would be a qualifying distribution under IRC 4942(g)(1)(A).

    • Transferring them to certain public charities in accordance with IRC 507(b)(1)(A).

    • Paying a termination tax under IRC 507(c) to the government.

    • Transferring all remaining assets to another PF within the meaning of IRC 507(b)(2).

      Note:

      Certain tax attributes and characteristics carryover to the transferee foundation. See Treas. Reg. 1.507-3(a)(1).

  2. Refer to the General Instruction T in the Instructions to Form 990-PF for guidance on the type of information needed.

  3. A transfer to another PF must satisfy the requirements of all pertinent provisions of Chapter 42 of the Code. For example, if the transfer constitutes a taxable expenditure as defined in IRC 4945, the transferor is liable for the Chapter 42 tax that is incurred. See Treas. Regs. 1.507–3(d). Consequently, no termination letter can be issued until the taxable expenditure is fully corrected, and the initial tax deficiency has been fully processed and assessed (or abated under IRC 4962).

  4. A termination of existence can’t be recognized until all Chapter 42 taxes against the foundation are assessed (or abated under IRC 4962) for acts or failures to act that occurred during the years of examination or as a result of the transfer, and such acts are corrected.

  5. If a transfer described in IRC 507(b)(2) constitutes a willful and flagrant act in violation of Chapter 42, as described in IRC 507(a)(2)(A), then the provisions of IRC 507(a)(2) dealing with involuntary terminations are applicable, rather than the provisions of IRC 507(b)(2). In that event, the transferor foundation would be subject to IRC 507(c) tax. See Treas. Regs. 1.507–3(d) and 1.507–4(b).

  6. For IRC 507(b)(2) transfers, the group may expand the examination or prepare Form 5666 for a future year examination of the transferee PF to ensure that the transferee properly assumed the Chapter 42 attributes of the transferred assets.

EO - Termination - Dissolution Document
  1. The organization may submit a dissolution document either to the examiner or in a final return. You can also obtain dissolution documents from certain state websites. You can’t recognize termination of an exempt organization until you review the dissolution documents.

  2. Appropriate dissolution documents for terminations vary based on the type of entity.

    If the EO is... Then secure...
    a corporation, that has filed Articles of Dissolution with the state a complete copy of the Articles of Dissolution, and proof of filing with the state, such as a "date-filed" stamp. If incorporated in multiple states, obtain the documents for each state.

    Note:

    Some states require all taxes be paid before dissolution. Check the state's requirements.

    an association a resolution signed by at least two officers of the entity. The resolution must state the date of dissolution.
    a trust a copy of the court order dissolving the trust. If there is no court order, a resolution signed by at least two trustees. The resolution must state the date of dissolution.
    an organization chartered by a parent organization in a group exemption ruling See IRM 4.70.14.2.1.3.4.2, Terminations.

EO - Termination - IRC 501(c)(3) Organizations
  1. A termination can only be recognized if all three documents in IRM 4.70.14.2.1.3.1.15 are secured.

  2. For public charities, ensure there are no changes to exemption or reclassification to PF, and that the annual information return(s) under examination is accepted as filed before you recognize a termination.

  3. For public charities, verify the correct foundation status. If an organization is described under IRC 170(b)(1)(A)(vi) or 509(a)(2) and it:

    • Has been in existence for more than five years.

    • Fails the public support test for any two consecutive tax years beginning with its fifth year of existence, and

    • Doesn’t otherwise qualify for another exclusion from PF status (such as IRC 509(a)(3). Propose a reclassification to a PF effective the first day of the second consecutive taxable year the organization failed the public support test.

  4. Don’t recognize a termination if there are Chapter 42 tax deficiencies or corrections that must be proposed against the organization or PF.

  5. Determine whether bonds were outstanding at the time of the termination. If so, prepare Form 5666, addressed to Tax Exempt Bonds (TEB), identifying the year of termination.

  6. To the extent terminations apply to IRC 501(c)(3) organizations they are subject to the rules on state notification under IRC 6104(c). See IRM 4.70.14.4.11.8, State Notification of EO Examination Results.

EO - UBIT and Other Income Taxes
  1. If the organization conducts an unrelated business activity, determine if the activity:

    1. Meets the definition of an regularly carried-on unrelated trade or business.

    2. Has a tax effect.

    3. Is large enough to jeopardize its exemption. If it jeopardizes exemption, consider revocation.

  2. If you secure a delinquent EO income tax return (such as Form 990-T or Form 1120-POL) and you don't make an adjustment to that return, the following procedures don't apply. See IRM 4.70.13.9, Delinquent, Amended and Substitute for Returns, for delinquent return procedures.

  3. If there are multiple unrelated businesses or multiple years involved and the EO agrees to some but not all of the proposed adjustments, attempt to secure a signed waiver form for the agreed items.

  4. Use the following letters and forms when preparing a report for changes in UBIT or any other income tax required of EOs and IRC 4947 trusts:

    Examination Result Type of Report Report Forms and Letters
    Change to EO Income Taxes - Exempt Organizations, taxable PFs, IRC 527 organizations, or IRC 4947 Trusts:
    • Form 990-T also proxy tax

    • Form 1120

    • Form 1120-POL

    • Form 1041

    Report
    • Draft transmittal letter, IDR or Form 5701 (for initial examination reports only), or

    • Letter 3614, 30-day letter

    • Form 4549, for initial examination reports only

    • Form 870, for formal examination reports only

    • Form 4549-A, for formal examination reports only

    • Form 886-A, with either letter above

    • Pub 3498, with either letter above

    • Pub 594, with either letter above (issued by the group)

    Agreed closing letter
    • Letter 2511 and

    • Copy of signed waiver form or

    • Letter 2656 or

    • Letter 5334 issued by the group)

    Unagreed closing letter 90-Day SNOD, (issued by Mandatory Review or Appeals)
    Change in Income Taxes - Converted Tax Returns
    • Form 1120

    • Form 1041

    Report
    • Letter 950-C or Letter 950-D, 30-day letter

    • Form 870

    • Form 4549-A

    • Form 886-A

    • Pub 3498

    • Pub 594(issued by the group)

    Agreed closing letter
    • Letter 2511, and

    • Copy of signed waiver form issued by the group)

    Unagreed closing letter 90-Day SNOD, (issued by Mandatory Review or Appeals)
    Change in Income Taxes - Discrepancy Adjustments
    • Form 1040

    • Form 1120

    Report
    • Letter 3605, 30-day letter, 1st formal examination report, then if necessary:

    • Letter 3603, 30-day letter, 2nd formal examination report, or

    • Letter 3619, 30-day letter, 2nd formal examination report

    • Form 4549-E, with any letter above

    • Form 886-A, with any letter above(issued by the group)

    Agreed closing letter
    • Letter 2511, and

    • Copy of signed waiver form (issued by the group)

    Unagreed closing letter 90-Day SNOD, (issued by Mandatory Review or Appeals)

  5. Give the taxpayer a schedule showing how the tax was computed.

  6. If an organization has an income tax deficiency, send a 30-day letter (Letter 3614) and an RAR to the organization. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

  7. A proposed income tax deficiency is agreed only if the organization signs Form 4549 or Form 870. Payment of tax is not agreement.

  8. If after receiving a reply to the 30-day letter the organization agrees with the tax change, issue a final agreed closing letter using Letter 2511. Close the case to the EO closing unit for assessment.

  9. Issue separate closing letters if there is an agreement for some but not all of the years.

  10. If the organization doesn’t agree with the proposed tax change, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

  11. If after receiving a reply to the 30-day letter the organization disagrees with the proposed tax change with protest, without protest, or doesn’t reply, close the case to Mandatory Review for the unagreed tax change. Mandatory Review or Appeals will issue a final closing letter in the form of a SNOD (90-day letter) if they agree with your adjustment.

  12. If in connection with a tax change, you have a primary return (or e-Postcard) also under examination, issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, to the EO that makes reference to the RAR for the tax change.

  13. Refer also to the tables in the following exhibits:

    • See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

    • For more details on 30-day letters, report forms, and closing letters for converted returns and discrepancy adjustments, refer to the same exhibits.

    • Refer to IRM 4.70.13.14., Discussion of Examination Findings/Conclusions, for more details on the initial report process.

    • Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

    • See also IRM 4.70.15, Discrepancy Adjustments.

    • See also IRM 4.70.14.2.1.3.3, EO - Conversion of Returns.

  14. Close all agreed tax changes to the EO closing unit and all unagreed tax changes to Mandatory Review (except for employment tax cases that do not involve IRC section 7436 issues). Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

    1. DC 03 (RCCMS - 102) for agreed tax changes.

    2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

    3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

EO - Private Foundation Excise Taxes
  1. PFs report their Chapter 42 excise taxes on Form 4720 (MFT 50). Disqualified persons use Form 4720 (MFT 66), also referred to as "Form 4720-A" .

    Exception:

    IRC 4940 and IRC 4948 taxes are reported on Form 990-PF.

  2. IRC Chapter 42 imposes several excise taxes. These taxes are assessed against the foundation and some are assessed against its disqualified persons and foundation managers. See Exhibit 4.70.14-10, EO Chapter 42 Excise Tax Reference Chart - Private Foundations.

  3. Use the following letters and forms when preparing a report for changes in Chapter 42 excise tax:

    Examination Result Type of Report Report Forms and Letters
    Change in Chapter 42 Excise Taxes
    • Form 4720

    • Form 4720-A

    • Form 990-PF

    Report
    • Draft transmittal letter, IDR or Form 5701 (for Initial reports only), or

    • Letter 3614

    • Form 870-E, with either letter above

    • Form 4621, with either letter above

    • Form 4883, with either letter above

    • Form 886-A, with either letter above

    • Pub 3498, with either letter above

    • Pub 594, with either letter above (issued by the group)

      Agreed closing letter
    • Letter 2511 and

    • Copy of signed waiver form(issued by the group)

      Unagreed closing letter 90-Day SNOD (issued by Mandatory Review or Appeals)

  4. A Thorne Letter:

    • Is only required to be issued to a Foundation Manager, where the 2nd tier tax is proposed under IRC 4941, 4944, 4945, 4951, 4952 and 4955.

    • Should be sent out to the foundation manager, prior to issuance of the 30-day letter.

      Note:

      The 30-day letters sets up the proposed excise taxes, such as 1st and 2nd tier. It would note the foundation manager’s refusal to correct.

    • Is not required to be issued to either
      1) a disqualified person who isn’t a foundation manager or
      2) the PF requesting correction.

      Reminder:

      Consult with TEGEDC when preparing a Thorne letter.

  5. In some cases, if the foundation or disqualified person (liable party) proposes a correction and:

    • You accept the proposed correction, issue Letter 5305, Private Foundation Correction Approval.

    • You deny the propose correction, issue Letter 5306.

  6. A proposed Chapter 42 excise tax deficiency is agreed only if the liable party signs Form 870-E and, in the case of two-tiered Chapter 42 excise taxes, has made full correction. Payment of tax alone is not agreement.

  7. If the liable parties fail to make correction, you must include the second-tier tax in the formal examination report. Describe each correctable activity and its remedy on Form 886-A of the report.

  8. Sometimes the tax liability extends beyond the taxable years covered by the examination report and into a future taxable year. In these cases:

    1. Make a statement on Form 4621 (the report form) or Form 886-A informing the liable party of its requirement to file Form 4720 for the following taxable years.

    2. Inform the liable party they are required to pay any tax owed with respect to the act or failure to act remaining uncorrected into that following taxable year.

    3. Consider preparing a referral on Form 5666 if the liable party indicates an unwillingness to make future corrections.

  9. Give the taxpayer schedules detailing computations for the adjustments. Show the adjustments on Form 4886.

  10. Consider whether the penalty under IRC 6684 for repeated or willful and flagrant Chapter 42 tax violations applies. Explain this penalty on Form 886-A. Include a comment on Form 4621 as to whether the penalty applies.

  11. Prepare the agreement form, Form 870-E for excise tax adjustments. See IRM 4.70.14.2.1.3.1.4, EO – Form 870 and Form 870-E, for additional information on Form 870-E.

  12. Send a 30-day letter (Letter 3614) and an RAR to the liable party. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense. If more time is needed for the taxpayer to reply, see IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

  13. Follow the instructions for IRC 6104(c) notification of certain States in IRM 4.70.14.4.11.8, State Notification of EO Examination Results.

  14. If after receiving a reply to the 30-day letter the liable party agrees with the tax change and has fully corrected the acts or failures to act that gave rise to the initial tax, issue a final agreed closing letter using Letter 2511. Close the case to the EO closing unit for assessment.

  15. If the taxpayer only agrees to or corrects some of the transactions, treat the case as partially agreed. Attempt to secure agreement for the agreed corrected items.

  16. Issue separate closing letters if there is an agreement for some but not all of the years.

  17. If the taxpayer doesn’t agree with the proposed tax change, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

  18. If after receiving a reply to the 30-day letter the liable party disagrees with the proposed tax change with protest, without protest, or doesn’t reply, close the case to Mandatory Review for the unagreed tax change. Mandatory Review or Appeals will issue a final closing letter in the form of a SNOD if they agree with your adjustment.

  19. If in connection with a tax change, you have a primary return (or e-Postcard) also under examination, issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, to the PF that makes reference to the taxable event that gave rise to a potential tax liability.

  20. Refer also to the tables in the following exhibits:

    • See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.70.13.14.3, Discussion of Examination Findings/Conclusions, for more details on the initial report process.

    • Refer to IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports, for more details on the formal report process.

    • See IRM 4.70.14.4.11.8.3, IRC 6104(c) Disclosures: Chapters 41 and 42 Assessments, for the procedures relating to state notification.

  21. Close all agreed tax changes to the EO closing unit. Close all unagreed tax changes to Mandatory Review. Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

    1. DC 03 (RCCMS - 102) for agreed tax changes.

    2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

    3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

EO - Non-Private Foundation Excise Taxes
  1. IRC Chapters 41 and 42 imposes several excise taxes on entities other than PFs. The IRC imposes some of these taxes on specified EOs and some on their disqualified persons and organization managers. See Exhibit 4.70.14-11, EO Chapter 41 and 42 Excise Tax Reference Chart - Non-Private Foundations.

  2. Use the following letters and forms when preparing a report for changes in Chapter 41 or 42 excise tax:

    Examination Result Type of Report Report Forms and Letters
    Change in Chapter 41 and 42 Excise Taxes
    • Form 4720

    • Form 4720-A

    • Form 990-BL

    Report
    • Draft transmittal letter, IDR or Form 5701(for Initial reports only), or

    • Letter 3614

    • Form 870-A, with either letter above

    • Form 4621, with either letter above

    • Form 4883, with either letter above

    • Form 886-A, with either letter above

    • Pub 3498, with either letter above

    • Letter 594, with either letter above(issued by the group)

      Agreed closing letter
    • Letter 2511, and

    • Copy of signed waiver form(issued by the group)

      Unagreed closing letter 90-Day SNOD, (issued by Mandatory Review or Appeals)

  3. If you identify a Chapter 42 excise taxable event subject to correction, send a Thorne letter requesting the organization or disqualified person to fully correct the acts or failure to act before you prepare a formal report. Consult with TEGEDC when preparing a Thorne letter.

  4. In some cases, if the organization or disqualified person (liable party) proposes a correction and:

    • You accept the proposed correction, issue a modified version of Letter 5305 applicable to the type of Non-PF Chapter 42 tax involved.

    • You deny the propose correction, issue a modified version of Letter 5306 applicable to the type of Non-PF Chapter 42 tax involved.

  5. A proposed Chapter 42 excise tax deficiency is agreed only if the liable party signs Form 870-E and, in the case of two-tiered Chapter 42 excise taxes, has made full correction. Payment of tax alone is not agreement.

  6. In the case of two-tiered taxes, if the liable parties fail to make correction, you must include the second-tier tax in the formal report. Describe each correctable activity and its remedy on Form 886-A of the report.

  7. Sometimes the tax liability extends beyond the taxable years covered by the examination report. In these cases:

    1. Make a statement on Form 4621 (the report form) or Form 886-A informing the liable party of its requirement to file Form 4720 for the following taxable years.

    2. Inform the liable party they are required to pay any tax owed with respect to the act or failure to act remaining uncorrected into that following taxable year.

    3. Consider preparing a referral on Form 5666 if the liable party indicates an unwillingness to make future corrections.

  8. Give the taxpayer schedules detailing computations of adjustments to the taxpayer. Show the computation of the tax on the adjustments on Form 4883.

  9. Consider whether the penalty under IRC 6684 for repeated or willful and flagrant Chapter 42 tax violations applies. Explain this penalty on Form 886-A. Include a comment on Form 4621 as to whether the penalty applies.

  10. Prepare the agreement form, Form 870-A for excise tax adjustments. See IRM 4.70.14.2.1.3.1.4, EO – Form 870 and Form 870-E, for additional information on Form 870-E.

  11. Send a 30-day letter (Letter 3614) and an RAR to the liable party. Hold the case for 30 days pending the taxpayer’s response. Update AIMS from Status 12 to Status 13 while in group suspense.

  12. If after receiving a reply to the 30-day letter the liable party agrees with the tax change and, in the case of two-tiered excise taxes, has fully corrected the acts or failures to act that gave rise to the initial tax, issue a final agreed closing letter using Letter 2511. Close the case to the EO closing unit for assessment.

  13. If the taxpayer only agrees to or corrects some of the transactions, treat the case as partially agreed. Attempt to secure agreement for the agreed corrected items.

  14. Issue separate closing letters if there is an agreement for some but not all of the years.

  15. If the taxpayer doesn’t agree with the proposed tax change, it can submit a written protest in response to the 30-day letter. See IRM 4.70.14.7, Closing Cases to Appeals, for preparing a rebuttal.

  16. If after receiving a reply to the 30-day letter the liable party disagrees with the proposed tax change with protest, without protest, or doesn’t reply, close the case to Mandatory Review for the unagreed tax change. Mandatory Review or Appeals will issue a final closing letter in the form of a SNOD if they agree with your adjustment.

  17. If in connection with a tax change, you have a primary return (or e-Postcard) also under examination, issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, to the organization that makes reference to the taxable event that gave rise to a potential tax liability.

  18. Refer also to the tables in the following exhibits:

    • See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.70.13.14, for more details on the initial report process.

    • Refer to IRM 4.70.14.2.4.3.1, Discussion of Examination Findings/Conclusions, for more details on the formal report process.

    • See IRM 4.70.14.4.11.8.3, IRC 6104(c) Disclosures: Chapters 41 and 42 Assessments, for the procedures relating to state notification.

  19. Close all agreed tax changes to the EO closing unit. Close all unagreed tax changes to Mandatory Review. Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

    1. DC 03 (RCCMS - 102) for agreed tax changes.

    2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

    3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

EO - Nonexempt Charitable Trusts
  1. Refer to Rev. Proc. 83-32, 1983-1 C.B. 723, for the various filing requirements of both nonexempt charitable trusts (NECTs) and split-interest trusts.

  2. NECTs described under IRC 4947(a)(1) file annual information returns on Form 990 or Form 990-PF depending on whether the trust has a determination letter granting IRC 509(a)(3) status. A determination letter granting IRC 509(a)(3) status doesn’t grant the trust a tax-exempt status, but rather allows the trust to file a Form 990 instead of a Form 990-PF.

  3. Nonexempt split-interest trusts described under IRC 4947(a)(2) file annual information returns on Form 5227. Split-interest trusts include:

    • Charitable remainder trusts (uni-trusts or annuity trusts).

    • Charitable lead trusts (uni-trusts or annuity trusts).

    • IRC 642 pooled income funds.

  4. When seeking information about a non-exempt charitable trust, send Letter 3407, requesting copy of trust instruments under Treasury Regulation 1.6012.

  5. If you are examining any IRC 4947 trust (Form 990, Form 990-PF or Form 5227), and the examination results in a no change, issue Letter 6049 for the examination of that return. See Exhibit 4.70.14-1, Closing Letters for No Change Cases, for a list of no-change and letter for Change due to Correction of Operations.

    TYPE OF RESULT & RETURN: CLOSING LETTER
    No Change for IRC 4947 Trusts
    • Form 990 for IRC 4947(a)(1) Trusts

    • Form 990-PF for IRC 4947(a)(1) Trusts

    • Form 5227 for IRC 4947(a)(2) Split-Interest Trusts

    • Letter 6049 pure no change, or

    • Letter 1744, Change due to Correction of Operations (choose selectable Paragraph 3, 4 or 5 and 7)

  6. If you are examining Form 990, Form 990-PF or Form 5227, and the examination results in corrective actions to correct operational issues that did not result in a change to exempt status, issue Letter 1744 following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations.

  7. The IRS doesn't revoke a tax-exempt status for IRC 4947 trusts, because a tax-exempt status was never granted.

    1. Chapter 42 excise taxes apply if charitable interests are diverted.

    2. A diversion of charitable interests may also require reclassification of an IRC 509(a)(3) NECT to a PF as it may no longer be a supporting organization.

    3. In some cases, you may also make a discrepancy adjustment to deny the grantor of the trust the overvalued portion of the charitable deduction (or make a referral to SB/SE or LB&I using Form 5666).

  8. IRC 4947 trusts are subject to income tax if there is positive taxable income, and may be required to file Form 1041. Refer to income tax deficiency procedures in IRM 4.70.14.2.1.3.1.21, EO – UBIT and Other Income Taxes. IRC 4947 trusts are not recognized as tax-exempt.

    1. Fiduciaries and trustees must also file a Form 1041 on behalf of the trust if the trust has positive taxable income.

    2. When the examination of a Form 1041 results in no change to income tax, prepare Letter 6049 for the examination of that return.

    3. If there is a tax change to Form 1041, follow the deficiency procedures similar to those applicable to Forms 990-T, except that you are applying the income tax under IRC 1 with respect to these trusts. The $1,000 specific deduction under IRC 512(b)(12) doesn't apply to IRC 4947 trusts. Follow the instructions in IRM 4.70.14.2.1.3.1.21, EO – UBIT and Other Income Taxes. for Form 1041 adjustments.

  9. If an NECT doesn't meet the requirements for IRC 509(a)(3) as a supporting organization, reclassify the NECT to a PF. Follow the instructions in IRM 4.70.14.2.1.3.1.13, EO – Reclassification of Foundation Status.

    • Generally the other exclusions from PF status under IRC 509(a), such as IRC 509(a)(2) don’t apply.

    • Split-interest trusts are always treated as PFs for Chapter 42 purposes.

  10. If you identify a Chapter 42 taxable event, based on Rev. Proc. 83-32, 1983-1 C.B. 723, follow the instructions in IRM 4.70.14.2.1.3.1.22, EO – Private Foundation Excise Taxes.

  11. Split-interest trusts are:

    • Not subject to IRC 4942 tax.

    • Limited in the application of IRC 4943 and IRC 4944 tax by IRC 4947(b)(3).

    • Limited in the application of IRC 507(a) by IRC 4947(b)(4).

  12. For the disposal codes used for foundation reclassifications, see IRM 4.70.14.2.1.3.1.13(15), EO - Reclassification of Foundation Status.

  13. Close all agreed tax changes to the EO closing unit. Close all unagreed tax changes to Mandatory Review. Use the following disposal codes for the closing record of the tax return you are changing, unless a higher priority disposal code applies:

    1. DC 03 (RCCMS - 102) for agreed tax changes.

    2. DC 07 (RCCMS - 601) for unagreed tax changes if protested.

    3. DC 10 (RCCMS - 604) for unagreed tax changes without protest.

EO - Inactive Organizations
  1. Inactivity for a period of years could result in proposed revocation of tax-exempt status on the grounds that the organization doesn't conduct qualifying activities, and therefore doesn't meet the operational test in 26 CFR 1.501(c)(3)-1(a)(1).

  2. A secondary ground for revocation may be that the inactive organization failed to establish that it was observing the conditions necessary for continuation of exempt status and thus didn't comply with IRC 6033. However, automatic revocation may preempt the closing of such examinations. In that event, see survey procedures for IRC 6033(j) automatically revoked organizations at IRM 4.70.14.4.11.2, EO Automatically Revoked Organizations.

  3. If an inactive organization (not subject to auto-revocation) properly terminated before the completion of the examination or can’t be located, it may be recognized as terminated if it meets the criteria in IRM 4.70.14.2.1.3.1.15, Termination of Exempt Status, or is described in Examples 1 and 3 of Exhibit 4.70.14-17, EO Unable-to-Locate Scenario Guidance Table.

  4. If an inactive organization has not properly terminated (or is unable-to-locate in Examples 2, 4, 5, and 6 of Exhibit 4.70.14-17), you may do one of the following:

    • Issue Letter 1744, following the guidelines in IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations, with a paragraph informing them that a lack of operations could result in revocation of tax-exempt status and/or reclassification to a PF, if applicable.

    • Propose revocation.

    • Survey the case if it falls under the survey guidelines.

  5. If an inactive publicly supported organization is subject to a proposed revocation, determine whether to reclassify the organization as a PF.

EO - Inadequate Records
  1. IRC 6001 provides that every person liable for any tax imposed by Title 26, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and Regulations as the Secretary or his delegate may from time to time prescribe.

  2. Whenever in the judgment of the Secretary or his delegate, it is necessary, he may require any person, by notice served upon such person or by Regulations, to make such returns, render such statements, or keep such records, as the Secretary or his delegate deems sufficient to show whether or not such person is liable for tax under Title 26.

  3. IRC 6033 provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and Regulations as the Secretary may from time to time prescribe.

  4. Treas. Reg. 1.6001-1(c) provides, in part, that organizations exempt from tax under IRC 501(a) shall "keep such books and records as are required to substantiate the information required by IRC 6033" .

EO - Inadequate Records Notice
  1. An "Inadequate Records Notice" places taxpayers on notice that their record keeping practices are deficient and must be improved to meet the requirements of law. The issuance of an Inadequate Records Notice may result in a follow-up examination or compliance check. This notice is a tool to enforce compliance with the requirement to keep adequate books and records for purposes.

  2. The following items together constitute an "Inadequate Records Notice" (the Notice):

    1. Letter 4095, signed by the GM.

    2. If agreed, a signed Form 2807, Agreement to Maintain Adequate Books of Accounts and Records.

    3. If unagreed, attachment titled, "Explanation of Inadequate Records" . This notice must be sent by certified mail.

      Note:

      Explain the reason the records were inadequate on the top of the page. Copy the list of inadequate records from Form 2807, and paste them onto bottom half of the page.

    4. Attachment titled, "Applicable Provisions of the Internal Revenue Code and Regulations" .

    5. Attachment titled, "Other Deficiencies Identified in the Examination" .

      Note:

      List other defects noted in the examination similar to a paragraph on Letter 1744. These include examples such as engaging in excessive lobbying activities, or failure to file other returns.

      Title the attachment: "Other Deficiencies Identified in the Examination."

  3. Use your judgment to determine whether a taxpayer has:

    • Maintained adequate records.

    • Complied with a record retention agreement.

  4. Consider the facts and circumstances, including but not limited to the following factors:

    1. Prior history and present degree of noncompliance.

    2. Indications of willful intent.

    3. Evidence of refusal to keep records.

    4. Other evidence of harm to the government.

    5. Probability that poor record keeping results in significant changes to the return.

    6. Likelihood that compliance can be enforced if the taxpayer fails or refuses to correct the inadequacies.

    7. Anticipated revenue in relation to the time and effort required to obtain compliance.

  5. If the taxpayer has failed to maintain adequate books and records, discuss the matter with your GM to determine whether to issue an Inadequate Records Notice.

  6. When discussing the inadequate records issue with the taxpayer:

    1. Avoid criticizing the work of the taxpayer's employees, accountants, or attorneys in a way that would suggest wrongdoing or negligence.

    2. Focus on explaining how the taxpayer's books and records are inadequate.

    3. Explain the steps that need to be taken to bring them into compliance with applicable statutes.

  7. Document the following:

    1. The nature of the inadequacies of the taxpayer's records.

    2. Managerial discussions.

    3. The basis for the conclusion reached.

    4. On_______, the date the organization was verbally informed that records were not adequate, and in the record of service section on the bottom of the attachment to Letter 4095 titled, Applicable Provisions of the Internal Revenue Code and Regulations.

    5. On_______, the date of delivery or service of Form 2807, and in the record of service section on the bottom of the attachment to Letter 4095 titled, Applicable Provisions of the Internal Revenue Code and Regulations. If certified-mailed, the return receipt constitutes record of service. Attach it to the copy of the Form 2807 retained in the case file. If hand-delivered, include the name of the individual served.

    6. On________, the date you solicited an agreement, and in the record of service section on the bottom of the attachment to Letter 4095 titled, Applicable Provisions of the Internal Revenue Code and Regulations.

  8. If the case involves a potential or existing record retention agreement, contact LB&I. Use the Specialist Referral System (SRS) to obtain the assistance of a Computer Examination Specialist. See IRM 4.70.13.6.2, Specialist Referral System.

  9. If you and your GM agree that an Inadequate Records Notice is appropriate, take the following steps:

    1. Prepare Form 2807. See example at Exhibit 4.70.14-9, EO Form 2807 Sample..

    2. Include the date the taxpayer was verbally notified that the records were inadequate or not in compliance with a record retention agreement.

    3. Include the tax years examined.

    4. Include a description of the specific books and records.

    5. Include a clear and concise statement how the taxpayer's records were inadequate or not in compliance with a record retention agreement.

    6. Personally serve Form 2807 or send by certified mail. If you hold a closing conference with the organization, serve Form 2807 to an officer or trustee authorized to sign tax returns. Allow no more than 15 days.

    7. Solicit an agreement with the taxpayer on Form 2807.

    8. If the taxpayer doesn’t sign Form 2807, discuss the facts and circumstances with your GM.

      Reminder:

      Document all managerial discussions.

    9. Prepare referral Form 5666. State in the "Information Obtained" section of Form 5666 that the attached Letter 4095 package is documentation for an Inadequate Records Notice.

      Note:

      Recommend a follow-up examination on Form 5666 for no less than two years subsequent to the year of the current examination.

    10. Name the electronic files of the referral package following the established naming convention format and post to the RCCMS Office Documents Folder.

    11. Check the "Yes" box on the SH-56.0 Referral item on tab 3 of 6 of the RCCMS 3198-A Special Handling checksheet to flag the Form 5666.

      Note:

      Manager reviews and sends the signed electronic Form 5666 (and attachments) in a secure email to the TE/GE Referral Group email box at *Manager EO Classification.

      See IRM 4.70.6.4, Referrals Procedures.

    12. Issue Letter 4095 and its attachments to the taxpayer. m. At closure, use RCCMS DC 214, Change due to Correction of Operations. Close the case to the closing unit following.

    13. At closure, use RCCMS DC 214, Change due to Correction of Operations. Close the case to the closing unit following.

EO - Inadequate Records - Follow Up After Issuance of Inadequate Records Notice
  1. You may be assigned a follow up examination or compliance check of the taxpayer. Document in your workpapers your consideration of the inadequate record-keeping issue. State whether or not the taxpayer has corrected the inadequacies.

  2. If the taxpayer is substantially complying with the requirements to keep adequate records, follow normal examination procedures with regard to the scope of the examination.

  3. When closing the case, include the inadequate records notice information in the case file.

  4. If, upon follow-up, the taxpayer is still not keeping adequate records, consider additional enforcement measures, including:

    • Assertion of accuracy penalties

    • Revocation

EO - Inadequate Records – Revocation
  1. Every organization exempt from tax, whether or not required to file an annual information return, must submit such additional information as may be required by the IRS for the purpose of inquiring into its exempt status and administering the provisions of subchapter F, Chapter 1 of subtitle A of the Code, IRC 6033, and Chapter 42 of subtitle D of the Code. Treas. Reg. 1.6033-2(1)(2).

  2. Any organization exempt from tax under IRC 501(a) is required to supply the IRS with such information as is required by the revenue procedures, the instructions to Form 990, and the schedules thereto, and to keep such books and records as are necessary to substantiate such information. IRC 6033, Treas. Reg. 1.6001-1(c) and Treas. Reg. 1.6033-2(a)(1) and 1.6033-2(i)(2).

  3. Failure to maintain proper books and records, and make them available to the examiner, may result in revocation of tax-exempt status because the organization isn’t observing the conditions required for such status.

    Caution:

    Except in unusual circumstances, don’t propose revocation due to inadequate records unless an Inadequate Records Notice was issued as a result of a prior examination.

  4. Although drafted prior to enactment of IRC 6652, Rev. Rul. 59-95 has never been withdrawn and can be used to support a revocation, where the organization will not supply the information necessary to enable the Service to make a determination as to whether there have been any substantial changes in the organization's character, purpose, or method of operation, and there is a substantial doubt that the organization should continue to be exempt.

  5. If the organization continues to fail to comply substantially with the law and regulations for maintaining adequate books and records, or fails to provide requested information, discuss the inadequacies with your GM to determine whether to propose revocation of tax-exempt status.

  6. If you and your GM decide revocation is appropriate, your workpapers and report of examination must demonstrate:

    1. How the information requested from the taxpayer is material in establishing the organization's right to continued exemption.

    2. That the organization was given an adequate opportunity to provide the requested information.

    3. That the organization was advised of the consequences of failing to provide such information.

      Note:

      The GM may consider requesting advice from TEGEDC during the development of a revocation issue based on a failure to maintain or provide records.

EO - Inadequate Records Appeal Rights
  1. An Appeals conference is not given to taxpayers who agree to proposed adjustments but don’t execute Form 2807.

  2. If the taxpayer doesn’t execute Form 2807 and the case is unagreed, inform the taxpayer of the opportunity to discuss the matter at an Appeals conference.

EO - Status 36 Organizations
  1. Status 36 in the EOBMF describes the following types of organizations that haven’t received a ruling or determination letter granting tax-exempt status, and aren’t covered under a group exemption ruling:

    • Organizations other than IRC 501(c)(3), (9) or (17) that filed a Form 990-N, Form 990, or Form 990-EZ, self-declaring their exempt status, not covered under a group exemption ruling.

    • IRC 501(c)(4) entities that have registered under IRC 506 (even if no Form 990 series return was filed).

    • Organizations claiming exemption under IRC 501(c)(29) even though these organizations are required to apply for exemption because the application process is anticipated to take longer than the 180 days prescribed under the Status 40 program.

  2. A Status 36 organization:

    • Can be disqualified from tax-exempt status for the specified self-declared tax years if it fails to qualify.

    • Is subject to filing Form 990-T and other EO returns if it qualifies for tax-exempt status for the self-declared tax year.

  3. A disqualification from a self-declared tax-exempt status is subject to declaratory judgment rights.

  4. If a Status 36 organization meets the requirements for the tax-exempt status as declared on Form 990 or Form 990-EZ:

    1. Use Letter 6049 for no-change.

    2. Inform the organization of the application for exemption process, including user fee.

  5. If a Status 36 organization fails to qualify for tax-exemption for any tax year, prepare Letter 3618, Form 4621-A, Form 886-A, and Form 6018.

    1. Prepare Form 2363-A (don’t submit for processing). See Exhibit 4.70.14-15, EO Status 36 Case: Form 2363-A Instructions.

    2. Prepare Form 5666 or (Form 5346) for SB/SE or LB&I. Alternatively, you can enforce the income tax for the examined tax years.

  6. Refer to the six Status 36 scenarios at Exhibit 4.70.14-4, Status 36 Case Scenarios.

  7. If the examination resulted in a change due to correction of operations or had changes to related returns, use DC 52 (RCCMS 214) and issue Letter 1744 as a closing letter with explanations of the changes on a Form 886-A. Use DC 02 (RCCMS 107) and issue Letter 6049 if there were no changes.

    Reminder:

    Status 36 organizations are not required to apply for tax-exemption, but must apply to receive recognition for tax-exempt status. Only IRC 501(c)(3), (9), (17) and (29) organizations are required to apply for tax-exemption.

  8. For agreed disqualifications:

    1. Close the primary return with DC 13 (RCCMS 501) unless a higher priority disposal code applies.

    2. Form 5666 (or Form 5346) is required if you use DC 13 (RCCMS 501).

    3. If you enforce the income tax for the disqualified tax years, close the primary return with DC 04 (RCCMS 205) or DC 05 (RCCMS 207).

      Note:

      Refer to Exhibit 4.70.14-6, for instructions in preparing Form 6018.

  9. For unagreed disqualifications, use DC 07 (RCCMS 601) or DC 10 (RCCMS 604).

EO - Initial Examination Reports
  1. An initial examination report is a preliminary summary report proposing a change in tax or status and soliciting an agreement. Initial examination reports:

    • Are an efficient way to present a report and secure an agreement when the taxpayer reasonably understands the changes and you expect to receive an agreement to the changes.

    • Are followed by a formal report if the taxpayer disagrees or fails to reply. In contrast formal reports are followed by a SNOD or immediate assessment if a taxpayer fails to reply.

    • Aren’t used for declaratory judgment cases, and church examinations. You can use a draft report tool instead if appropriate.

    • Are optional and not appropriate for all cases.

      Note:

      In the case of discrepancy adjustments, Letter 3605, Form 4549-E and Form 886-A is a first formal examination report issued to the taxpayer that can be thought of as an initial examination report, but it is actually a formal examination report because it is followed by a SNOD if there is no reply to the 30-day letter.

  2. For non-declaratory judgment cases, you can bypass an initial report process and resort directly to a formal report process if:

    • You aren’t certain the taxpayer understands the proposed changes.

    • You reasonably expect the taxpayer will disagree with the changes.

    • Other reasons are at the discretion of the examiner or the GM.

      Note:

      In some larger cases, you can present an issue to the taxpayer using Form 5701, and then prepare an initial or formal examination report after you have gathered all comments on all issues (all Forms 5701). Form 5701 isn't a "report" or a waiver form, rather it is used to present one issue at a time and to document the taxpayer's agreement or comments on each specific issue.

      See also Form 5700, Issue Control Log, also optional.

      Note:

      Consider that a FTS may be more appropriate in order to settle one or more unagreed issues. See IRM 4.70.14.2.4.3.2, EO - Fast Track Settlement (FTS).

  3. The taxpayer's reply or non-reply to an initial examination report determines whether you have an agreed or unagreed case moving forward.

    1. If the initial examination report is agreed, issue a final agreed change closing letter with the GM’s signature, and close the case to the EO closing unit.

    2. If the initial examination report is unagreed, issue a 30-day letter and formal examination report, update AIMS to status 13 while in 30-day suspense. Hold in suspense pending the taxpayer’s reply.

  4. The initial examination report:

    1. Is a proposal.

    2. Solicits an agreement.

    3. Solicits correction of a taxable event for Chapter 42 excise tax purposes.

    4. Allows more time to resolve any disputed facts of the case.

    5. Allows for usage of shorter reply due dates (less than 30 days), if desired.

    6. May inform the taxpayer to consider FTS for an unagreed issue.

    7. Is optional and may be bypassed for a formal report.

  5. For the initial examination report, you must:

    1. Fully develop the case before issuing the report.

    2. Have a reasonable belief the taxpayer understands the changes and will agree without much difficulty.

    3. Inform the taxpayer that the initial examination report doesn't constitute an official 30-day letter.

  6. Generally, you prepare the facts, law and argument portion of the RAR component in summary form. If prepared in summary form, the explanation must be sufficient to justify the proposed change.

  7. Give the initial examination report to the taxpayer using one of the following transmittals:

    • A drafted nonstandard letter.

    • A Form 4564, Information Document Request.

    • A Form 5701, Notice of Proposed Adjustment.

      Note:

      Indicate on the transmittal, "This Not a 30-day Letter."

  8. If a taxpayer has verbally indicated they will agree to a proposed tax adjustment, an initial examination report doesn't need to include a Form 886-A, Explanation of Items.

    Note:

    Obtain proof of correction for two-tiered Chapter 42 excise taxes before considering the tax as agreed.

  9. If preparing Form 886-A, type:

    1. "This is an initial examination report" on the first page of the Form 886–A.

    2. "Initial examination report" in the header of the Form 886–A.

  10. Use the spelling and grammar checker. Refer to the tables listing various reports and letters that can be included in an initial examination report:

    • See Exhibit 4.70.14-2, EO Reports and Closing Letters for Claims and Abatements, for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.70.14-3, Reports and Closing Letters for Change Cases, for a list of the formal 30-day letters, report forms, and closing letters in general.

  11. After the deadline for responding passes, determine if the taxpayer:

    • Agreed to the proposed adjustment.

    • Submitted a reply other than a signed agreement.

    • Failed to reply to the initial examination report.

  12. If the taxpayer signs the agreement, process as follows:

    If the issue is... Then...
    An agreed worker reclassification.
    • Process any payments received.

    • Close to the EO closing unit as agreed with DC 03 (RCCMS - 102).

    • If the EO signed a CSP agreement, close the calendar quarters for which you will be making an assessment using DC 03 (RCCMS - 102).

    • Close all other tax periods using DC 01 (RCCMS - 210). Refer to IRM 4.23.6.15.2. Use Letter 3382.

    Agreed tax changes including:
    • Excise (no correction required, or correction was required and fully made)

    • Employment taxes (non-worker classification)

    • Income taxes

    • Process any payments received.

    • Verify correction, if applicable.

    • Issue Letter 2511 with a copy of the signed agreement. Close to the EO closing unit as agreed with DC 03 (RCCMS - 102).

    Chapter 42 excise tax adjustment without correction.
    • Process any payments received.

    • Issue a formal RAR. Recommend imposition of the 1st tier tax and propose the 2nd tier tax in the event the act or failure to act giving rise to the 1st tier tax is uncorrected within the taxable period.

    • To ensure issuance of a notice of deficiency, you must recommend imposition of both taxes.

    • The report brings together all the issues and alerts the taxpayer to the full consequences of the failure to correct.

    • Fully describe the act or failure to act which gave rise to the tax liability in the report.

    Subject to multiple issues listed above.
    • Process any payments received.

    • Issue separate formal examination reports for each unagreed issue.

    • Management may split cases by type of tax, closing unagreed issues to Mandatory Review and closing agreed issues to the EO closing unit.

    Note:

    If issuing one or more Letter 2511, with no other issues, prepare and issue Letter 1744 as the closing letter for the primary return (or e-Postcard) examination. In the attached Form 886-A, reference the agreed adjustment as being "issued under separate cover."

  13. If the taxpayer disagrees with the initial examination report (and doesn't request a FTS), review the reply and proceed as follows:

    If the additional information provided... Then...
    Changes the conclusion, resulting in a no change. Close as a no change. See Exhibit 4.70.14-1, Closing Letters for No Change Cases.
    Changes the conclusion, resulting in a modified adjustment. Consider FTS for the unagreed issue. See IRM 4.70.14.2.4.3.2, EO – Fast Track Settlements (FTS). Otherwise, modify the report, and issue a formal examination report. See IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.
    Doesn't change the conclusion. Consider FTS for the unagreed issue. See IRM 4.70.14.2.4.3.2, EO – Fast Track Settlements (FTS). Otherwise issue the formal RAR. See IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

  14. If no one replies to the initial report, issue a "Formal examination report" via certified mail to the taxpayer and any representatives. See IRM 4.70.14.2.4.3.1, EO – Formal Examination Reports.

EO – Exempt Organizations Examinations Closing Agreements
  1. IRC 7121 gives the Commissioner the authority to enter into a written closing agreement with any person for their internal revenue tax liability for any taxable period ending before or after the agreement date. EO employees use closing agreements to resolve exemption and tax issues under EO jurisdiction and in voluntary taxpayer-initiated (walk-in) requests. See Exhibit 4.70.14-12, EO Closing Agreement Authority and Finality, for authorities covering closing agreements.

  2. The Director, EO is the executive responsible for closing agreements.

  3. The EOCAC prepares a quarterly monitoring report detailing closing agreement activities. See IRM 4.70.14.2.1.3.2.46, EO – EOCAC: Monitoring Reports, for further detail.

EO – Terms/Definitions/Acronyms
  1. Closing agreement: A legally binding document that exhibits some attributes of a contract, but is created by statute and subject to statutory requirements.

  2. Exempt Organizations Closing Agreement Coordinator (EOCAC): The EOCAC is a senior employee in EO Examinations who is fully experienced in dealing with EO issues. If EO designates more than one EOCAC, one is the primary contact for communications with other offices. The duties of the EOCAC include:

    1. Support the fair, impartial, objective, and consistent use of closing agreements for the treatment of similar issues. Thus, the EOCAC retains a copy of all approved closing agreements.

    2. Provide guidance regarding the closing agreement process to tax exempt organizations seeking a closing agreement.

    3. Provide managers and/or examiners advice whenever they are considering a closing agreement to ensure consistency of treatment for similar issues.

    4. Review requests to begin the closing agreement process and review closing agreements for accuracy, completeness and consistency before submitting them to the Director, EO:E.

    5. Contact TEGEDC concerning legal or technical issues, or the possibility of litigation.

    6. Consider any alterations or erasures to material provisions of the closing agreement throughout the approval process and coordinate with the Director, EO:E.

    7. Review and track closing agreements through signature process.

    8. Provide backup file and information as needed.

    9. Coordinate responses to requests for closing agreement information with Public Affairs and the Disclosure Officer.

    10. Prepare quarterly closing agreement reports.

  3. Informal stage: The taxpayer/representative and the EOCAC (or examiner) discuss the closing agreement process. Any information obtained is used to determine if a closing agreement is viable. The taxpayer is allowed to stay anonymous only with walk-in agreements.

  4. Formal stage: The taxpayer/representative makes a formal request to enter into a closing agreement under IRC 7121. The taxpayer is required to reveal its identity.

  5. We/our/us: Used in lieu of "the service" and "the government" .

    Acronyms Definition
    AIMS Audit Information Management System
    BMF Business Master File
    CSP Classification Settlement Program
    EO Exempt Organizations
    EO Exam Exempt Organizations, Examinations
    EOCAC Exempt Organizations Closing Agreement Coordinator
    EO:E Exempt Organizations Examinations
    EO:RA:T Exempt Organizations Ruling and Agreements Technical
    EPR Examination Program and Review
    IDR Information document request
    JCT Joint Committee on Taxation
    MF Master file
    NMF Non-master file
    R&A Exempt Organization Rulings and Agreements
    RCCMS Reporting Compliance Case Management System
    TC Transaction code
    TEDS/EDS Tax Examination Determination System/Exempt Determination System
    TE/GE Tax Exempt/Government Entities

EO – Introduction
  1. IRS uses closing agreements when satisfactory resolutions can’t be reached through normal audit procedures.

  2. A taxpayer may request a closing agreement during or outside of an audit. IRS isn’t required to grant a closing agreement in either situation. See Exhibit 4.70.14-12, EO Closing Agreement Authority and Finality, for an explanation of the authority to enter into a closing agreement.

    Note:

    See IRM 4.23.6, Classification Settlement Program (CSP), for CSP agreements used to resolve worker classification issues.

EO - Appropriate Situations
  1. Consider a closing agreement in "but for" situations. "But for" situations are when an organization would retain exemption "but for" the involvement of certain persons, actions, or transactions otherwise requiring revocation.

    Example:

    A public charity operates a food bank. The founder and his spouse, the primary officers, used the charity's funds for personal expenses. While their transactions could be dealt with through IRC 4958, their continued control of the organization as officers requires revocation. The charity would be exempt "but for" the actions and control of the officers.

    Example:

    A social club files Form 990-T annually and reports non-member income in excess of 20% from monthly pool parties open to the public. The remaining income stems from activities involving members only. The club would otherwise be exempt "but for" the existence of the pool parties.

    Example:

    A homeowners association for a gated-community posts signs prohibiting public entry to the community. The homeowners association would be exempt under IRC 501(c)(4) "but for" the signs prohibiting entry.

    Note:

    The taxpayer must remove the persons and completely correct the actions or transactions before executing the closing agreement.

  2. You should consider a walk-in closing agreement when a tax issue can't be resolved through regular procedures.

    Example:

    An IRC 501(c)(5) organization has been primarily operating substantial non-exempt activities for several years. The organization wants their exemption revoked retroactive to the year in which they no longer met the exemption requirements under IRC 501(c)(5).

    Example:

    An exempt organization failed to include as wages a taxable fringe benefit to its employees. The employer wants to pay all outstanding liability as a result of this under-reporting error.

  3. A closing agreement can be entered into in a case under audit.

EO – Restrictions
  1. EO Exam doesn’t enter into closing agreements:

    • For prospective transactions.

    • To impose sanctions as a penalty for non-compliance.

  2. Closing agreements shouldn’t be used if future compliance is in jeopardy.

    Example:

    A taxpayer continues to engage in flagrant acts that compel revocation.

  3. A closing agreement shouldn’t be used to:

    • Circumvent a tax liability, regardless of the type or amount of tax.

    • Infringe on the settlement authority of Appeals.

    • Simply allow a taxpayer to reduce the amount of a tax or penalty.

    • Skirt a normal audit procedure.

    • Bypass other existing procedures.

  4. Specific examples of when a closing agreement shouldn’t be used include:

    • Processing an application for exemption.

    • Processing delinquent returns.

    • Submitting Offers in Compromise.

    • Requesting a Technical Advice Memo.

    • Processing a Private Letter Ruling request (an action performed by EEE Counsel only).

    • Obtaining guidance from R&A.

    • Referring the taxpayer to Criminal Investigation.

    • Resolving a civil case after a criminal tax conviction.

EO - Recognition of Exempt Status
  1. A closing agreement may not confer recognition of tax-exempt status; it may only state we recognize the taxpayer as exempt as of a given date.

  2. The Area Manager or the EOCAC coordinates with the Manager, EO Determinations (Cincinnati) to process an application for recognition of exemption filed with a closing agreement.

  3. EO Determinations establishes the application on TEDS/EDS and forwards it to R&A for expedited processing.

  4. R&A issues the determination letter.

EO - Minimum Requirements
  1. Fully develop all facts before considering a closing agreement.

  2. Ensure the closing agreement brings taxpayers into full retroactive compliance:

    1. Secure all delinquent returns for the last six years, as applicable or required.

    2. Collect payment of 100% of the tax, interest, and penalties, if applicable.

    3. Verify correction of any transactions subject to Chapters 41, 42, and 44

    .

  3. Base assessments on the taxpayer's actual tax liability. The taxpayer may enter into an installment agreement if unable to pay in full when signing the agreement.

    Note:

    If the taxpayer uses an installment agreement, the closing agreement should reference it.

  4. If you’re considering a closing agreement in lieu of revocation, you must determine the potential tax liability as if the organization were revoked. See IRM 4.70.14.2.1.3.3, Conversion of Returns Upon Revocation of Exemption.

EO - Closing Agreement Document
  1. When creating a closing agreement, you may opt to use Form 866, Agreement As to Final Determination of Tax Liability, or Form 906, Closing Agreement On Final Determination Covering Specific Matters. If not using Form 866 or Form 906, make sure the closing agreement contains the same information that is in the top of Form 906.

    Note:

    Form 866 is for determinations of tax liability only. Use Form 906 for exemption and/or status issues. A Form 906 can be used to determine tax liability and exemption and/or status issues.

  2. Consider using Form 4222, Closing Agreement Checklist, to:

    • Ensure accuracy when preparing the closing agreement.

    • Prevent procedural errors.

EO - Closing Agreement Format
  1. While preparing a closing agreement refer to the format in Exhibit 4.70.14-14, EO Closing Agreement Authority and Finality.

  2. The agreement begins with a standard caption at the top of the first page stating the nature of the document.

  3. The agreement should list:

    • Names of all parties to the agreement

    • Addresses

    • Taxpayer identification numbers (TIN)

  4. If several parties are involved in the agreement, follow the instructions in Rev. Proc. 68-16, section 6.04, paragraph four. See IRM 8.13.1.3.12, Multiple Party Agreements.

  5. The agreement should contain one or more "WHEREAS" clauses. The "WHEREAS" clauses: • Introduce the subject matter of the agreement. • State the premises upon which the agreement is based. • Explain the facts supporting the determinations that follow.

  6. The section of the agreement captioned "NOW, THEREFORE IT IS HEREBY DETERMINED AND AGREED BETWEEN TAXPAYER AND THE SERVICE AS FOLLOWS for federal tax purposes that:" lists:

    1. The items agreed upon by both parties.

    2. The actions taken by the taxpayer.

    3. The payments made by the taxpayer.

  7. Draft the "THEREFORE" clauses as a continuation of the preceding "HEREBY DETERMINED" statements. The "THEREFORE" clauses list the resolution of the "WHEREAS" clauses.

  8. The last section of the closing agreement is entitled "THIS CLOSING AGREEMENT IS FINAL AND CONCLUSIVE, EXCEPT" . See Exhibit 4.70.14-14, EO Sample Closing Agreement as To Final Determination.

  9. If the closing agreement (exclusive of attachments) consists of more than one page:

    1. Number each page at the bottom "Page ___ of ___" .

    2. On the top of each page following page 1, state the following: "Closing Agreement with (name of taxpayer)" .

  10. If several parties are involved in the agreement, follow the instructions in Rev. Proc. 68-16, section 6.04, paragraph four.

  11. If the taxpayer is unable to pay in full, consider an installment agreement request. Reference the installment agreement in the closing agreement, but leave out the terms. See IRM 4.70.14.2.1.3.2.10, EO – Addressing Payment of Closing Agreement Liability, and IRM 4.70.14.2.1.3.1.9, EO – Installment Agreements.

  12. If organizational documents need to be amended, secure the amendment and describe the changes in the closing agreement.

    Reminder:

    The taxpayer must be compliant in both exemption and tax issues before the agreement is executed.

  13. Closing agreements must include:

    • The relevant facts, including our proposed adverse action.

    • Explicit conditions the taxpayer either has completed or must complete to achieve compliance. Keep concurrent actions to a minimum.

    • A statement addressing the treatment we will accord the taxpayer (for example, retention of exempt status).

    • The agreed-upon effect of the closing agreement on subsequent periods.

    • A statement that the agreement is limited to Internal Revenue Code matters and doesn’t extend to other federal or state law.

    • The specific amount of tax, penalties and interest owed. Don’t list other dollar amounts.

    • A statement instructing the taxpayer to remit the total amount due by certified check(s), cashier's check(s) or similar instrument payable to the United States Treasury when he/she signs and returns the agreement for approval.

    • A statement that the payment isn’t tax deductible.

EO - Addressing Waiver of Taxpayer’s Rights
  1. Section 3468 of the Restructuring and Reform Act of 1998, prohibits officers or employees of the United States from requesting a taxpayer "to waive the taxpayer’s rights to bring a civil action against the United States, or any officer or employee of the United States, for any action taken in connection with the internal revenue laws" . The law provides three exceptions:

    1. The taxpayer waives the right knowingly and voluntarily.

    2. The request by the employee is made in person and the taxpayer’s attorney or other federally recognized tax practitioner is present, or

    3. The request is made in writing by the taxpayer’s attorney or other representative.

      Note:

      The closing agreement shouldn’t contain a taxpayer release of any right of action against the IRS or its employees unless it meets one of the above exceptions.

  2. If you’re considering seeking a waiver of rights, discuss it first with the EOCAC.

  3. The EOCAC will discuss the matter with EO:RA:T.

  4. If it’s determined the waiver request is appropriate, the examiner should include it in his/her case file:

    • Signed and dated documentation from the taxpayer or the taxpayer’s representative.

    • Complete notes on Form 5464, Case Chronology Record, describing the process you used to secure the waiver.

EO - Addressing Payment of Closing Agreement Liability
  1. The taxpayer must pay the liability in full when signing the agreement. If the taxpayer is unable to fully pay, indicate in the closing agreement that before or simultaneously with the execution of the agreement, the taxpayer entered into an installment agreement providing for full payment of the liability.

  2. IRM 5.14.1.6(3) states that multi-functional installment agreement authority is limited to certain types of accounts with an aggregate unpaid balance of assessments less than or equal to the amount provided in IRM 5.14.1.6(3).

  3. If the liability is greater than $25,000, consult with TEGEDC about using an installment agreement.

  4. See IRM 4.70.14.2.1.3.1.9, EO – Installment Agreements, for more on installment agreements.

EO - Explanation of Process
  1. Closing agreements involve a five-step process:

    1. Obtain necessary information

    2. Obtain approval to work on the draft

    3. Prepare and facilitate the draft

    4. Obtain approval of the agreement

    5. Process the approved agreement

  2. At any time before the agreement is executed, either the taxpayer/representative or the IRS can decide not to enter into an agreement.

  3. If the taxpayer/representative or the IRS decides not to enter into an agreement and the situation involves:

    • A taxpayer currently under audit, the examiner continues to work the case using normal audit procedures.

    • A walk-in, the EOCAC closes the request for a closing agreement and issues a denial letter.

EO – Timelines
  1. Follow the time frames below so the closing agreement process is completed expeditiously:

    Action Maximum Time frame after Receipt (working days)
    Return phone call 3 days
    Review request and consult with Counsel 10 days
    Preparation of request for additional information 10 days
    Due date for additional information Due date for additional
    Review of additional information 10 days
    Due date for preparation of draft agreement 90 days
    Review of draft agreement 10 days
    Counsel review of draft agreement 45 days
    TP review of draft agreement 15 days
    Subsequent revisions to draft agreement 15 days
    Group Manager, Area Manager, Counsel approval 5 days
    Schedule briefings 30 days
    EOCAC, EPR Manager, Director, EO:E approval 5 days
    Respond to questions raised during briefings 5 days
    Secure taxpayer signature and payment 30 days
    Director executes agreement 10 days
    Mail executed agreement to taxpayer 3 days
    Assessment made after payment posts 5 days
    Close case in RCCMS 45 days

  2. Consider reasonable requests to extend the above time frames.

  3. Secure any applicable statute extensions for requests for taxpayers currently under exam.

EO - Exam-Initiated Closing Agreements
  1. A closing agreement is an option for resolving issues encountered in an exam.

  2. The examiner or taxpayer may suggest a closing agreement. However, confer with your manager before you suggest a closing agreement.

  3. Complete the paperwork for a closing agreement and to process any payments. TEGEDC may help to draft the closing agreement, but the examiner maintains the case file.

EO - Informal Stage - Obtaining Necessary Information
  1. Before considering a closing agreement:

    1. Assess the legal aspects of the case.

    2. Establish our position on the issues.

    3. Establish the taxpayer's position.

    4. Discuss our position on the issues with the taxpayer.

    5. Determine the effect adverse action(s) would have on public interest.

    6. Clarify if organizational and/or operational deficiencies can be corrected.

    7. Decide if we’ll sustain disadvantage(s) by entering into the closing agreement.

  2. Discuss the possible closing agreement with your group manager and decide if it’s worth pursuing.

  3. Talk to the taxpayer to see if they’d consider a closing agreement. However, don't guarantee a closing agreement as it may not be approved.

  4. If the taxpayer agrees, consult your manager and TEGEDC. If both concur, submit a summary of the issues and the proposed solution to the EOCAC.

  5. If the EOCAC considers a closing agreement to be viable, the EOCAC sends the cover sheet in Exhibit 4.70.14-13, EO Closing Agreement Cover Sheet, to the examiner. The examiner:

    1. Completes Part A.

    2. Secures the group manager’s electronic signature in Part B.

    3. Secures the area manager’s electronic signature in Part B.

    4. Returns the signed cover sheet to the EOCAC.

EO - Formal Stage - Obtaining Approval to Prepare Draft
  1. The Director, EO:E must approve the request to begin working on a draft agreement.

  2. The examiner shouldn’t start working on the terms of a closing agreement until after the approvals are obtained.

  3. Upon receipt of the signed cover sheet, the EOCAC:

    1. Prepares briefing notes per Exhibit 4.70.14-18, EO Briefing Report.

    2. Briefs the Manager, EPR. Manager, EPR signs either the "approved" or "not approved" Part B section of the cover sheet and returns it to the EOCAC.

    3. Sends the briefing notes and approved cover sheet to the Director, EO:E.

    4. Briefs the Director, EO:E.

  4. The Director, EO:E signs either the "approved" or "not approved" Part B section of the cover sheet and returns it to the EOCAC.

  5. If the Director, EO:E concurs, the EOCAC returns the cover sheet to the group manager/examiner.

  6. If approval isn't granted at any stage:

    1. The EOCAC returns the cover sheet to the group manager/examiner and communicates the reasons for rejection.

    2. The examiner must consider pursuing the original planned course of action (such as revocation, adverse action, etc.).

    3. The taxpayer may pursue a Fast Track Settlement (if applicable).

    4. The taxpayer may submit a formal protest to Appeals.

  7. If further evidence is found indicating a closing agreement would be beneficial, the EOCAC may continue to further develop the proposal with the group. The approval process starts all over again.

EO - Formal Stage - Preparing and Facilitating the Draft
  1. Examiner: before you prepare the closing agreement:

    • Determine the tax consequences. • Discuss the general terms of the agreement with the taxpayer and attempt to work out any disputes.

    • Make sure the taxpayer understands that either party has the option to discontinue at any point in the process if a resolution can't be reached. The taxpayer loses no appeal rights if an agreement isn’t reached.

    • If additional information is needed from the taxpayer, issue the cover letter in Exhibit 4.70.14-19, EO Information Document Request Cover Letter (Exams Only), and Form 4564, Information Document Request.

    • Determine any required actions the taxpayer needs to complete.

      Example:

      The President and Vice President engaged in several excess benefit transactions, jeopardizing the organization's exempt status. Revoking the organization's exempt status would severely hurt the local community. In lieu of revocation, we want the President and Vice President to resign and the Board to create and maintain a conflict of interest policy to prevent future excess benefit transactions.

    • Consult the group manager and TEGEDC, as necessary.

EO - Preparing a Draft Agreement
  1. Once the issues are resolved, the examiner prepares the closing agreement. The taxpayer may also craft the closing agreement. TEGEDC reviews and revises the document as needed.

  2. The closing agreement should:

    • State each matter clearly allowing no room for misinterpretation.

    • Be objective.

    • Be easily enforceable.

      Note:

      Although the material in the case file clearly explains the intent of the agreement, the agreement must speak for itself and will be the primary basis of future action.

  3. Avoid using subjective terms such as:

    • "Substantial"

    • "Reasonable"

    • "Due diligence"

  4. See IRM 4.70.14.2.1.3.2.7, EO – Closing Agreement Format, for instructions on format and structure of a closing agreement.

  5. See IRM 8.13.1, Closing Agreements, for further in-depth technical guidance on preparing closing agreements.

EO - Formal Stage - Obtaining Approval of the Agreement(s)
  1. After the language is drafted and revisions are made, the examiner secures verbal agreement of the draft language from the taxpayer.

  2. Before securing the taxpayer’s signature on the final version of the closing agreement, the draft must be approved by:

    1. Group Manager

    2. Area Manager

    3. TEGEDC

    4. EOCAC

    5. Manager, EPR

    6. Director, EO:E

  3. The examiner secure emails the cover sheet to the field group manager with the draft closing agreement. If the group manager agrees with the closing agreement he/she electronically signs the cover sheet and secure emails the documents to the next person in line based on the following table.

    If the... Agrees, then electronically signs the approval on Part C of the cover sheet and sends the document to: Disagrees, then electronically signs the disapproval on Part C of the cover sheet and sends the document to:
    Field Group Manager Area Manager Examiner and work with them to redo the closing agreement or to end the process.
    Area Manager TEGEDC Field group manager with an explanation for the denial.
    TEGEDC EOCAC Field group manager, and:
    • Writes a memo to the group listing the legal deficiencies, suggesting possible alternatives.

    • Sends a copy of the memo to the Area Manager.

    EOCAC Manager, EPR and briefs him/her Examiner. Works with the field group manager and the examiner to resolve any discrepancies. If necessary, briefs Manager, EPR and Director, EO:E
    Manager, EPR EOCAC (sends briefing notes to the Director, EO:E) EOCAC, who:
    • Holds a briefing with the field group manager and the examiner to discuss the Manager, EPR’s concerns.

    • Briefs Director, EO:E, if necessary.

    Director, EO:E EOCAC. The EOCAC returns the cover sheet and draft closing agreement to the field group manager. EOCAC, who:
    • Holds a conference call with the field group manager and the examiner to discuss the denial.

    • Returns the documents to the field group manager.

    Note:

    Examiner: If there is tax due, enclose a computation of the tax or an explanation as to how the tax liability was determined. Also explain if the agreement doesn't assess penalties and/or interest.

  4. If the EOCAC has any concerns about the terms of the closing agreement, the EOCAC:

    1. Contacts the examiner and/or field group manager.

    2. Gives the reason(s).

    3. Suggests alternatives.

    4. Briefs the Director, EO:E as necessary.

  5. If approval isn’t granted at any stage, the examiner/manager determines if the concerns can be resolved. If so, the examiner starts the approval process again.

  6. If the concern can't be resolved:

    1. The EOCAC returns the cover sheet to the field group manager/examiner.

    2. The examiner considers pursuing the original planned course of action (revocation, adverse action, etc.).

    3. The taxpayer may pursue a Fast Track Settlement (if applicable).

    4. The taxpayer may submit a formal protest to Appeals.

EO - Final Approval Signatures – Taxpayer
  1. Examiner responsibilities: When you receive the cover sheet approved by the Director, EO:E, print a copy of the closing agreement for execution.

  2. Enter the organization's legal name and taxpayer identification number (TIN) on the signature page. Following this are the lines for the signature, title of an authorized officer or authorized representative and date signed.

  3. Send Letter 1595,Closing Agreement Request for Taxpayer Signature Transmittal, and the closing agreement to the taxpayer for signature. Be sure to use selectable paragraphs as appropriate. The taxpayer or the representative must sign the closing agreements before the Director, EO:E signs.

  4. If it is impracticable to obtain signatures from each party on all copies of the agreement, consult with TEGEDC.

    Example:

    This may apply for:

    • Large numbers of individuals/entities party to the agreement, such as a 40 member board of trustees of a university.

    • Substantial geographic separation of the parties, such as the officers being located in Alaska and Florida.

  5. The taxpayer must sign and date the closing agreement.

  6. If an authorized representative signs an agreement, attach the executed power of attorney to the signed copy of the agreement.

  7. An agreement tendered with the taxpayer's signature is the taxpayer's offer to enter into a closing agreement.

  8. Once the taxpayer signs the closing agreement, don't make changes or additions to the agreement.

  9. Be aware that the taxpayer or representative may try to make changes to the agreement. If they do, consult the EOCAC. Changes may be permitted, however:

    1. The taxpayer or representative should initial and date any additions or corrections made to the closing agreement.

    2. If a new page is substituted, the taxpayer or representative must initial and date the bottom of the page.

    3. If the taxpayer or representative makes any alterations or erasures to material provisions, determine whether the closing agreement is still appropriate.

    4. If, based on the changes, the agreement is no longer appropriate, proceed with proposed revocation and/or other adverse action.

    5. If a revised closing agreement is appropriate, redraft the closing agreement.

      Note:

      The IRS will also need to initial and date any additions or corrections made to the closing agreement when the IRS countersigns the agreement. See IRM 8.13.1.3.17, Erasures and Alterations.

  10. Solicit payment of the closing agreement liability. If more than one taxpayer is involved, solicit separate checks. This is to ensure we post the payments properly and prevent erroneous refunds.

  11. The closing agreement isn’t in effect until the Director, EO:E approves and signs the agreement.

EO - Examiner's Responsibilities Upon Receipt of Signed Agreement from Taxpayer
  1. When you receive the signed agreement from the taxpayer, verify the taxpayer took all required actions described in the closing agreement. The taxpayer must be in full compliance before executing the closing agreement.

  2. Make sure the closing agreement is in proper order and follow these steps:

    1. Sign and date the reverse of the last page of the closing agreement as the Receiving Officer. See Exhibit 4.70.14-15, EO Certification by Receiving And Reviewing Officials.

    2. Process the remittance and any delinquent returns received. See IRM 4.70.13.9, Delinquent, Amended and Substitute for Return.

    3. Complete Part D of the cover sheet.

    4. Forward the Closing Agreement to the EOCAC for approval.

    5. The EOCAC forwards the Closing Agreement to the Director, EO:E for approval.

    6. Await the return of the signed Closing Agreement from the EOCAC to you as the examiner.

    7. Scan the signed copy of the closing agreement and upload into RCCMS.

    8. Close the case to Mandatory Review. If the case is closed using regular procedures, the case closing coordinator receives the case.

  3. If the closing agreement contains errors, send a corrected closing agreement to the taxpayer using Letter 1595-B, Closing Agreement Return for Correction Transmittal.

EO - Approval and Execution of Closing Agreement
  1. Upon receipt of the scanned copy of the closing agreement, the EOCAC:

    1. Makes sure the closing agreement is in proper order.

    2. Electronically signs and dates the reverse of the last page of the closing agreements "Reviewing Officer" . See Exhibit 4.70.14-15, EO Certification by Receiving And Reviewing Officials.

    3. Completes Part D and E of the cover sheet.

    4. Prepares a memo to the Director, EO:E. See Exhibit 4.70.14-16, Transmittal Memo to Director, EO Examinations.

    5. Secure emails the memo, scanned copy of the agreement, cover sheet and briefing notes to the Manager, Mandatory Review.

  2. Once the Manager, Mandatory Review, receives three copies of the signed agreement, he/she prepares the package to send to the Director, EO:E.

  3. Upon receipt of the package, the Director, EO:E:

    1. Signs and dates the three copies.

    2. Initials and dates Part E of the cover sheet.

    3. Returns the package to the examiner.

      Exception:

      The Director, EO:E won’t take the above actions if the case is a Joint Committee case.

  4. If the case is a Joint Committee on Taxation (JTC) case, the EOCAC first submits the agreement as part of the original Joint Committee letter. The report or transmittal must contain a statement indicating tentative approval of the closing agreement by the Director, EO:E. If the Joint Committee approves the proposed closing, then the Director, EO:E signs the closing agreement.

  5. If an issue is resolved early in the audit, such as Fast Track Settlement or Early Referral to Appeals, and the case is likely to require a report to the JCT, the examiner must request an advanced review of the closing agreement by the JCT before the case closing. If the examiner wishes to pursue this option, he/she prepares a cover memo and forwards a copy of the closing agreement and any relevant supporting documents to the EOCAC. The EOCAC coordinates with the JCT. After JCT review, the appropriate Service official signs the agreement.

EO - Post-Approval Actions
  1. Manager, Mandatory Review Staff: forward the signed package to the reviewer.

  2. Mandatory Review Staff:

    1. Print the signed closing agreement. Attach a copy to the taxpayer's most recent

    2. return in the file covering the year to which the agreement pertains.

    3. Mail Letter 1595-D, Final Signed and Approved Closing Agreement Transmittal Letter, and copies to the taxpayer (and a copy to their representative if authorized to receive notices).

    4. Attach a copy of Letter 1595-D, Final Signed and Approved Closing Agreement Transmittal Letter, to a copy of the Closing Agreement.

      Note:

      Do not send an executed copy of the Certification by Receiving and Reviewing Officials, to the taxpayer (or representative).

    5. Place a copy of the agreement (with letter attached), the report transmittal (or pertinent work papers if no transmittal,) and the report of examination in the file.

  3. List instructions on the 3198 Special Handling checksheet in RCCMS, for disclosure on all returns in the case file subject to disclosure under IRC 6104(a) or IRC 6104(b) for the years to which the agreement pertains.

EO - Closure of Case
  1. Close the case using normal case closing procedures found in IRM 4.70.14.4, Closing A Case.

  2. Examined closing agreements are closed with DC 12 (104) unless a higher priority disposal code applies.

EO - Walk-In Initiated Closing Agreements
  1. Any taxpayer may initiate the closing agreement process.

  2. Non-exam initiated closing agreement requests are called "walk-ins" .

  3. The EOCAC handles all walk-in requests and tracks the case on RCCMS, but doesn't establish the case on AIMS.

  4. The Manager, Mandatory Review may appoint additional staff to help process walk-in closing agreements.

  5. If a taxpayer contacts an examiner or group manager to verbally discuss a walk-in closing agreement, refer the taxpayer or representative to the EOCAC.

  6. If a taxpayer submits a written walk-in closing agreement request to the field, send it using Form 3210, Document Transmittal, to the EOCAC at:
    Internal Revenue Service
    Attn: EOCAC
    [Enter EO Mandatory Review Manager’s Address]

  7. If the field receives an electronic walk-in closing agreement request, secure email or e-fax it to the EOCAC.

  8. The taxpayer is allowed to remain anonymous during any informal discussions.

EO - Informal Stage - Obtaining Necessary Information
  1. The taxpayer/power of attorney contacts the EOCAC to explain the situation and discuss possible remedies.

  2. The EOCAC:

    1. May request additional information during the informal discussion.

    2. Explains how the closing agreement program works and if applicable, recommends other avenues to pursue such as filing delinquent returns.

  3. If both parties agree that a closing agreement is viable, the taxpayer submits the following:

    1. Explanations why a closing agreement is appropriate.

    2. Description of the advantage(s) to us and how we will sustain no disadvantage(s) because of a closing agreement.

    3. A detailed description of the method proposed for correcting the non-compliant activities.

    4. Description of each step of the correction method. The description must include specific information to support the suggested correction method.

    5. Explanation of how it will achieve future compliance.

    6. Description of proposed method to calculate any tax, interest and penalty.

    7. Explanation of the facts, legal analysis, and proposed terms.

  4. When a written request is received, the EOCAC must:

    1. Establish the case on RCCMS, leaving "Update AIMS" unchecked.

    2. Generate Form 5464, Case Chronology Record, to track actions taken on the closing agreement.

    3. Request any additional documentation needed from the taxpayer to fully develop the taxpayer's proposal. If needed, issue a Form 4564, Information Document Request, using the cover letter at Exhibit 4.70.14-20, Information Document Request Cover Letter (Walk-Ins Only).

    4. Review the information and have a TEGEDC attorney assigned. If the EOCAC and TEGEDC believe a closing agreement is viable, ask the taxpayer/representative to disclose the taxpayer's EIN and obtain Form 2848, Power of Attorney and Declaration of Representative, if applicable.

    5. Review the exempt organization’s module information on IDRS to verify compliance and that the organization isn’t currently under audit.

  5. If the request for a closing agreement isn’t viable, the EOCAC issues Letter 5465, Closing Agreement Case has been Closed - Exempt Organizations.

EO - Formal Stage - Obtaining Approval to Prepare Draft
  1. The Director, EO:E must approve all requests to begin working on a draft agreement. The EOCAC doesn't work on the terms of a draft closing agreement until after approval is received.

  2. EOCAC:

    1. Complete Part A and B of the cover sheet ( Exhibit 4.70.14-13, EO Closing Agreement Cover Sheet). Electronically sign Part B.

    2. Send the cover sheet and briefing notes ( Exhibit 4.70.14-18, EO Briefing Report) to the Manager, EPR.

    3. Brief the Manager, EPR.

  3. Manager, EPR signs either the "approved" or the "not approved" Part B section of the cover sheet and returns it to the EOCAC.

  4. If Manager, EPR approves the cover sheet, the EOCAC sends it and the briefing notes to the Director, EO:E and briefs the Director, EO:E.

  5. The Director, EO:E signs either the "approved" or "not approved" Part B section of the cover sheet and returns it to the EOCAC.

  6. If the Director, EO:E approves the request, the agreement moves to the next stage.

  7. If the Director, EO:E denies the request, the EOCAC notifies the taxpayer and issues Letter 5465.

EO - Formal Stage - Preparing and Facilitating the Draft
  1. EOCAC: Before you prepare the draft closing agreement:

    • Determine the tax consequences.

    • Discuss the general terms of the agreement with the taxpayer and attempt to work out any disputes.

    • Make sure the taxpayer understands that either party has the option to discontinue the process at any point if a resolution can't be reached.

    • Issue an IDR with the cover letter in Exhibit 4.70.14-20, Information Document Request Cover Letter (Walk-Ins Only), if you need additional information.

    • Determine any required actions the taxpayer needs to complete.

      Example:

      The president and vice president engaged in several excess benefit transactions, jeopardizing the organization's exempt status. Revoking the organization's exempt status would severely hurt the local community. In lieu of revocation, we want the president and vice president to resign and the Board to create and maintain a conflict of interest policy to prevent future excess benefit transactions.

EO - Preparing a Draft Agreement
  1. EOCAC: When the issues are resolved, instruct the taxpayer/representative to prepare the draft closing agreement.

  2. The agreement should:

    • State each matter clearly as to reasonably lead to only one interpretation.

    • Be objective.

    • Be easily enforceable.

  3. The agreement should not include subjective terms such as:

    • "Substantial"

    • "Reasonable"

    • "Due diligence"

  4. EOCAC: When you receive the draft from the taxpayer:

    • Review the draft agreement.

    • Make revisions.

    • Send the draft to TEGEDC for review.

    • Work with TEGEDC on any necessary items.

    • Send the draft to the taxpayer/rep for any further revisions.

  5. See IRM 4.70.14.2.1.3.2.8, EO – Closing Agreement Format, for instructions on closing agreement format.

  6. See IRM 8.13.1, Closing Agreements, for further in depth technical guidance on preparing closing agreements.

EO - Formal Stage - Obtaining Approval of the Agreement(s)
  1. The EOCAC secures the taxpayer’s/rep’s verbal approval of the draft closing agreement language before proceeding with the executive approval process.

  2. The draft agreement must be approved by the following before the taxpayer signs:

    1. TEGEDC

    2. EOCAC

    3. Manager, EPR

    4. Director, EO:E

  3. Secure email the draft agreement and cover sheet to Area Counsel. The documents may be electronically signed. Send these documents to the next person as indicated per the table below:

    If the... Agrees... Then electronically sign approval on Part C of the cover sheet and send the documents to... Disagrees... Then electronically sign disapproval on Part C of the cover sheet and...
    TEGEDC EOCAC
    • Write a memo to the EOCAC explaining the legal deficiencies, suggesting possible alternatives.

    • Return the cover sheet and the memo to the EOCAC.

    • The EOCAC attempts to resolve the deficiencies or, if necessary, issues Letter 5465 to deny the request.

    EOCAC Manager, EPR and briefs Manager, EPR. Works to resolve any discrepancies. May brief Manager, EPR and Director EO:E. If unable to resolve, issues Letter 5465 to deny the request.
    Manager, EPR EOCAC. The EOCAC forwards cover sheet and briefing notes to the Director, EO:E. EOCAC briefs Director, EO:E. EOCAC. EOCAC works to resolve any discrepancies. EOCAC may brief Director EO:E. If unable to resolve, EOCAC issues Letter 5465 to deny the request.
    Director, EO:E EOCAC EOCAC. EOCAC works to resolve any discrepancies. If unable to resolve, the EOCAC issues Letter 5465 to deny the request

    Note:

    The EOCAC should provide TEGEDC a tax computation or an explanation as to how the tax liability was determined and an explanation if the agreement doesn't assess penalties and/or interest.

EO - Final Approval Signatures – Taxpayer
  1. After the EOCAC receives the approved cover sheet from the Director, EO:E, they forward it to the examiner.

  2. The examiner prints a copy of the final closing agreement for execution.

  3. The examiner:

    1. Enters the organization's legal name and TIN on the signature page. Following this are the lines for the signature, title of an authorized officer or representative and date.

    2. Sends Letter 1595, Closing Agreement Request for Taxpayer Signature Transmittal, and the closing agreements to the taxpayer for signature. Be sure to use the selectable paragraphs as appropriate. The taxpayer must sign and date the closing agreement. The taxpayer or the representative must sign the closing agreements before the Director, EO:E signs.

    3. Consults with TEGEDC if it’s impracticable to obtain signatures from each party on the agreement.

      Example:

      Large numbers of individuals/entities party to the agreement, (such as, a 40-member board of trustees) or substantial geographic separation of the parties (such as, officers located in Alaska and Florida).

    4. Solicits payment of the closing agreement liability. If more than one taxpayer is involved, solicit separate checks.

      Note:

      Separate checks ensure we post the payments properly and prevent erroneous refunds.

  4. The taxpayer signs and dates the closing agreement.

  5. When an authorized representative signs an agreement, attach the executed power of attorney to the agreement.

  6. An agreement tendered with the taxpayer's signature is the taxpayer's offer to enter into a closing agreement.

  7. Once the taxpayer signs the closing agreement, don’t make changes or additions to the agreement.

  8. Be aware that the taxpayer or representative may try to make changes to the agreement. If the taxpayer/representative makes any alterations or erasures to material provisions, consult with the EOCAC. Changes may be permitted; however, the examiner must ensure:

    1. The closing agreement is still appropriate.

    2. The taxpayer/representative initials and dates any additions or corrections made to the closing agreement.

    3. The taxpayer/representative initials and dates the bottom of any substituted pages.

    4. The taxpayer is notified that the closing agreement is no longer appropriate, if as a result of the taxpayer’s/representative’s changes, the agreement is no longer acceptable.

      Note:

      The IRS will also need to initial and date any additions or corrections made to the closing agreement when the IRS countersigns the agreement. See IRM 8.13.1.3.17, Erasures and Alterations.

  9. The examiner redrafts the closing agreement if a revised closing agreement is appropriate.

EO - Examiners Responsibilities Upon Receipt of Signed Agreement from Taxpayer
  1. When you receive the signed closing agreement from the taxpayer, verify the taxpayer took all actions required by the closing agreement. The taxpayer must be in full compliance before executing the closing agreement.

  2. Make sure the closing agreement is in proper order and follow these steps:

    1. Sign and date the reverse of the last page of the agreement as the "Receiving Officer" . See Exhibit 4.70.14-15, EO Certification by Receiving And Reviewing Officials.

    2. Process the remittance and any delinquent returns following IRM 4.70.13.9, Delinquent, Amended and Substitute for Return Procedures. If you receive a delinquent return, make a copy before processing original.

    3. Complete Part D of the cover sheet.

    4. Scan the signed closing agreement and upload into RCCMS.

    5. Close the case to Mandatory Review using normal case closing procedures.

  3. The closing agreement isn’t in effect until the Director, EO:E approves and signs the agreement.

  4. If the closing agreement contains errors, send a corrected closing agreement to the taxpayer using Letter 1595-B, Closing Agreement for Correction Transmittal.

EO - Approval and Execution of Closing Agreement
  1. When the Director EO:E receives the closing agreement package, he/she:

    1. Signs and dates the closing agreement.

    2. Initials and dates Part E of the cover sheet.

    3. Returns the package to the EOCAC and Manager, Mandatory Review.

      Exception:

      The Director, EO:E doesn’t take the above actions if the case is a Joint Committee case.

      The EOCAC must first submit the agreement as part of the original Joint Committee letter. The report or transmittal must contain a statement indicating the Director’s tentative approval of the closing agreement. If the Joint Committee approves the proposed closing agreement, then the Director, EO:E signs the closing agreement. See IRM 4.36.3 for more information on Joint Committee cases.

EO - Post-Approval Actions
  1. Manager, Mandatory Review: forward the signed closing agreement package to the Mandatory Review Staff.

  2. The reviewer will:

    1. Upload the signed agreement into RCCMS.

    2. Mail Letter 1595-D and the second copy to the taxpayer (and a copy to their representative if authorized to receive).

      Note:

      Do not send an executed copy of the Certification by Receiving and Reviewing Officials, to the taxpayer (or representative).

EO - Closure of Case
  1. Cases requiring master file (MF) assessments should contain:

    1. Closing agreement

    2. Form 4549-A, Form 4883, or other report form

    3. 3198-A Special Handling checksheet in RCCMS

    4. Form 3870

  2. EOCAC: secure email the items in IRM 4.70.14.2.1.3.2.10.5.1(1) above to your manager.

  3. Manager: electronically sign Form 3870 and send the items in (1) above to EO Closing Unit for assessment.

  4. EOCAC: monitor IDRS to verify the assessment is made correctly before closing the case on RCCMS. See IRM 4.70.14.5, Managerial Review and Case Closure.

  5. See IRM 4.70.14.2.1.3.2.42, EO – NMF Tax Assessment on Walk-In Initiated, for non-master file (NMF) assessments.

EO - Employment Tax Agreements (Walk-ins)
  1. Employers enter into employment tax closing agreements to correct prior errors. These errors usually involve failure to report a payment as wages.

  2. To ensure no harm to the government, the employer agrees to pay all the applicable employment taxes. This might include:

    • Employer share of FICA

    • Employee share of FICA

    • Employer share of Medicare

    • Employee share of Medicare

    • Federal income tax

    • FUTA

  3. In general, the payment is subject to the interest-free provisions under IRC 6205(a)(1), 26 CFR 31.6205-1.

  4. Penalties are determined on a case by case basis.

  5. See Exhibit 4.70.14-21, EO Employment Tax Closing Agreement Outline, for a sample employment tax closing agreement.

EO - Determining Amount of Wages
  1. The types of liability an employer may pay on behalf of the employee includes:

    • Employee share of FICA

    • Employee share of Medicare

    • Federal income tax

    • State income tax

  2. When an employer pays the liability on behalf of an employee, the payment is considered additional wages to the employee in the year paid and subject to FICA, FUTA, and income tax withholding. This creates a pyramiding effect. The employer avoids this by paying taxes on the gross-up wage amount.

  3. The formula for determining the gross-up wage amount is W=S/(1-R) (see Rev. Proc. 81-48).

    W = Gross-up wage amount
    S = Additional wage amount
    R = Rate of employee tax
    The "Rate of employee tax" is the tax rate for all taxes the employer paid on behalf of the employee.

    Example:

    Employer didn’t include $20,000 year-end bonuses paid to its employees as wages.

    Employer wants to correct this by entering into a closing agreement. Using these percentages, the total rate of employee taxes is 32.65%:
    Federal income tax rate of 25%
    FICA rate of 6.2% (employee share)
    Medicare rate of 1.45% (employee share)
    The gross up amount of wages is $29,696 calculated as follows:
    $20,000/(1-32.65%).
    Multiply the gross up wage amount by the applicable employment tax rates to determine the amount of taxes owed.

EO - Issuance of W-2c, Corrected Wage and Tax Statement
  1. The employer must report the increased social security/Medicare wages on Form W-2c, Corrected Wage and Tax Statement, boxes 3 and 5. Doing so, results in reporting the correct amount of wages for social security and Medicare benefit purposes, but doesn’t require employees to amend their Forms 1040, U.S. Individual Income Tax Return.

  2. The employer must also:

    1. Issue any necessary Forms W-2c to the Social Security Administration.

    2. Provide a copy of Form W-2c to the affected employee.

      Note:

      The employer can use the following language to send a copy of the Form W-2c to the employee: You are receiving a copy of Form W-2c, Corrected Wage and Tax Statement, that reflects a correction and increase in social security wages and Medicare wages reported to the Social Security Administration. The corrected wages are reported in Box 3 for social security wages and Box 5 for Medicare wages. The Form W-2c does not include any increase to your federal income tax wages reported in Box 1. The Form W-2c is for informational purposes only relating to social security and Medicare wages; it does not require any action by you. You are not required to file an amended Form 1040, U.S. Individual Income Tax Return, based on receipt of this Form W-2c.

EO - Tax Assessments
  1. IRS must assess the liability stemming from a closing agreement when closing a case. We don’t delay assessment pending payment.

  2. If the taxpayer hasn't filed a required tax return, secure the return and any payment due from the taxpayer.

  3. If the taxpayer fails to file a delinquent tax return, but executes an agreement (i.e., signs Form 4549, Income Tax Examination Changes, Form 870, Waiver of Restrictions on Assessments and Collection of Deficiency in Tax and Acceptance of Overassessment, Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment, or other waiver/agreement form), the agreed report constitutes a return under IRC 6020(a).

  4. The EO closing unit makes the assessment from an executed closing agreement.

  5. Enter the amount of the closing agreement tax liability in the "Penalties" section of the Form 4549 or other report form.

EO - Taxable Return Assessment - Master File Returns
  1. Examiner: Enter the codes below into the RCCMS Closing Record, as follows:

    1. Hold Code - enter 2.

    2. Tax Liability Adjustment - enter TC 300 and the agreed amount of tax.

    3. Tax Liability Adjustment - enter the appropriate penalty transaction code and the agreed amount of penalties. See Document 6209 Section 8A, Transaction Codes.

    4. Disposal Code - enter 12.

      Note:

      If the statute expiration is imminent, enter TC 300 with a .00 amount. Enter the amount of tax and/or penalties to be assessed as the Manual Assessment Amount.

  2. Examiner: enter appropriate instructions on the 3198-A Special Handling checksheet in RCCMS as follows:

    If... Then enter "EO Closing Agreement" ...
    No assessment. "with No Tax Assessment - close off AIMS."
    An assessment is to be made on a taxable return and the statute isn't imminent. "with Tax Assessment. Assess tax using entries in RCCMS closing record."
    An assessment is to be made on a taxable return and the statute is imminent (60 days or less). "with Tax Assessment. Statute expires (insert date). Prepare Form 2859."
    An assessment is to be made on a non-taxable return and the statute isn't imminent. "with Assessment on Non-Taxable Return. Assess using entries on RCCMS Closing Record."
    An assessment is to be made on a non-taxable return and the statute is imminent (60 days or less). "with Assessment on Non-Taxable Return. Statute expires (insert date). Prepare Form 2859."
    An assessment is to be made on a NMF Return (i.e., Form 990-BL or Form 4720-A). "with Tax Assessment on NMF Return - Prepare Form 5734"

    Note:

    Include instructions to EO Closing Unit on 3198-A Special Handling checksheet in RCCMS to not assess penalties and/or interest if the closing agreement provides for non-assessment.

EO - Taxable Return Assessments - Non-Master File (NMF) Returns
  1. The EO closing unit uses Form 2859, Request for Quick or Prompt Assessment, to make manual assessments to NMF.

  2. The EO closing unit manually processes closing agreements involving:

    • Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Person

    • Forms 4720-A

    Note:

    Refer to IRM 21.7.7.4.11.3, for directions on processing Forms 4720-A.

EO - Non-Taxable (Information) Return Assessments
  1. A closing agreement can impose an assessment on an exempt organization information return (such as, Form 990) that is under audit and controlled on AIMS. In order to assess the liability and close the return off AIMS, the examiner enters the codes below into the RCCMS Closing Record as follows:

    1. Hold Code - enter 2.

    2. Tax Liability Adjustment - enter TC 300 and .00.

    3. Disposal Code - enter 12.

    4. Credit and Tax Computation Adjustment - enter Item Adjustment Number 689 and the amount.

      Note:

      Item Adjustment Number 689: EO Closing Agreement Penalty Assessment.

  2. The EO closing uses Form 2859 to:

    • Make a manual assessment when the statute is imminent.

    • Input TC 150 and .00 to allow the closing agreement assessment if there are problems with posting a return (TC 150 for .00).

EO - NMF Tax Assessment on Walk-In Initiated
  1. A walk-in closing agreement assessment is usually made on BMF. There are times however, when that can’t be done, such as when the statute has expired or the closing agreement payment amount can’t be attributed to a particular tax return.

  2. EOCAC: if the assessment can’t be made on BMF:

    1. Prepare Form 5734, Non-Master File Assessment Voucher. See Exhibit 4.70.14-22, EO Instructions for Completing Form 5734, Non-Master File Assessment Voucher.

    2. Prepare a NMF Closing Agreement Memorandum. See Exhibit 4.70.14-23, EO NMF Closing Agreement Memorandum.

    3. Secure email Form 5734 and a copy of the executed agreement to Cincinnati Submission Processing.

    4. Follow up to ensure that the assessment and payments were made in NMF.

EO - Follow-Up Procedures
  1. To ensure an organization stays compliant with the terms of the closing agreement, the EOCAC may monitor an organization’s actions. An organization’s failure to comply with the terms of an executed closing agreement could result in a follow-up audit.

EO - EOCAC Responsibilities
  1. EOCAC:

    1. Identify cases for follow-up by electronically preparing and submitting Form 5666, TE/GE Referral Information Report. See Exhibit 4.70.14-24, Preparation of Form 5666, r specific instructions.

    2. Insert a copy of the executed closing agreement into the Form 5666 pdf document so that only one document (the package) is submitted to the EO Referrals Group.

    3. Include in the package a suggested date for follow-up. Depending on the facts and circumstances, recommend a date two to three years in the future to give the organization time to:

      o Operate under the terms of the agreement.
      o File returns.

    4. Secure email the package to your group manager for approval and secure his/her electronic signature.

    5. Secure email the package to the EO Referrals Group after you receive it from your manager.

EO - Referrals Responsibilities
  1. Manager, EO Referrals Group: holds the Form 5666 pdf package until the recommended audit date.

  2. Classifier: at the appropriate date, classifies the request under the high priority referral process.

  3. Classifier: sends the case to the TE/GE Classification function if the case is recommended for field assignment.

EO - EOCAC: Monitoring Reports
  1. EOCAC: prepare a quarterly monitoring report detailing closing agreement activities. The monitoring report should include:

    1. A breakdown by type of issue.

    2. A description of how the closing agreement resolved the issues.

    3. The number of closing agreements in-process.

    4. The number of closing agreements closed for the quarter.

    5. The number of closing agreement closed year-to-date.

    6. A breakdown of total payment amounts finalized for all agreements in the quarter.

    7. A breakdown of total payment amounts finalized for all agreements year-to-date.

  2. Send the monitoring report to Manager, Mandatory Review. After approval, Manager, Mandatory Review sends the report to Manager, EPR. Manager, EPR approves the report and sends it to Director, EO:E. See Exhibit 4.70.14-25, Closing Agreement Director's Office Quarterly Report (Page 1) through Exhibit 4.70.14-29, Closing Agreement Director's Office Quarterly Report (Page 5).

  3. The due dates for the quarterly reports are:

    Quarter Due Date
    October 1st - December 31st January 15th
    January 1st - March 31st April 15th
    April 1st - June 30th July 15th
    July 1st - September 30th October 15th

EO – Conversion of Returns
  1. This IRM section describes the converted return process in EO Examinations. This manual provides the procedures, guidelines and criteria for soliciting converted tax returns, and establishing and enforcing substitute for converted tax returns. This manual addresses the conversion of primary returns Form 990 or Form 990-EZ to three specific tax returns:

    • Form 1120, U.S. Corporation Income Tax Return.

    • Form 1041, U.S. Income Tax Return for Estates and Trusts.

    • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.

EO – Proposed Adverse Status Change
  1. For purposes of this manual, an "adverse status change" includes:

    • A revocation.

    • A disqualification of a status 36 organization.

    • A reclassification from a public charity to a private foundation.

      Note:

      All are subject to mandatory review with declaratory judgment rights.

  2. If a proposed adverse status change appears likely during the examination:

    • Establish the primary return for subsequent tax years, unless the facts and circumstances warrant not establishing those years.

    • Document the facts and circumstances for not expanding the primary return examination to subsequent tax years.

    • Prepare an administrative record.

      Note:

      Consider examination cycle time, statute of limitations, and available resources. Also, consider the extent of voluntary correction of non-compliant activities in subsequent tax years.

  3. If you expand the primary return examination to include subsequent tax years, you can focus that examination to determining:

    • The extent the noncompliant activities continue or were voluntarily corrected.

    • The potential converted tax liability (see IRM 4.70.14.2.1.3.3.7, EO – Converted Tax Return Securedfor each affected tax year, or

    • Both.

  4. Follow these additional instructions for preparing an adverse status change report and closing the case:

    • See IRM 4.70.14.2.4.3.1, EO- Formal Examination Reports, for preparing a 30-day letter and RAR.

    • See IRM 4.70.14.2.1.3.3.22, EO – Revocations and Disqualifications – Alternative Positions, for including alternate positions in a revocation RAR if the revocation is not upheld.

    • See IRM 4.70.14.2.4.1, EP & EO – Declaratory judgement Cases and the Administrative Record, for preparing an administrative record when there are indications of a proposed adverse status change.

  5. An "adverse status change" requires taking the steps necessary to protect the assessment of the tax resulting from the adverse status change for the affected tax years by either:

    • Preparing Form 5666 information report.

    • Conversion of the primary return (see next paragraph).

      Note:

      Form 5666 is not needed for a revoked private foundation nor for reclassifying a public charity to a private foundation.

      Note:

      However, you can prepare Forms 5666 for other tax years, other returns and other persons.

  6. A conversion is accomplished by either of the following actions:

    • Securing a "converted tax return" accepted as filed (see IRM 4.70.14.2.1.3.3.7, EO – Converted Tax Return Secured).

    • Adjusting the secured converted tax return (deficiency procedures) (see IRM 4.70.14.2.1.3.3.8, EO – Converted Tax Return Secured – To Be Further Adjusted).

    • Establishing an SFR (deficiency procedures) (see IRM 4.70.14.2.1.3.3.11, EO – Substitute for Return – Converted Tax Returns).

  7. To help you decide how to bring an organization current, review:

    • Enforcement criteria in IRM 4.70.14.2.1.3.3.13, EO – EO Enforcement CriteriaI.

    • Guidance for determining income tax in IRM 4.70.14.2.1.3.3.15, EO – Determination of Tax Liability, and IRM 4.70.14.2.1.3.3.15(2).

  8. "Converted tax returns" addressed in this manual include:

    • Form 1120, for revocations and disqualifications, including revocation of a private foundation.

    • Form 1041, for revocations and disqualifications, including revocation of a private foundation.

    • Form 990-PF, for reclassifications from a public charity to a private foundation.

      Note:

      If you are both reclassifying a public charity to a private foundation and revoking its tax-exempt status, the converted tax return will be Form 1120 or Form 1041. A separate report can be issued for proposed Chapter 42 excise taxes including IRC 4940 tax after Mandatory Review or Appeals sustains both actions.

EO - Proposed Adverse Status Change – Agreed
  1. A proposed adverse status change is agreed when the organization signs Form 6018. Filing a converted tax return or paying the tax does not constitute an agreement.

  2. Solicit converted tax returns for all affected tax years not barred for assessment. Affected tax years are the years the adverse status change is effective.

    1. Generally, give the organization no more than 30 days to file their converted tax return with you.

    2. You are not required to hold the primary return case file in group inventory waiting for converted tax returns.

      Note:

      Refer to IRM 4.70.14.2.1.3.3.7, EO – Converted Tax Return Secured, for processing a secured converted tax return.

      Note:

      If you are reclassifying the organization from a public charity to a private foundation, you can also solicit or prepare SFRs for Form 4720 or 4720-A for IRC 4941-4945 taxes if they are required.

  3. Bring the organization current on its tax and filing obligations for the affected tax years.

  4. Prepare the following closing documents for the primary return case file:

    • RCCMS Closing Record for closing the case

    • Form 2363-A for posting the adverse status change and change in filing requirement.

    • 3198-A Specail Handling checksheet in RCCMS for special handling of the primary return case file.

    • Form 5666 if you decided not to employ deficiency procedures.

    • See IRM 4.70.14.2.1.3.3, Conversion of Returns.

EO – RCCMS Closing Record
  1. For agreed adverse status changes, you can use either one of the following disposal codes, unless a higher priority disposal applies:

    • DC 211, Agreed Revocation.

    • DC 501, Referrals to Other Operating Divisions (applicable for agreed disqualifications).

    • DC 203, Change in Foundation Status (applicable for reclassification of a public charity to a private foundation).

  2. For unagreed adverse status changes, you can use either one of the following disposal codes, unless a higher priority disposal applies:

    • DC 601, Unagreed - Protest to Appeals.

    • DC 605, Unagreed Revocation Without Protest.

    • DC 604, Unagreed - Without Protest.

    • DC 602, Church Examination - Unagreed.

EO – Form 2363-A Primary Case File
  1. Prepare Form 2363-A for every adverse status change case file (primary return case file).

    1. Form 2363–A – Revocation of IRC 501(c)(3) and Generating 1120 Filing Requirement:

      • Field 1, Enter the EIN.

      • Field 2, Enter the name control.

      • Field 3, Place an X in the box next to 80.

      • Field 4, Place an X in the box next to 016.

      • Field 5, Type in definer codes A and B.

      • Field 8, Type in the name of the entity.

      • Field 17, Enter 03.

      • Field 18, Type in the two-digit foundation status code. See BMFOLO or INOLES.

      • Field 19, Type in the one-digit classification code. See BMFOLO or INOLES.

      • Field 22, Type in 22 followed by the year and month of effective revocation date.

      • Field 34, Type in the number 9 to remove Employment Code "W" .

      • Field 35, Type in the two digits representing the ending month of the fiscal year.

      • Field 38, Place a 01 in the 941 field and an 01 in the 940 field (if applicable.)

      • Field 39, Type REVOKE C-3 AND SET 941 -940 AND 1120 FILING REQ.

      • Field 40, Digitally sign and date or print the form, sign and date it.

      • Field 41, Type in PREPARER/GROUP NUMBER.

    2. Form 2363–A – Revocation of PF and Generating Form 1120 Filing Requirement:

      • Field 1, Enter the EIN.

      • Field 2, Enter the name control.

      • Field 3, Place an X in the box next to 80.

      • Field 4, Place an X in the box next to 016.

      • Field 5, Type in definer codes A and B.

      • Field 8, Type in the name of the entity.

      • Field 17, Enter 03.

      • Field 18, Type in the two-digit foundation status code. See BMFOLO or INOLES.

      • Field 19, Type in the one-digit classification code. See BMFOLO or INOLES.

      • Field 22, Type in 19 followed by the year and month of effective revocation date.

      • Field 34, Type in the number 9 to include Form 940 as a filing requirement.

      • Field 35, Type in the two digits representing the ending month of the fiscal year.

      • Field 38, Place a 01 in the 941 field and an 01 in the 940 field (if applicable.)

      • Field 39, Type REVOKE C-3 AND SET 941 -940 AND 1120 FILING REQ.

      • Field 40, Digitally sign and date or print the form, sign and date it.

      • Field 41, Type in PREPARER/GROUP NUMBER.

    3. Form 2363–A – Revocation of IRC 501(c)(Other) and Generating Form 1120 Filing Requirement:

      • Field 1, Enter the EIN.

      • Field 2, Enter the name control.

      • Field 3, Place an X in the box next to 80.

      • Field 4, Place an X in the box next to 016.

      • Field 5, Type in definer codes A and B.

      • Field 8, Type in the name of the entity. • Field 17, Enter code section. i.e., 04,05, etc.

      • Field 18, Type in the two-digit foundation status code. See BMFOLO or INOLES.

      • Field 19, Type in the one-digit classification code. See BMFOLO or INOLES.

      • Field 22, Type in 22 followed by the year and month of effective revocation date.

      • Field 34, Type in the number 9 to include Form 940 as a filing requirement.

      • Field 35, Type in the two digits representing the ending month of the fiscal year.

      • Field 38, Place a 01 in the 941 field and an 01 in the 940 field (if applicable.)

      • Field 39, Type REVOKE C-3 AND SET 941-940 AND 1120 FILING REQ.

      • Field 40, Digitally sign and date or print the form, sign and date it.

      • Field 41, Type in PREPARER/GROUP NUMBER

  2. You can also refer to IRM 25.7.1 for more information.

EO – 3198-A Special Handling checksheet in RCCMS Primary Return Case File
  1. Prepare a 3198-A Speical Handling checksheet in RCCMS for every adverse status change case file (primary return case file).

  2. Enter one or more of the following notations if applicable in "Other Instructions" or under the "Mandatory Review" check box before transferring the case file to Mandatory Review:

    • If there is a POA, check the box for "Send All Communications Per POA" .

    • "Process Form 2363-A [and Form 5666 ] if Revocation [Disqualification or Reclassification to PF] is Sustained."

    • "Process Converted Form [1120, 1041, or 990-PF ] Only If Revocation [Disqualification or Reclassification to PF] is Sustained."

    • Under the Mandatory Review check box, "Agreed Revocation [Disqualification or Reclassification to PF]."

    • Under the Mandatory Review check box, "Unagreed Revocation [Disqualification or Reclassification to PF] - With [Without] Protest."

    • Check the "Forward to Appeals" box.

    • Notate for Appeals: "Notify EO Exams if TP Intends Not to Extend Statute - Converted Tax Return in Suspense Pending Final Revocation [Disqualification or Reclassification to PF]."

    • For IRC 501(c)(3) revocations, enter "Notify State Officials Under IRC 6104(c)."

    • "If Revocation [Disqualification] is Sustained, Transfer Payments Applied to 990-T Module for the Revoked [Disqualified] Tax Years to the Converted 1120 [1041 or 990-PF ] Module - Then Reverse Tax Assessments on 990-T Tax Module."

    • Indicate the reason for not enforcing a converted tax return tax in Other Instructions. See IRM 4.70.14.2.1.3.3.14, EO – EO Enforcement Criteria.

EO – Form 5666 Primary Return Case File
  1. See instructions at IRM Exhibit 4.5.1-12, Instructions for Preparing Form 5666, TE/GE Referral/Information Report (Reference: IRM 4.5.1.6.9.2.)1)).

  2. Use Form 5666 to recommend an examination of the organization that loses its exempt status for the affected tax years, and subsequent years if needed. Include the following information on Form 5666:

    • A statement that the organization’s exemption has been revoked (or disqualified).

    • The effective date of the revocation (or affected tax years for disqualifications).

    • The date the organization was incorporated or created.

    • A statement that, as a taxable entity, the organization should be reporting income tax, FUTA tax or excise taxes for which it may be liable.

    • A list of the converted tax returns secured by the examiner (include form number, MFT, tax period).

    • A statement whether the original converted tax returns were submitted for processing.

    • A statement that contributions to the organization are no longer deductible as charitable contributions (IRC 170(c) organizations only).

    • List the names and TINs of insiders whose deductions for contributions should be disallowed.

      Note:

      A contributor can’t deduct contributions effective the date the revocation is announced in the IRB. However, certain contributors also can’t deduct contributions prior to that date if the contributor:

      1. Had knowledge of the revocation of the ruling or determination letter,

      2. Was aware that such revocation was imminent or

      3. Was in part responsible for, or was aware of, the activities or deficiencies on the part of the organization which gave rise to the revocation.

      See Treas. Reg. §1.509(a)-7(a) and Rev. Proc. 2011-33, 2011-1 C.B. 887, which supersedes and modifies Rev. Proc. 82-39, 1982-2 C.B. 759 and Rev. Proc. 2009-32, 2009-28 I.R.B. 142.

  3. Attach the following documents to Form 5666:

    • A copy of the report of examination proposing a revocation (or disqualification).

    • A copy of the of the annual EO information returns for the affected tax years; e.g., Form 990.

    • A copy of any converted tax returns if filed.

    • Any other pertinent information or documents.

    • A copy of the 90-day FADL (attached by Mandatory Reviewer).

  4. For additional instructions on preparing Form 5666, see IRM Exhibit 4.5.1-12, Instructions for Preparing Form 5666, TE/GE Referral/Information Report (Reference: IRM 4.5.1.6.9.2(1) ). You can also use Form 5346 if you prefer that form.

EO – Converted Tax Return Secured
  1. Receiving and securing a converted tax return normally follows:

    • Your solicitation for the converted tax return in IRM 4.70.14.2.1.3.3.2, EO – Proposed Adverse Status Change – Agreed, or

    • An unexpected filing of a converted tax return.

      Caution:

      Secured converted tax returns will have an ASED based on the filing of Form 990 or 990-EZ.

  2. Follow delinquent return procedures in IRM 4.70.13.9.5, Delinquent Return Procedures (Processing Delinquent Returns Other than Employment Tax Returns), except that you will:

    • Mark the top margin of the converted tax return in red, "Form 990 Converted to Form [1120 or 1041 or 990-PF ] by TE/GE" .

    • Generally, don’t impose delinquency penalties if the underlying primary return was filed in good faith.

    • Not send the return to the FAST.

  3. Prepare a "converted tax return package," for the filed return which includes the following forms:

    • Form 13133.

    • 3198-A Special Handling checksheet in RCCMS.

    • A copy of the payment instrument (check, cashiers check, etc.).

    • A copy of Form 3244-A.

    • A copy of the taxpayer's written penalty relief request.

    • The original return.

    • Double envelopes addressed to the FAST. See IRM 4.70.14.2.1.3.3.10, EO – The FAST. Don’t seal the envelopes.

      Note:

      The unsealed converted tax return package will ride with the primary return case file to Mandatory Review.

  4. If you receive and secure a converted tax return after you closed your primary return case file to Mandatory Review, follow these instructions:

    If... Then...
    The underlying adverse status change has not yet posted per INOLES Follow the converted tax return procedure in IRM 4.70.14.2.1.3.3, EO – Conversion of Returns. Send the converted tax return package to Mandatory Review to associate with the primary return case file.
    Charge this time to 610-0999, or charge time to the converted tax return if you established it for adjustment.
    The underlying adverse status change has posted per INOLES Follow delinquent return procedures for the converted tax return, and send to the FAST for processing.
    Charge this time to 610-0999, or charge time to the converted tax return if you established it for adjustment.

  5. If you secured the converted tax return after a TC 150 already posted an SFR, follow the instructions in IRM 4.70.14.2.1.3.3.11(8), EO - Substitute for Return - Coveted Tax Returns.

  6. Decide whether to accept the converted tax return as filed, or whether you will prepare Form 5666 or adjust the return yourself. Consider:

    • Information obtained during your examination of the primary return.

    • The primary return information for the years of examination and subsequent years.

    • Enforcement criteria in IRM 4.70.14.2.1.3.3.13, EO – EO Enforcement Criteria.

    • Guidance for determining income tax in IRM 4.70.14.2.1.3.3.15, EO – Determination of Tax Liability and IRM 4.70.14.2.1.3.3.15(2).

  7. If the underlying adverse status change is sustained by Mandatory Review or Appeals, Mandatory Review will:

    • Issue a 90-day FADL (Appeals is authorized to issue a FADL).

    • Sign and forward Form 2363-A (located in the primary return case file) to the FAST for processing.

    • Forward Form 5666 to the EO Referrals group via the EO Closing Unit, after the 90 days plus 15 days expires.

    • Forward the original converted tax return package to the FAST for processing.

    • If applicable, send converted tax return case file in status 38 suspense back to you to adjust the return.

  8. If the underlying adverse status change is not sustained by Mandatory Review or Appeals, Mandatory Review will:

    • Send the converted tax return package back to you. The return is unpostable.

    • Destroy Form 2363-A and Form 5666.

      Note:

      Send the converted tax return back to the organization with a cover letter informing them that the converted tax return is unpostable due to the continuation of tax-exempt status or public charity status. Amounts paid with the converted tax return will either be refunded or credited to other accounts. Contact the FAST via email to ensure that the amounts paid with the secured converted tax return are refunded or applied to other tax accounts.

      See IRM 4.70.14.2.1.3.3.10, EO - The Fast.

EO - Converted Tax Return Secured - To Be Further Adjusted
  1. This course of action follows your evaluation in IRM 4.70.14.2.1.3.3.7(6), EO – Converted Tax Return Secured, where you determine enforcement is needed by adjusting a secured converted tax return.

    Caution:

    Secured converted tax returns will have an ASED based on the filing of Form 990 or 990-EZ.

  2. If you know the return is substantially incorrect or incomplete, give the organization an opportunity to submit a correct return if time permits for purposes of the ASED.

    Note:

    If the organization insists on filing the incorrect return, collect the return subject to examination adjustment. If you believe the return to be fraudulent, consult with the Fraud Technical Advisor.

  3. Establish the secured converted tax return for adjustment on:

    • AIMS NMF if the underlying adverse status change is not posted to the EOBMF (see IRM 4.70.14.2.1.3.2.40, EO – Taxable Return Assessments – Non-Master File (NMF) Returns).

    • AIMS MF if the underlying adverse status change is posted to the EOBMF (see IRM 4.70.14.2.1.3.2.39, EO – Taxable Return Assessments – Master File Returns ).

  4. The NMF case file will:

    • Have its own Forms 3198-A, 5464, 5773 or their RCCMS equivalents, working return assembly, and workpapers. See IRM 4.70.14.2.1.3.3.9, EO – 3198-A – Special Handling checksheet in RCCMS – Secured Converted Return To Be Adjusted Case File.

    • Include a copy of the primary return marked "Copy - Do Not Process" .

    • Follow the RCCMS naming convention.

    • Include workpapers to support amounts per examination that are different from those reported on the primary return.

    • Ride with the primary return case file to Mandatory Review to be placed in suspense Status 38 until the underlying proposed adverse status change is sustained.

    • Have statute dates based on the filing of the underlying primary return of record.

      Note:

      Mandatory Review will only hold the NMF converted tax return case file in Status 38 suspense until there are 270 days remaining on the ASED. Thereafter the reviewer will send the converted income tax case back to the examiner to initiate statute controls while the adverse status change remains unresolved.

      Don’t suspend the NMF case file with AIMS Status Code 39. During the short statute period, you and your manager will decide when to initiate deficiency procedures on NMF in order to protect the statute of limitations for assessment, even if the revocation is not final. Consult with TEGEDC regarding the issuance of a statutory notice of deficiency if the ASED is less than 270 days.

  5. You can obtain NMF transcripts as follows:

    • Send an encrypted email to the Submission Processing Center Non-Master File (NMF) in Kansas City, at *W&I KCSPC Non-Master File Team.

    • Subject line: NMF Transcript Request.

    • The body of the email should contain: "Please provide a NMF transcript for XYZ Corporation; EIN 12-3456789; MFT 66; Tax period 201111."

    • Call (816) 499-5445 to follow-up on your request.

  6. If the underlying adverse status change is sustained by Mandatory Review or Appeals:

    1. Mandatory Review will forward the converted tax return package to the FAST for processing.

    2. Mandatory Review will also send the NMF case file back to you to initiate deficiency procedures.

    3. Initiate deficiency procedures:

      Adjusting the Secured Converted Tax Return:  
      Form 1120 or Form 1041 - Income Tax Form 990-PF - IRC 4940 Tax
      Based on Revocation or Disqualification Based on Reclassification to a Private Foundation
      • Letter 950

      • Form 870

      • Form 4549-A

      • Form 886-A

      • Pub 3498

      • Pub 594


      Reference: IRM 4.70.14.2.1.3.1.15, EO - Termination of Exempt Status
      • Letter 3614

      • Form 4621

      • Form 4883

      • Form 870-E

      • Form 886-A

      • Pub 3498

      • Pub 594

    4. After the underlying adverse status change posts to the EOBMF, establish the converted tax return on AIMS MF, Push Code 020. See IRM 4.70.14.2.1.3.2.39, EO – Taxable Returns Assessment – Master File Returns.

    5. Delete the duplicate NMF account. Follow deletion instructions in IRM 4.70.14.4.9.1, Deleting AIMS Accounts.

  7. If the underlying adverse status change is not sustained by Mandatory Review or Appeals:

    1. Follow the workflow in IRM 4.70.14.2.1.3.3.7(8), EO - Converted Tax Returns Secured, with respect to disposition of the secured converted tax return package.

    2. Mandatory review will also send the NMF converted tax return case file back to you.

    3. Delete the NMF examination account. Follow deletion instructions in IRM 4.70.14.4.9.1, Deleting AIMS Accounts.

  8. After initiating deficiency procedures in subparagraph (6)c, close the converted tax return case file as follows:

    Closing the Converted Tax Return, as Adjusted
    # If the organization... Then...
    1. Agrees
    1. Stamp the received date on Form 870 or Form 870-E.

    2. Issue Letter 2511, with copy of signed waiver form.

    3. Prepare RCCMS Closing Record for converted tax return, DC 102.

    4. Complete ARDI Code, on RCCMS Closing Record.

    5. Close tax case to the EO Closing Unit


    Reference IRM 4.70.14.2.1.3.1.15, EO – Termination of Exempt Status and IRM 4.70.14.2.1.4, Employment Tax Agreed Case Processing.
    2. Fails to reply
    1. Prepare RCCMS Closing Record for converted tax return, DC 604.

    2. Close tax case to Mandatory Review to issue the SNOD.

    3. Disagrees - Provides NO new information, or provides additional information that does not change your report
    1. Issue Letter 5918 rebuttal to organization.

    2. Prepare RCCMS Closing Record, for converted tax return, DC 601 or DC 604.

    3. Close tax case to Mandatory Review to issue the SNOD.

    4. Disagrees - Provides additional information showing no tax adjustment was necessary
    1. Issue Letter 2656.

    2. Prepare RCCMS Closing Record, for converted tax return, DC 107.

    3. Close tax case to the EO Closing Unit.

    Reference Exhibit 4.70.14-1, Closing Letters for No Change Cases.
    5. Disagrees - Provides additional information that decreases the tax
    1. Issue a corrected RAR only. Don’t issue a new 30-day letter.

    2. Issue Letter 5918 rebuttal to organization over the part of the deficiency that remains unchanged.

    3. Prepare RCCMS Closing Record for converted tax return, DC 07 (601) or DC 10 (604).

    4. Close tax case to Mandatory Review to issue the SNOD.


    Reference IRM 4.70.14.2.1.3.1.4, EO – Form 870 and Form 870-E.
    6. Disagrees - Provides additional information that increases the tax
    1. Issue a new 30-day letter, Letter 950 or Letter 3614 and a corrected RAR.

    2. Suspend tax case for 30 days pending reply to new proposal.

    3. Refer back to this table after organization responds.


    Reference IRM 4.70.14.2.1.3.1.4, EO – Form 870 and Form 870-E and IRM 4.70.14.2.1.4, Employment Tax Agreed Case Processing.

  9. With respect to an adjustment to a Form 990-PF converted tax return in subparagraph (6)c, the adjustment need not be limited to IRC 4940 tax, which is subject to deficiency procedures. You can also adjust non-tax items, such as the reported distributable amount, qualifying distributions, or undistributed income. If adjusting non-tax items is the only adjustment, the adjustment is subject to a nonstandard 30-day letter, with protest to Appeals, but not subject to issuance of a final 90-day letter by Mandatory Review. Consult with *TEGE EO Review Staff on a nonstandard 30-day letter. Any IRC 4942 tax resulting from non-tax adjustments is reported separately on Form 4720, which is subject to full deficiency procedures.

EO - 3198-A Special Handling checksheet in RCCMS - Secured Converted Tax Return To Be Adjusted Case File
  1. Prepare a 3198-A Special Handling checksheet in RCCMS for every Converted Tax Return case file. Enter one or more of the following notations if applicable in "Other Instructions" or under the "Mandatory Review" check box on 3198-A Special Handling checksheet before transferring the case file to Mandatory Review:

    • Check the box for "Send All Communications Per POA" .

    • Check the box for "Mandatory Review" and enter "Unagreed Income Tax Deficiency" .

    • Check the box for "Forward to Appeals."

    • At Special Features: Indicate "Place Converted Tax Return Case In Mandatory Review Suspense (Status 38) Pending Outcome of Revocation [Disqualification or Reclassification to PF]" .

    • Indicate "Assess Tax Per Form 4549 [Form 4883 ] – Exempt Status Revoked [Disqualified] or [501 (c)(3) Reclassified as a PF]" .

    • At the "Earliest Statute Date" section, The Statute Starts With Filing of Form 990 [990-EZ, 990-PF, 990-BL ] on [Date] and Expires [ASED].

    • Check the box for "Forward to Appeals" .

    • "Transfer Payments Applied to 990-T Module for the Revoked [Disqualified] Tax Years to the Converted 1120 [1041 ] Module - Then Reverse Tax Assessments on 990-T Tax Module."

EO - The FAST
  1. The FAST envelopes will contain the secured converted tax return package to be processed by the FAST if the underlying proposed adverse status change is sustained by Mandatory Review or Appeals.

  2. For security reasons, prepare two envelopes:

    1. First envelope addressed to the FAST, to enclose the contents above.

    2. Second envelope addressed to the FAST, to enclose first envelope and its contents.

  3. Do NOT seal the envelopes. Both envelopes should be addressed to the FAST:

    FAST U.S. Postal Service Address and UPS Address Tax Exempt & Government Entities - FAST Attention: FAST M/S 1114
    1973 Rulon White Blvd.
    Ogden, UT 84201-0252
    FAST Contact Numbers and Email Address:  
    FAST e-Fax Number 877-814-2236
    FAST email address *TEGE FAST

  4. The secured converted tax return package and the FAST envelopes ride with EO primary return case file folder until the underlying adverse status change is determined.

EO - Substitute for Return - Converted Tax Returns
  1. This course of action is followed after an "adverse status change" is proposed, and where you determine an SFCR is required, because a converted tax return has not or cannot be secured.

    Caution:

    The SFCR will have an ASED based on the filing of Form 990 or 990-EZ.

  2. The decision to initiate deficiency procedures requires managerial approval.

  3. Establish the SFCR on NMF pending finality of adverse status change. Managerial approval is required. You establish a converted tax return on NMF because you recognize the need to protect the converted tax, but your underlying proposed adverse status change is not yet final and posted. While the adverse status change is not final, generally don’t submit a 30-day letter and RAR to the organization, and don’t solicit an agreement to a tax adjustment until you know the adverse status change is sustained by Mandatory Review (or Appeals if protested). To establish the Form 1120 on NMF (Pending Finality of Adverse Status Change) in RCCMS:

    • Validate For: Establish.

    • Update AIMS: Unchecked.

    • Type: Form 1120.

    • Activity Codes: 338, 203 through 231 [For Form 1041, 495 or 496].

    • Statute date: The statute date is assumed to be the same as the statute date for the EO information return. If the organization is a non-filer, it is the date the tax return will be postmarked or filed with the examiner.

    • Master File type: NMF – Non-Master File.

    • MFT Code: 32 (Form 1120 NMF), or 21 (Form 1041 NMF).

    • Source Code: 44.

    • Status Code: 10.

    • Reason for Request: Protective AIMS establishment for Conversion of Form 990 to Form 1120 ; Case suspended while revocation is unagreed.

    • Save and Close.

    • Select Request Establishment from the Actions menu.

      Note:

      The activity will be established on RCCMS without the AIMS box checked. The AIMS NMF establishment must be done manually on Form 5588. See instructions for Form 5588 at IRM Exhibit 4.5.1-11 and IRM Exhibit 4.5.1-12. Leave the SBC field blank for manual establishments on Form 5588. See IRM Exhibit 4.5.1-8 and IRM Exhibit 4.5.1-10.

  4. The NMF case file will:

    • Have its own 3198-A Special Handling checksheet in RCCMS, Form 5773 or their RCCMS equivalents, working return assembly, and supporting workpapers.

    • Include a copy of the primary return marked "Copy - Do Not Process" .

    • If actual amounts per examination are different from those reported on the primary return, include workpapers to support such amounts.

    • Follow the RCCMS naming convention.

    • Ride with the primary return case file to Mandatory Review to be placed in suspense Status 38 until the underlying proposed adverse status is sustained.

    • Contain a substitute for converted tax return with a statute based on the filing of the underlying primary return of record.

      Note:

      Mandatory Review will only hold the NMF converted tax return case file in Status 38 suspense until there are 270 days remaining on the ASED.

      Thereafter the reviewer will send the income tax case back to the examiner to initiate statute controls while the adverse status change remains unresolved. Don’t suspend the NMF case file with AIMS Status Code 39. During the short statute period, you and your manager will decide when to initiate deficiency procedures on NMF in order to protect the statute of limitations for assessment, even if the revocation is not final. Consult with TEGEDC regarding the issuance of a statutory notice of deficiency if the ASED is less than 270 days.

  5. You can obtain NMF transcripts as follows:

    • Send an encrypted email to the Submission Processing Center Non-Master File (NMF) in Kansas City, at *W&I KCSPC Non-Master File Team.

    • Subject line: NMF Transcript Request.

    • The body of the email should contain: "Please provide a NMF transcript for XYZ Corporation; EIN 12-3456789; MFT 66; Tax period 201111."

    • Call (816) 499-5445 to follow-up on your request.

  6. If the underlying adverse status change is sustained by Mandatory Review or Appeals:

    1. Mandatory Review or Appeals will issue a 90-day FADL.

    2. Mandatory Review will sign and forward Form 2363-A (located in the primary return case file) to the FAST for processing.

    3. Mandatory Review will forward Form 5666 to the EO Referrals group via the EO Closing Unit, after the 90 days plus 15 days expires.

    4. Mandatory Review will send the NMF case file back to you to initiate deficiency procedures.

    5. Initiate deficiency procedures:

      Converted Tax Return SFCR Adjustment:
      Converted Tax Return SFCR Adjustment: Form 1120 or Form 1041 - Income Tax Form 990-PF - IRC 4940 Tax
      Based on Revocation or Disqualification Based on Reclassification to a Private Foundation
      • Letter 950

      • Form 870 (only if using Form 4549-A)

      • Form 4549-A

      • Form 886-A

      • Pub 3498

      • Pub 594

      • Letter 3614

      • Form 870-E

      • Form 4621

      • Form 4883

      • Form 886-A

      • Pub 3498

      • Pub 594

    6. You establish a converted tax return on AIMS MF only after the underlying proposed adverse status change is sustained and posted. You can proceed to submit a 30-day letter and RAR to the organization, and solicit an agreement to a tax deficiency. After the underlying adverse status change posts to the EOBMF, follow IRM 4.70.13.9.8, Substitute for Returns Procedures, for establishing SFRs on AIMS MF, Push Code 036.

    7. Establish an examination record on AIMS Master File using RCCMS. If you must establish the examination record manually using Form 5597, follow the instructions below. The items in parenthesis denote corresponding block numbers on Form 5597.
      • (P7-8): Source Code 44 for SFCRs.
      • (P10-12): Enter Primary Business Code. 401 Northeast. 403 Great Lakes/FIU. 404 Gulf Coast. 406 Pacific Coast. 410 EOCA.
      • (P20-23): Enter Employee Group Code.
      • (P25-26): Enter MFT 02 for Form 1120; MFT 05, For Form 1041, MFT 44 for Form 990-PF.
      • (P28-29): Enter Status Code 12.
      • (P31): Return Not Requested should be "3" .
      • (P33-36): Enter appropriate Project Code.
      • (P41-43): Enter Push Code 036, for a SFCR establishment; 020 for a secured delinquent return.
      • (P45-46): Enter Statute Alpha Code, if appropriate.
      • (P48): Enter "1" as the flow-through indicator.
      • (Line 2, P1-12; P14-17; blocks A and B): Enter Entity information.
      • (P19-24): Enter Tax Periods.
      • (P26-28): Enter Activity Codes: Form 1120 Activity Codes are 338, 203 through 231; Form 1041 Activity Codes are 495 or 496.
      • (Blocks C, D and E): Self Explanatory.

      Note:

      See also IRM 4.5.1, TE/GE AIMS Processing, Leave the SBC field blank for manual establishments on Form 5597.

      You can enter the SBC for AIMS MF establishments made on RCCMS. See IRM Exhibit 4.5.1-8, Instructions for Preparing Form 5597, Page 1, TE/GE IMF/BMF/EPMF Request (Reference IRM 4.5.1.6.8.1(1) and IRM Exhibit 4.5.1-10.8, Instructions for Preparing Form 5588, Page 1, TE/GE NMF Request (Reference: IRM 4.5.1.6.8.4(1).

    8. Follow SFR Package procedures in IRM 4.70.13.9.8.9., EO Delinquent and SFR Forms 4720 and 4720-A.

    9. If an AIMS NMF examination record was previously established for the same returns, you must delete the duplicate NMF examination record after fully establishing the AIMS MF examination record. Follow deletion instructions in IRM 4.70.14.4.9.1, Deleting AIMS Accounts.

  7. After initiating deficiency procedures in IRM 4.70.14.2.1.3.3.11(6), close the SFCR as follows:

    Closing the Converted Tax Return (SFCR)
    # If the organization... Then...
    1. Agrees
    1. Stamp the received date on Form 4549 (or Form 870-E).

    2. Issue Letter 2511.

    3. Prepare RCCMS Closing Record for the SFCR, 102.

    4. Complete ARDI Code, on RCCMS Closing Record.

    5. Close tax case to the EO Closing Unit.

    2. Fails to reply
    1. Prepare RCCMS Closing Record for the SFCR, DC 604.

    2. Close tax case to Mandatory Review to issue the SNOD.

    3. Disagrees - Provides NO new information, or provides additional information that does not change your report
    1. Issue Letter 5918, Rebuttal to Organization.

    2. Prepare RCCMS Closing Record, for the SFCR, DC 601 or DC 604.

    3. Close tax case to Mandatory Review to issue the SNOD.

    4. Disagrees -Provides additional information showing no tax adjustment was necessary
    1. Issue Letter 2656.

    2. Prepare RCCMS Closing Record, for the SFCR, DC 107.

    3. Close tax case to the EO Closing Unit.

    5. Disagrees - Provides additional information that decreases the tax
    1. Issue a corrected RAR only. Don’t issue a new 30-day letter.

    2. Issue Letter 5918 Rebuttal to Organization, over the part of the deficiency that remains unchanged.

    3. Prepare RCCMS Closing Record for the SFCR, DC 601 or DC 604.

    4. Close tax case to Mandatory Review to issue the SNOD.

    6. Disagrees - Provides additional information that increases the tax
    1. Issue a new 30-day letter Letter 950 (orLetter 3614) and a corrected RAR.

    2. Suspend tax case for 30 days pending reply to new proposal.

    3. Refer back to this table after organization responds.

  8. After initiating deficiency procedures in IRM 4.70.14.2.1.3.3.11(6), close the SFCR as follows if you secure a converted tax return:

    Closing the Converted Tax Return (SFCR)Organization Responds to Your Converted Tax Proposal by Filing a Converted Tax Return
    # If... Then...
    7. You accept the tax return as filed The Matter of Processing the Converted Tax Return:
    1. Follow delinquent return procedures.

    2. Submit return to the FAST after the adverse status change posts to the EOBMF.

    The Matter of Your Adjustment to the Tax Return:
    1. Issue Letter 5331.

    2. Prepare RCCMS Closing Record for converted tax return, DC 208.

    3. Enter ARDI Code on RCCMS Closing Record.

    4. Enter the manual assessment amount and delinquent return code on the RCCMS Closing Record.

    5. Enter Delinquent Return Amount, on RCCMS Closing Record.

    6. Close tax case to the EO Closing Unit.

    8. You issue a new 30-day Letter 950 (or Letter 3614) & report to correct the tax return, but the organization then replies with additional information showing the correction was unnecessary The Matter of Processing the Converted Tax Return:
    1. Follow delinquent return procedures.

    2. Submit return to the FAST after the adverse status change posts to the EOBMF.

    The Matter of Your Adjustment to the Tax Return:
    1. Issue Letter 2656.

    2. Prepare RCCMS Closing Record for converted tax return, DC 208.

    3. Enter ARDI Code on RCCMS Closing Record.

    4. Enter the manual assessment amount and delinquent return code on the RCCMS Closing Record.

    5. Enter Delinquent Return Amount on the RCCMS Closing Record.

    6. Close tax case to the EO Closing Unit.

    9. You issue a new 30-day Letter 950 (or Letter 3614) & report to correct the tax return, and the organization agrees with your correction. The Matter of Processing the Converted Tax Return:
    1. Follow delinquent return procedures for converted tax return.

    2. Submit return to the FAST after the adverse status change posts to the EOBMF.

    The Matter of Your Adjustment to the Tax Return:
    1. Stamp the received date on Form 4549 (or Form 870-E).

    2. Issue Letter 2511.

    3. Prepare the RCCMS Closing Record for converted tax return, DC 102.

    4. Enter ARDI Code on the RCCMS Closing Record.

    5. Close tax case to the EO Closing Unit.

    10. You issue a new 30-day Letter 950 (or Letter 3614) & report to correct the tax return, and the organization fails to reply. The Matter of Processing the Converted Tax Return:
    1. Follow delinquent return procedures for converted tax return.

    2. Submit return to the FAST after the adverse status change posts to EOBMF.

    The Matter of Your Adjustment to the Tax Return:
    1. Prepare the RCCMS Closing Record for converted tax return, DC 604.

    2. Close tax case to Mandatory Review to issue the SNOD.

    11. You issue a new 30-day Letter 950 (or Letter 3614) & report to correct the tax return, and the organization disagrees with protest The Matter of Processing the Converted Tax Return:
    1. Follow delinquent return procedures for the converted tax return.

    2. Submit the return to the FAST after the adverse status change posts to the EOBMF.

    The Matter of Your Adjustment to the Tax Return:
    1. Issue Letter 5918, Rebuttal to Organization.

    2. Prepare the RCCMS Closing Record for converted tax return, DC 601.

    3. Close tax case to Mandatory Review to send to Appeals.

  9. If the underlying adverse status change is not sustained by Mandatory Review or Appeals:

    1. Mandatory review will also send the NMF SFCR converted tax return case file back to you for deletion.

    2. Mandatory Review will destroy Form 2363-A and Form 5666 (located in the primary return case file).

    3. Delete the NMF examination account. Follow deletion instructions in IRM 4.70.14.4.9.1, Deleting AIMS Accounts.

  10. With respect to an SFR Form 990-PF converted tax return in subparagraph (6)e, the adjustment need not be limited to IRC 4940 tax, which is subject to deficiency procedures. You can also adjust non-tax items, such as the reported distributable amount, qualifying distributions, or undistributed income. If adjusting non-tax items is the only adjustment in the SFR, the adjustment is subject to a nonstandard 30-day letter, with protest to Appeals, but not subject to issuance of a final 90-day letter by Mandatory Review. Consult with *TEGE EO Review Staff on a nonstandard 30-day letter. Any IRC 4942 tax resulting from non-tax adjustments is itself reported separately on Form 4720, which is subject to full deficiency procedures.

EO - 3198-A Special Handling checksheet - SFCR Case File
  1. Prepare a 3198-A Special Handling checksheet in RCCMS for every SFCR case file. Enter one or more of the following notations if applicable in "Other Instructions" or under the "Mandatory Review" check box before closing the case to either Mandatory Review or the EO Closing Unit:

    • Check the box for "Send All Communications Per POA."

    • Check the box for "Mandatory Review" box and enter "Unagreed Income Tax Deficiency."

    • Check the box for "Forward to Appeals."

    • At Special Features: Indicate "Place Converted Tax Return Case In Mandatory Review Suspense (Status 38) Pending Outcome of Revocation [Disqualification or Reclassification to PF]."

    • Check the box "SFR - Substitute for Return to be Processed."

    • Indicate "Assess Tax Per Form 4549 [Form 4883 ] – Exempt Status Revoked [Disqualified] or [IRC 501(c)(3) Reclassified as a PF]."

    • At the "Earliest Statute Date" section, "The Statute Starts With Filing of Form 990 [990-EZ, 990-PF, 990-BL ] on [Date] and Expires [ASED]."

    • Check the box for "Forward to Appeals."

    • Transfer Payments Applied to 990-T Module for the Revoked [Disqualified] Tax Years to the Converted 1120 [1041 ] Module - Then Reverse Tax Assessments on 990-T Tax Module.

EO - EO Enforcement Criteria
  1. Generally, EO examiners must enforce converted return taxes for the affected tax years of an adverse status change if there is a tax deficiency of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ in the aggregate for all tax years under examination.

    Note:

    "Enforcement" is part of the conversion process that involves initiating deficiency procedures in IRM 4.70.14.2.1.3.3.7, EO – Converted Tax Return Secured, and IRM 4.70.14.2.1.3.3.11, EO – Substitute for Return – Converted Tax Returns.

    Note:

    Mandatory Review will accept business decisions made over enforcement so long as they are properly supported and documented.

  2. EO Enforcement is NOT required under any one of the following conditions:

    • The tax is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ for the examined tax years in the aggregate.

    • The time remaining on the ASED based on the filing of Form 990 or 990-EZ is less than 12 months. See IRM 4.70.12.3.7.2, Examiner Responsibilities and Procedures.

    • There is an NOL available to offset taxable income for the year under consideration.

    • The organization is inactive, non-operational or abandoned.

    • The converted return tax is reportable on specialized tax returns, e.g., Form 1120-L, Form 1120-F, etc.

    • The converted return tax issues require specialized examiners trained to address the complex issues.

    • An income tax BOD is interested in working the converted return tax case.

    • Sufficient resources are unavailable, considering Policy Statement 4-119.

  3. Additional factors to consider in enforcing converted return taxes include:

    • That failure to enforce converted return taxes could be a serious administrative omission or result in a serious criticism of the IRS’s administration of tax law with fairness and integrity.

    • The relative simplicity of the income tax issues and the conversion.

    • The need to quickly process a deficiency.

    • History, extent or frequency of repeated or continuous noncompliance.

    • Indicators of fraud, malfeasance, collusion, concealment, or misrepresentation.

    • Your familiarity with the case versus the time needed for another group to re-learn the case.

    • Setting a precedent that could seriously hamper the IRS’s subsequent attempts to take corrective action.

    • The effect on future noncompliance by like organizations in the same industry or profession.

    • The negative impact on EO Examinations programs, goals, work plans, implementing guidelines and strategic plan.

    • The technical complexity of the income tax issues and the excessive demands on time for issue resolution.

    • The availability of trained examiners and expertise in the specific income tax matter.

    • Sensitivity of the case that should be addressed by SB/SE.

    • Avoiding inconsistent treatment of similarly situated organizations in a market segment worked.

    • Collectibility.

  4. If you can’t enforce the converted return taxes, prepare Form 5666 (or Form 5346) package. Indicate the reason for not pursuing income tax on the 3198-A Special Handling checksheet in RCCMS for the EO information return case file.

EO - Scope of EO Enforcement
  1. Policy Statement 4-119 states that the primary objective of the EO examination program is regulatory, with emphasis on the continued qualification of exempt organizations. For purposes of applying limited resources, income tax enforcement of revoked or disqualified organizations is incidental to that primary objective. The referral option on Form 5666 is available.

  2. Policy Statement 4-63 provides that deficiencies should be based on meritorious adjustments. No adjustments should be included for punitive, bargaining, or similar purposes. Estimated amounts to protect the Government's interest may be used only when it is impossible to establish exact amounts.

  3. In recognition of existing EO work plans and implementing guidelines, EO examiners will generally enforce income taxes by rolling over amounts known to be correct on the primary return, to the RAR of the tax return. See the Conversion Table at IRM 4.70.14.2.1.3.3.15(2).

  4. Converted return taxes are generally enforced for a maximum of 6 years. See P-5-133 at IRM 1.2.14.1.18 (8/2006).

  5. In appropriate cases, consult with TEGEDC to determine whether special statute conditions exist for any return or tax year, e.g., 6-year statute. TEGEDC requires 45 days to provide a written opinion. See IRM 4.70.12.3.7, Statute of Limitations and Statute Control Procedures, for statute considerations.

EO - Determination of Tax Liability
  1. Examiners may rely on the following resources to help determine income taxes:

    1. GCM 39813.

    2. 1990 CPE Text, Topic B, The Synanon Case.

    3. CCH U.S. Master Tax Guide.

    4. IRM Chapters 4.10, 4.11 and 4.12.

    5. Income tax training textbooks.

    6. Training Pub 11361–002, LMSB Corporate Taxation Participant Guide (Catalog 50286Q).

    7. Consult with fellow examiners with strong income tax background.

    8. Lexis-Nexis® and Westlaw®.

    9. SB/SE or LB&I websites. See SB/SE’s Issues and Procedures website.

  2. Form 990 to Form 1120 Conversion Table

    Contributions, gifts, grants, and other receipts
    Form 990 Description Form 1120 Description
    Direct public support Non-taxable or Gross Receipts or Sales 1 & 2
    Indirect public support Non-taxable or Gross Receipts or Sales
    Government contributions Gross Receipts or Sales 3
    Program service revenue including government fees and contracts Gross Receipts or Sales
    Membership dues and assessments Gross Receipts or Sales 4
    Interest on savings and temporary cash investments Interest
    Dividends and interest from securities Dividends
    Gross rents Gross Rents 5
    Less: rental expenses Other Deductions 5
    Other investment income Other Income
    Gross amount from sales of assets other than inventory Capital Gain Income (net with Cost)
    Less: cost or other basis and sales expenses Capital Gain Income (net with Cost)
    Net gain or (loss) Capital Gain Income
    Gross revenue from special events and activities Gross Receipts or Sales
    Cost of goods sold from special events and activities Cost of Goods Sold
    Gross sales of inventory, less returns and allowances Gross Receipts or Sales
    Less: cost of goods sold Cost of Goods Sold
    Other Revenue Other Income
    Expenses 6, 7 & 8
    Form 990 Description Form 1120 Description
    Grants and allocations Charitable Contributions, if qualified
    Specific assistance to individuals Other Deductions, if qualified
    Benefits paid to or for members Other Deductions, if qualified 4
    Compensation of officers, directors, etc. Compensation of Officers
    Other salaries and wages Salaries and Wages
    Pension plan contributions Pension, profit-sharing, etc., plans
    Other employee benefits Employee benefits programs
    Payroll taxes Taxes and Licenses
    Professional fund-raising fees Other Deductions, if qualified
    Accounting fees Other Deductions
    Legal fees Other Deductions
    Supplies Other Deductions
    Telephone Other Deductions
    Postage and shipping Other Deductions
    Occupancy Rents
    Equipment rental and maintenance Repairs and Maintenance
    Printing and publications Other Deductions
    Travel Other Deductions
    Conferences, conventions, and meetings Other Deductions
    Interest Interest
    Depreciation, depletion, etc. Depreciation or Depletion, if qualified
    Other expenses Other Deductions
    1 IRC 61, Gross Income Defined. As a general rule, all income is taxable unless proven otherwise.
    2 IRC 102, Gift and Inheritances. As a general rule, gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. *See also: Synanon Church v. Commissioner, T.C. Memo. 1989-270 (Docket No. 20015-84). See Exhibit CPE 1990, Taxation of Revoked Tax-Exempt Organizations: The Synanon Case, and General Counsel Memorandum 39813. (Not citable as legal precedent)
    ** Issues Examiner should consider:
    1. Was there a good faith solicitation?

    2. Was there a good faith contribution?

    3 Government Grants are not excludable income under IRC 102.
    4 IRC 277, Deductions by Certain Membership Organizations [non 501(c)(3)]. As a general rule, deductions shall be allowed only to the extent of income derived during such year from members or transactions with members.
    * 501(c)(3) - generally deductible
    ** Examiners need to distinguish between contributions and gross receipts. Scenarios would be:
    1. All classified as contributions with member benefits all deductible.

    2. Quid-pro-quo - only partially contributions and only partially deductible.

    3. Member services for member benefits - where no part is attributable to charitable purpose, would not be deductible.

    5 IRC 470, Property Leased to an Exempt Organization. If a corporation leases property to a governmental or other tax-exempt entity, the corporation cannot claim deductions related to the property to the extent that they exceed the corporation's income form the lease payments.
    6 IRC 162, Trade of Business Expenses. Examiners should be aware of the "Income Offset Rules" for deductibility of expenses.
    7 IRC 263 and IRC 263A, Capital Expenditures. Generally requires corporations to capitalize, or include in inventory certain costs incurred in connection with real property and inventory. *Please be aware that this section applies to Form 990 as well*
    8 IRC 183, Activities not engaged in for profit. As a General Rule, in the case of an activity engaged in by an individual or an S Corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter [26 USCS §§ 1 et. seq.] except as provided in this section.

EO - Basic Income Tax Considerations
  1. Apply IRC 7701. Identify the entity’s legal status as a corporation, association, trust, cooperative or partnership. This determines what type of return needs to be filed. Unincorporated associations are generally treated as corporations liable for Form 1120 returns.

  2. Don’t make income tax elections on behalf of taxpayers.

  3. All income is taxable and included in gross income unless excluded by statute IRC 61.

  4. Regarding certain dues collected for others, escrow funds, similar trust funds, and amounts received on behalf of others, such amounts are not included in the organization’s gross income until the organization asserts dominion over it as its own. See guidance on an income determination with respect to deposits in Commissioner v. Indianapolis Power & Light Co., 110 S. Ct. 589; See Rev. Rul. 71-189, 1971-1 C.B. 32 (inactive deposits are not income until bank asserts dominion over the accounts). See also Fidelity-Philadelphia Trust Co. v. Commissioner, 23 T. C. 527 (1954).

  5. Contributions and donations received may or may not be taxable. See IRC 102.

    1. Determine whether a contribution received constitutes a “gift”.

    2. Gifts are excluded from gross income by IRC 102.

    3. “Intent” is a critical consideration in determining whether a transaction is a gift. Commissioner v. Duberstein, 363 U.S. 278 (1960).

    4. However, if the gift is acquired by misrepresentation or fraud it is included in gross income of the recipient. Synanon Church v. Commissioner, T.C. Memo. 1989-270.

    5. Government grants are not automatically presumed to be gifts. In some cases, a governmental entity can expect an economic benefit from programs that relieve business or individual hardships. For guidance, refer to Kroon v. United States, Civil No. A-90-71 (D. Alaska 1974); Rev. Rul. 77-280, 1977-2 C.B. 14; Rev. Rul. 68-97, 1968-1 C.B. 34; and United States v. Chicago, B. & Q. R. Co., 412 U.S. 401 (1973), 1973-2 C.B. 428.

    6. Quid pro quo contributions are gifts only to the extent the total amount received exceeds the fair market value of the consideration provided to the donor. IRC 6115(b).

  6. Deductibility of Expenses.

    1. Apply the rules of IRC 162. Expenses are deductible only to the extent they are ordinary and necessary in carrying on a trade or business.

    2. The income-offset rule allows full deduction for exempt function expenses but only to the extent of income derived from the exempt function. See Adirondack League Club, 55 T.C. at 806; Five Lakes Outing Club v. U.S., 468 F. 2d 443, 446 (8th Cir. 1972); Synanon, 57 T.C.M. at 631.

    3. Similarly, charitable distributions are deductible in full only to the extent of the charitable gifts received. For corporations, charitable distributions from other income are deductible only to the extent of 10% of taxable income after certain adjustments. See limitations at IRC 170(b)(2).

      Note:

      Some organizations may want to claim charitable and program expenses as "promotional expenses" , which if proven to be ordinary and necessary, are fully deductible.

    4. Lobbying and political expenses are not deductible expenses.

    5. Fines and penalties are not deductible expenses.

    6. Amounts paid for kickbacks, bribes, and other illegal payments are not deductible expenses.

    7. Amounts paid by health care providers for payments in consideration of the referral of a client, patient or customer are not deductible expenses.

    8. Amounts in excess of reasonable compensation or compensation for non-profit motivated activities are not allowable as a deduction.

    9. Income taxes paid (including UBIT) are not deductible.

    10. Expenses incurred in connection with a convention, seminar, or similar meeting held outside the "North American area" are limited under IRC section 274(h). Rev. Rul. 2011-26, 2011-48 IRB 803.

  7. Substantiation of Expenses.

    1. Generally, the burden of proving the existence of a deduction or loss falls on the organization.

    2. Examiners should use their best judgment in balancing utilization of time on substantiating expenses and accomplishment of the overall EO examination program as directed by Management. Thus, EO Examiners are not required to substantiate all deductible expenses unless the situation demands it.

    3. Scrutiny should be reserved for expenses that appear unreasonable, large, unusual, and questionable. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) [92-1 USTC P 50,113].

    4. The "Cohan rule" is often cited by taxpayers who ask to use estimates where specific proof of the amount of the claimed deduction is absent. Cohan v. Commissioner, 39 F. 2d 540, 543-544 (2d Cir. 1930) [2 USTC P 489]. However, the organization must establish the essential proof necessary to allow for an estimate. Coloman v. Commissioner, 540 F. 2d 427 (9th Cir. 1976) [76-2 USTC P 9581], affirming T. C. Memo. 1974-78; see also Vanicek v. Commissioner, 85 T.C. 731 (1985).

    5. Expenses for travel, entertainment expenses, business gifts, computers and vehicles require record-keeping before a deduction is allowed. These expenses should be substantiated in accordance with IRC 274(d) and IRC 280F and the regulations thereunder.

  8. Depreciation.

    1. A depreciable asset begins to depreciate in the year it is first placed in service.

    2. Note that the useful life or cost recovery period for certain assets may have expired before the year under examination began; thus, further depreciation of such assets would not be allowed.

    3. Certain assets are NOT depreciable, such as certain works of art and land.

    4. The IRC 179 deduction is only allowed if an election was made on a voluntarily filed tax return.

    5. In general, the depreciation method depends on when tangible property was placed in service:
      1. Since 1986 – Generally Use MACRS,
      2. After 1980, but before 1987 – Use ACRS,
      3. Before 1981 – Use straight line, DB, SYD or other consistent method.

    6. EO examiners generally will not challenge the organization’s depreciation methods established before the revoked years, and reported on annual EO Information Returns.

  9. Dividend Received Deduction.

    1. Corporations are allowed a special deduction called a dividend received deduction. See IRC 243, IRC 244, IRC 245 and IRC 246. The major reason for the dividend received deduction in IRC 243 is to avoid so-called "double taxation" in corporate taxes on earnings as income is passed from one corporation to another.

    2. Generally, examiners will not allow this deduction unless a revoked organization can establish that it is entitled to the deduction.

  10. IRC 277, Deductions Incurred by Certain Membership Organizations in Transactions with Members.

    1. IRC 277 provides that a membership organization not exempt from tax may deduct expenses attributable to the provision of goods or services to members only to the extent of income derived from members. The purpose of this provision is to prevent nonexempt membership organizations from effectively rendering themselves free of tax by off-setting losses from membership activities against income derived from investments or other nonmember sources to produce little or no taxable income. Were they permitted to do so, they could put themselves in a better position than exempt clubs, which are taxable on all income but "exempt function" income.

  11. Other Income tax provisions.

    1. IRC 263 and IRC 263A requires corporations to capitalize certain expenditures or include in inventory certain costs incurred in connection with real property and inventory.

    2. IRC 470 provides that if a corporation leases property to a governmental or other tax-exempt entity, the corporation cannot claim deductions related to the property to the extent that they exceed the corporation’s income from the lease payments.

    3. If an organization under examination requests a change in accounting method, follow the procedures in IRM 4.11.6. A request for change in accounting method for an organization under examination requires the consent of the Director, EO Examinations before an application on Form 3115, Application for Change in Accounting Method, can be submitted in accordance with the instructions of the form. See Rev. Proc. 2008-52, 2008-2 C.B. 587.

EO - Gift Tax Consequences
  1. IRC 2501 imposes a gift tax on donors who give to taxable entities, knowing it’s a taxable entity or after public notice of the revocation. A donor is not subject to gift tax and has advance assurance of charitable deductibility under IRC 170 for amounts contributed to a revoked IRC 501(c)(3) entity prior to public notice of the revocation (such as in the Internal Revenue Bulletin, however, notice may occur in other ways, see Estate of Clopton v. Commissioner, 93 T.C. No. 275 (8-29-89)).

  2. Consult with Gift Tax Specialist (attorney). Enforcement of this tax requires a referral to Estate and Gift using SRS online. See IRM 4.70.13.6.2, Specialist Referral System.

EO - Effect on Employee Plans
  1. The revocation of an organization’s IRC 501(c)(3) status may adversely impact deferred compensation programs sponsored by the organization. Consult with an Employee Plans IRC 403(b) or IRC 457 Coordinator for your area if the organization maintains a deferred compensation plan. Deferred compensation plans are those described under IRC 401(a), IRC 403(b) or IRC 457.

EO - Effect on Tax Exempt Bonds
  1. Revocation of an organization’s IRC 501(c)(3) status will result in the loss of the exclusion from gross income under IRC 103 for interest payments on tax-exempt obligations issued under IRC 145 as “qualified 501(c)(3) bonds.” The loss of such exclusion is effective back to the date of issuance of the IRC 501(c)(3) obligations.

  2. Determine whether the organization is the beneficiary of outstanding tax-exempt obligations under IRC 145 at the time of revocation.

EO - Referral to Tax Exempt Bonds (TEB)
  1. Because a revocation of the tax-exempt status of an IRC 501(c)(3) organization results in the loss of excluding interest from gross income of bondholders on the organization's qualified IRC 501(c)(3) bonds a referral is required to Tax Exempt Bonds. This section describes the procedure to make a referral by transmitting the required information to the TEB Referral Coordinator.

  2. Use the Specialist Referral System (SRS) or Form 5666 to refer a potential noncompliant bond issuance to the TEB Referral Coordinator. Detailed instructions for completing the form are located in IRM Exhibit 4.5.1-12. Also see IRM 4.70.13.6.2, Specialist Referral System.

  3. Complete a separate Form 5666 with all information that is available about the issuer of the bonds and the nature and size of the potential noncompliance issue. Include information pertaining to the source of the EO examination and attach any news articles, correspondence or other documentation concerning the potential noncompliance issue with the Form 5666. The referral package should be as complete as possible with objective information to facilitate the TEB Classifiers in making their recommendations of compliance actions.

  4. Use the proper AIMS Source Codes for each referral. The following guidance will assist the originator in determining the proper source code for referrals and the preparation of or the Specialist Referral System.

    1. Use the appropriate source codes based on the EO examination. TEB source codes are identified in the GE Computer Systems Codes Book, Document 11308.

EO - Statute Protection - Dual Responsibility With Appeals
  1. Both the primary return (e.g., Form 990) and the converted tax return (e.g., Form 1120) for the same tax year will share the same statute date based on the filing of the same Form 990. However, the two MFT case files will be separated once Mandatory Review ships the primary return case to Appeals assuming the organization protests the proposed adverse status change. This results in separating case assignments, and therefore dual responsibility for monitoring statutes.

  2. At the onset, you are primarily responsible for monitoring and protecting the statute on all returns you establish on AIMS, including converted tax returns.

    1. However, if an organization protests an adverse status change (e.g., Form 990 returns) for specific tax years, Appeals will assume primary responsibility for protecting the statute of limitations for those tax years once accepted in their inventory.

    2. You will continue to monitor statutes for all converted return tax years you establish on AIMS, but because Appeals assumed primary responsibility for protecting the statute for the protested years, you continue to assume primary responsibility for protecting the statute of limitations for the non-protested years, if any.

  3. While the primary returns (e.g., Form 990) are in Appeals for resolution of the exemption issue, Mandatory review will hold the converted tax return case file in Status 38 suspense:

    1. Mandatory Review will only hold the converted tax return case file in Status 38 suspense until the sooner of:

      1. A converted tax return in the case file becomes a "short statute return," requiring "statute controls" or
      2. Appeals has decided the adverse status change issue.

    2. If a converted tax return becomes a short statute return, the reviewer will send the converted tax return case file back to you to monitor statutes for all converted return tax years, and to protect and solicit a statute extension for the non-protested tax years, if any.

    3. If the organization will not consent to extend the statute date for any short statute returns, you and your manager may take steps to initiate deficiency procedures in order to protect the tax, even if the adverse status change is not yet resolved in Appeals.

    4. Consult with TEGEDC regarding your issuance of a statutory notice of deficiency for a converted tax return if the ASED is imminent.

    5. Don’t suspend the converted tax return case file using AIMS Status Code 39. See IRM 4.70.12.3.7.5, Extending the Statute of Limitations, for statute extension procedures.

  4. You are allowed to contact Appeals if needed to coordinate communications with the organization and soliciting statute extensions. This communication will not violate Rev. Proc. 2012-18, 2012-10 IRB 455, regarding ex parte communications because it meets the ministerial, administrative or procedural matters exception in Section 2.03(2)(a) of the Rev. Proc, so long as the issues are not discussed.

  5. The instructions in the previous paragraphs are illustrated by the following examples:

    Example:

    (1) By reason of IRC 6501(g)(2), Form 990 and Form 1120 show the same statute expiration date. Due to a proposed revocation of tax-exempt status under protest, Appeals has one set of returns under its control - 2014 and 2015 Forms 990; the examination group has another set of returns under its control - 2014 and 2015 converted Forms 1120 (on AIMS NMF). The statute expires in less than 270 days for both 2014 and 2015 returns and the examination group wants to solicit statute extensions from the organization. Appeals has primary responsibility for protecting the statute of limitations for income taxes for 2014 and 2015. In this case, the examination group may initiate contact with Appeals to follow-up on whether Appeals solicited and secured statute extensions for income tax for 2014 and 2015. Because the communication is restricted to coordinating the solicitation and securing of statute extensions, this is a permissible procedural communication that falls within the ministerial, administrative or procedural matters exception and is permissible so long as the substance of issues is not discussed. See section 2.03(2)(a) of Rev. Proc. 2012-18.

    Example:

    (2) Assume the same facts as Example (1) but in addition, the organization refuses to extend the statute of limitations after both the examiner and Appeals coordinated their solicitations to extend the statute for their respective short statute returns. The statute expiration date is within 90 days and the revocation matter is not yet settled. The examination group wants to issue an SNOD for income tax. The examination group can inform Appeals of its plan to issue an SNOD because the communication is restricted to the prospect, method and timing of issuing a SNOD. Protecting the government's interest for separate returns sharing the same statute date is a procedural matter. The communication is permissible so long as the substance of issues and the contents of the SNOD are not discussed. See section 2.03(2)(a) of Rev. Proc. 2012-18.

    Example:

    (3) Examiner T is examining XYZ’s 2014 Form 990. XYZ is exempt under IRC 501(c)(3). T determines XYZ’s exempt status should be revoked effective 1/1/2014. Based on T’s examination of the 2014 books and records, T estimated XYZ’s income tax liability for 2014 to be $6,000. After inspecting the 2015 Form 990 return alone, T also estimates the income tax liability for 2015 to be $8,000. To protect the income tax for both tax years, T establishes the 2014 and 2015 Form 1120 SFR on AIMS Non-Master File for later adjustment pending the final outcome of your proposed revocation. XYZ appeals T’s proposed revocation. T closes the Form 990 case file to Mandatory Review, with the Form 1120 case file riding with the package. Mandatory Review later forwards the Form 990 case file to Appeals. Two months later, both the 2014 Form 990 and the 2014 SFR Form 1120 become short statute returns. Because Appeals has primary responsibility for protecting the statute for income tax in 2014, T may initiate contact with Appeals to follow-up on their request to extend the statute of limitations for income tax for 2014 without violating ex parte rules.

    Example:

    (4) Assume the same facts as Example (3) except both the 2014 and 2015 Form 1120 returns are short statute returns. Because Appeals continues to have primary responsibility for protecting the statute for income tax in 2014, T may initiate contact with Appeals to follow-up on their solicitations to extend the statute of limitations for the 2014 income tax. While Appeals doesn’t have a 2015 Form 990 return in its inventory, T is primarily responsible for protecting the statute of limitations for the 2015 income tax.

    Example:

    (5) Assume in Example (4) that Appeals has issued a 90-day final adverse determination letter (FADL) notifying XYZ of the final revocation of its exempt status. Because Appeals is closing its case, Appeals is no longer primarily responsible for protecting the statute of limitations for the 2014 income tax. T now assumes primary responsibility for protecting the statutes for both the 2014 and 2015 income tax while Form 1120 SFR returns in T’s inventory. Appeals’ issuance of a FADL does not suspend the statute of limitations for any tax year. Only Mandatory Review’s or T’s issuance of a 90-day SNOD will suspend the statute of limitations for assessment if the taxpayer won’t extend the statute.

  6. If the organization refuses to extend the ASED for short statute converted tax returns, discuss your next course of action with your manager. Generally, you will prepare the tax case for closure to Mandatory Review for issuance of a SNOD in order to protect the government's interest, even if the revocation issue is undecided in Appeals.

    Note:

    While the adverse status change issue is working in Appeals, the converted return tax case will still be on NMF. You must process that closure on NMF unless and until the revocation is sustained and posted to the EOBMF.

  7. If the statute is imminent you must issue the SNOD. See IRM 4.70.12.3.7.11, EO Imminent Statute, for approval procedures. See IRM 4.70.14.6.6.1, SNOD Preparation and Issuance, for SNOD preparation procedures. Upon issuance of the SNOD, close the income tax case to Mandatory Review for 90-day suspense (AIMS Status 24) within 5 business days.

  8. Appeals will notify EO Examinations if the organization has no intention to execute a consent to extend the statute date by the earlier of:

    1. 120 days prior to the statute expiration date.

    2. The date Appeals sends its case to TEGEDC for review of the 90-day FADL.

  9. Appeals will also inform EO Examinations:

    1. If and when the adverse status change was approved by TEGEDC, and

    2. When it issues a 90-day FADL.

EO - Revocations and Disqualifications - Alternative Positions
  1. The UBIT issue for the open Form 990-T examination for the affected tax years should be fully developed before closing the adverse status change case (primary return)

    Note:

    The presence of a Form 990-T examination only impacts what goes on the proposed revocation or disqualification RAR and on the 3198-A Special Handling checksheet in RCCMS for the primary return case file. It has no effect on conversion procedures.

  2. Incorporate the UBIT issue as an alternate position in the revocation or disqualification report. See IRM 4.70.14.2.1.3.3.8, EO – Converted Tax Return Secured – To Be Further Adjusted. Include Form 990-T at the heading of Letter 3618.

    1. If there is no change to UBIT under examination, include a statement to that effect after the conclusion part of the revocation or disqualification RAR.

    2. If there is a UBIT deficiency, include the deficiency as your alternative position after the conclusion part of the revocation or disqualification RAR, complete with facts, law and argument and Form 4549 marked "Alternative Position" in the top margin.

      Exception:

      If you requested a TAM on a revocation issue that grants IRC 7805(b) relief to the organization, process the Form 990-T case file for a normal tax-exempt organization for years of examination, because the revocation will be prospective

      .

    Note:

    In cases where there is a revocation or disqualification report with an alternate UBIT issue, include a copy of the proposed revocation or disqualification report in the Form 990-T case file.

  3. If applicable, notate the following on 3198-A Special Handling checksheet in RCCMS for the primary return case file and for the Form 990-T case file if also open for examination: "If Revocation [Disqualification] is Sustained, Transfer Payments Applied to 990-T Module for the Revoked [Disqualified] Tax Years to the Converted 1120 [1041 or 990-PF ] Module - Then Reverse Tax Assessments on 990-T Tax Module" .

  4. Close Forms 990-T for the affected tax years with identical revocation or disqualification disposal codes used for the primary returns, unless a higher priority disposal code applies.

    Exception:

    If you requested a TAM on a revocation issue that grants IRC 7805(b) relief to the organization, use disposal codes for Form 990-T for a normal tax-exempt organization, because the revocation will be prospective.

Revocation or Termination of Organizations Covered by a Group Ruling
  1. This section focuses on an examiner’s responsibilities for examinations of organizations under a group ruling. It addresses these topics:

    1. Revocations of group rulings

    2. Terminations of group rulings

    3. Appeals consideration

      Note:

      for guidance on examining Organizations Covered by a Group Ruling see IRM 4.70.13.4.2.2.1, Organizations Covered by a Group Ruling.

Revocations
  1. When you’re determining that a subordinate organization should no longer be tax-exempt, you are effectively proposing to remove the organization from the group ruling. This terminates their exempt status, and constitutes an adverse action that triggers the subordinate's rights to appeal. When writing the report of examination, minimize the use of terms like "revoke" and "revocation" . Instead, use the phrase "removal from the group exemption" or some variation.

  2. Removal of any subordinates that are under an IRC 501(c) group ruling triggers the administrative record requirement if unagreed. See IRM 4.70.14.2.4.1, EP & EO - Declaratory Judgment Cases and the Administrative Record for unagreed cases.

  3. Revocation of the central organization's exempt status results in the termination of the group ruling as a whole. The subordinate organizations may seek their own individual recognition, join another group ruling, or if a statutorily exempt organization continue as exempt without recognition. The central organization is subject to declaratory judgment procedures under IRC 7428 and Mandatory Review (or Appeals) issues a 90-day final adverse determination letter (FADL). Contact Mandatory Review for a custom agreed revocation letter. See also IRM 4.70.14.6.9, EO - Revocations, any other loss of tax exemption, and foundation reclassifications.

  4. For all revocations of central or subordinate organizations under examination, prepare Form 2363-A, Request for IDRS Input for BMF/EO Entity Change, to update the Exempt Organizations Business Master File (EO BMF) status to 22. Leave the Form 2363-A in the case file (and/or upload the Form 2363-A to RCCMS). See IRM 4.70.14.2.1.3.3, EO – Conversion of Returns, for securing converted returns or enforcing income tax on revoked organizations.

  5. If Mandatory Review concurs with (or Appeals sustains) the revocation, they send Form 2363-A to the FAST unit to update the EO BMF status to 22. If a central organization is revoked, the GEN file updates all the subordinates to status 28.

Terminations
  1. Organizations that have their own exemption letter are corporations, trusts or associations. Organizations included under a group ruling may receive charters from the central organization. This is common with many fraternal and veterans’ organizations.

  2. When examining a subordinate that has a charter from the central organization, in lieu of or in addition to a certificate of incorporation, determine whether the charter has been rescinded/revoked by the central organization. Obtain a copy of the letter rescinding/revoking the charter of the subordinate entity.

  3. When a central organization dissolves/terminates, is revoked, or relinquishes its exemption, then recognition on a group basis terminates. A subordinate may then file for a separate exemption letter by following the standard procedures in Rev. Proc. 2020-5 (updated annually) and submitting the appropriate application (e.g., Form 1023 including paying the user fee).

    Note:

    The subordinate may also join another group, or if statutorily exempt or not required to file an application, continue as exempt without recognition. Refer to Pub 557, Application Procedures for Exempt Recognition - for application requirements, forms and procedures.

  4. If terminating a subordinate in a group ruling, see the notification requirements in IRM 4.70.14.2.1.3.4.4, Notification Requirements.

  5. For all subordinate termination cases, prepare Form 2363-A to update the status to 20. Leave the Form 2363-A in the case file (and/or upload the Form 2363-A to RCCMS). Examiners will send the Form 2363-A to the FAST unit when they close the case.

  6. When a central organization terminates, prepare Form 2363-A to update the EIN's status to 29. Leave the Form 2363-A in the case file (and/or upload the Form 2363-A to RCCMS). Examiners will send the Form 2363-A to the FAST unit when they close the case. When processed, this updates the subordinates to EO BMF status 28.

    Note:

    For other case closing procedures, please see IRM 4.70.14.4, Closing A Case.

Concurrent Examinations
  1. A central organization’s group ruling terminates when:

    1. A central organization notifies the IRS that it is going out of existence by filing a return.

    2. Its exemption is revoked (automatically or manually).

    3. It files a final return.

    4. The IRS revokes the group ruling letter.

  2. The action impacts any current examination of a subordinate organization. All members of the group ruling are updated to EO BMF status 28. Any former subordinate organizations who later file a Form 990 series return are updated to status 40 or 36, depending on the code section claimed on the return. Subordinate organizations are also placed in status 40 or 36 when a central organization notifies them that it’s dissolving its group ruling (but not terminating).

  3. When possible, attempt to coordinate exams of central and subordinate organizations. If you’re examining subordinate organizations, check AIMS to see if the central organization and/or the group return is under exam. Contact the examination group to discuss the exam issues and coordinate actions.

  4. Mandatory Review follows these actions when these events occur:

    For all central organization revocations:
    1. Mandatory Review or Appeals issues the final letter (revocation or FADL to the central organization.)
    2. The reviewer, or Appeals, notifies the manager, Mandatory Review, of the issuance of the letter to the central organization.
    3. The manager, Mandatory Review, in turn notifies the Area Manager, GL\FIU, of the revocation of the central organization.
    4. The manager, Mandatory Review, secure emails the area managers giving directions on any subordinates in their inventories. See Exhibit 4.70.14-32, EO Secure Email message from Manager, Mandatory Review, to Area Managers Regarding the Revocation of a Central Organization (501(c)- FADL Issued), for all 501(c) revocations.
    As all 501(c) Organizations Are Subject to IRC 7428:
    5. When the waiting period per IRC 7428 ends, either the statute coordinator, Mandatory Review, or Appeals, depending on the file’s location, notifies the manager, Mandatory Review of whether a petition was filed with the court.
    6. The manager, Mandatory Review, informs the applicable area manager.
    7. If no petition was filed, the manager, Mandatory Review, secure emails the area managers to proceed with final actions. See Exhibit 4.70.14-33, EO Secure Email message from Manager, Mandatory Review, to Area Managers Regarding the Revocation of a Central Organization - FADL Not Petitioned.

    Note:

    Cases where a petition was filed remain in suspense.

    8. Upon notification by Appeals or TEGEDC of the conclusion of the court case(s), the manager, Mandatory Review, secure emails the area managers to remove cases from suspense and conclude the exams. See Exhibit 4.70.14-34, EO Secure Email message from Manager, Mandatory Review, to Area Managers Regarding the Revocation of a Central Organization (Courts Upheld), and Exhibit 4.70.14-35, EO Secure Email message from Manager, Mandatory Review, to Area Managers Regarding the Revocation of a Central Organization (Courts Rejected).

  5. Follow these actions for the central and subordinate organizations:

    If the central organization's revocation/termination... Then for the subordinate...
    Occurs before the subordinate’s Close the examination of the Form 990. Pursue other taxes (excise/employment).
    Occurs after the subordinate’s Follow normal procedures.

Notification Requirements
  1. You should not notify the central organization of your examination of a subordinate organization unless authorized to do so by the subordinate organization.

    Exception:

    modifications, terminations and revocations.

  2. If you can’t contact the subordinate organization, contact the central organization for help contacting the subordinate’s officers. The central organization is responsible for ensuring that the subordinate organization continues to meet the requirements for exemption under the group ruling.

  3. See the following chart for the appropriate letter to issue and the group that issues the letter:

    Taxpayer's situation Letter to Issue
    Subordinate Organization Revocation ("removal from group exemption coverage" )
    1. Issue 30-day Letter (Letter 3618), then to respond to the 30-day letter:

      1. If valid protest received - Issue Rebuttal letter Letter 5918

      2. If invalid protest or no reply- Issue 90-Day Final Adverse Determination Letter, ( Exhibit 4.70.14-30, EO 90-Day Final Adverse Determination Letter - Revocation of 501(c) Subordinate).

      3. If agreement is secured - Issue 90-Day Final Adverse Determination Letter, (Exhibit 4.70.14-30, EO 90-Day Final Adverse Determination Letter - Revocation of 501(c) Subordinate).

    2. Notification letter to Central Organization if revocation becomes final- Issue Letter 6263.

    Subordinate Organization Termination
    1. Termination Letter - 501(c) (Letter 5426)

    2. Notification letter to Central Organization Issue Letter 6263

    Central Organization Revocation Issue 30-day Letter 3618, then to respond to the 30-day letter:
    1. If valid protest received - Issue Rebuttal letter (Letter 5918)

    2. If invalid protest or no reply - Issue 90-Day Final Adverse Determination Letter ( Exhibit 4.70.14-31, EO Central Organization 90-Day Final Adverse Determination Letter (501(c))

    3. If agreement is secured - Issue 90-Day Final Adverse Determination Letter (Exhibit 4.70.14-31, EO Central Organization 90-Day Final Adverse Determination Letter (501(c) )

    Central Organization Termination Termination letter(Letter 5426)

    Note:

    The exam group issues Letter 3618 and other custom 30-day letters, and if the examiner receives a valid protest, Letter 5918. Mandatory Review issues all of the other letters.

     

  4. Prepare all letters issued to the taxpayer. For Mandatory Review letters, leave the contact information fields blank. Upload the letter to the Reporting Compliance Case Management System (RCCMS) and note on the 3198-A Special Handling checksheet in RCCMS, the file name for the letter and its folder location on RCCMS.

Employment Tax Agreed Case Processing
  1. IRM 4.23, Employment Tax, provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting, and payment of employment taxes. IRM 4.23 serves as the foundation for consistent administration of ET by various IRS operating divisions.

  2. However, for purposes of closing TE/GE ET cases after issuing your report, follow the closing instructions in this manual unless directed otherwise.

  3. An agreed examination is one for which:

    1. The examiner does not propose any tax adjustments and or change in worker classification.

    2. The examiner proposes and the taxpayer agrees to tax adjustments proposed by the examiner and/or work classification determination.

    3. The Service and Taxpayer come to a closing agreement or settlement program.

    4. Disputes between the Service and Taxpayer are resolved under the following alternative dispute resolution programs:

      • Early referral to Appeals

      • Fast Track Settlement

Employment Tax Establishing Related, Prior and Subsequent Period Returns
  1. When the Examiner identifies an issue that requires establishment of additional periods or related returns managerial approval is required prior to establishment of the return or period in RCCMS.

  2. The source code to use when establishing additional tax periods or related returns depends on the source code that was used on the primary case. Refer to Document 11308 for each function specific source codes.

  3. Procedures for delinquent and Substitute for Returns can be found in IRM 4.70.13.9, Delinquent, Amended and Substitute for Returns.

Employment Tax Closing Agreements
  1. Treas. Reg. 301.7121-1(a) provides that a closing agreement may be entered into in any case in which there appears to be an advantage in having the case permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and the Commissioner determines that the United States will sustain no disadvantage through consummation of an agreement.

  2. IRM 8.13.1, Closing Agreements, gives instructions and prescribes procedures for Service personnel handling closing agreements entered under IRC 7121.

FSL/ET - AD Hoc Closing Agreement Procedures and Policy
  1. Refer to IRM 8.13.1. The FSL/ET Closing Agreement Coordinator, Director, Government Entities and TEGEDC, as needed, may consider an ad hoc closing agreement to resolve a taxpayer’s prior tax year compliance issue. The taxpayer would not be under examination. The Director, Government Entities signs all ad hoc closing agreements.

  2. FSL/ET closing agreements will generally require Forms W-2/W-2c to be furnished and filed as part of the agreement, unless a specific dollar amount per employee cannot be determined. Any deviation from such policy will be rare and will require the approval from both EEE Counsel and the Director of Government Entities.

  3. Closing agreement tax assessments for barred assessment statute years (i.e. Section 218 retroactive pay issues) will be made per current Chief Financial Officer’s guidance.

  4. Taxpayers will generally pursue the assessment of tax on all open years for the closing agreement issue via amended tax returns (for example, Form 941-X) and provide a copy to the FSL/ET Closing Agreement Coordinator. Facts and circumstances will govern any exceptions to this general policy.

FSL/ET - AD Hoc Closing Agreement Procedures for Walk In Cases/Cases not Under Examination
  1. If a taxpayer, not under examination, approaches FSL/ET field personnel seeking a closing agreement to resolve a prior tax year compliance issue, the matter will be handled by the FSL/ET Closing Agreement (CA) Coordinator. The request for a closing agreement, and any information received from the taxpayer, should be sent by secure email to the CA Coordinator.

  2. The CA Coordinator receives and reviews all written requests for ad hoc closing agreements from taxpayers or representatives who are not under examination

  3. The CA Coordinator will request establishment of a closing agreement case via normal establishment procedures on RCCMS.

  4. The CA Coordinator will complete the “Ad Hoc Walk-In Closing Agreement Initial Memo” explaining the facts, taxpayer’s proposal and voluntary disclosure. The memo will be sent to the FSL/ET Director, Government Entities. The Director will approve or disapprove whether or not the agreement process is the right solution. The Director will provide comments and direction, if necessary.

  5. If the Director has questions or needs additional information not provided in the memo, a conference call will be set up with the CA Coordinator to address the inquiries.

  6. The CA Coordinator will include updates on all ad hoc closing agreements in-process in the FSL/ET Monthly Briefing. The Director will review the Briefing and contact the CA Coordinator if new circumstances arise.

  7. The CA Coordinator will contact the FSL/ET Group Manager if a high profile/sensitive issue arises. The FSL/ET Group Manager will coordinate with the Director as to the direction to take.

  8. If the Director approves the agreement, then the CA Coordinator will work with the taxpayer and/or representative to complete the closing agreement. All files will be uploaded to RCCMS and all case related activity will be recorded on Form 9984, Examining Officer's Activity Record. The Director will receive the closing agreement for approval and signature. The CA Coordinator will follow established procedures to close the case, process the payment and send a copy of the case to the CP&C Monitor. The FSL/ET Group Manager will approve final processing of the case in RCCMS.

  9. If the Director rejects the agreement, then the CA Coordinator will close the case according to established procedures and upload all electronic files received from the taxpayer into the RCCMS case file. Hard-copy documents will be scanned and imported, and the CA Coordinator will record all case-related activity on Form 9984. The FSL/ET Group Manager will approve final processing of the case in RCCMS and annotate Form 9984, Examining Officer's Activity Record.

FSL - Role of FSL/ET Ad Hoc Closing Agreement Coordinator
  1. The role of the CA Coordinator is to ensure the closing agreement process is consistent throughout FSL/ET and to provide a contact point for FSL/ET. The CA Coordinator has the following responsibilities:

    1. Reviewing all draft ad hoc closing agreements and obtaining initial concurrence from the Director, Government Entities.

    2. Working directly with the taxpayer and their representative as the taxpayer is not under examination. In these cases, the final closing agreement will be reviewed by the FSL/ET Group Manager and may be reviewed by Chief Counsel.

    3. Maintaining an FSL/ET closing agreement spreadsheet.

    4. Sending a hard copy file of closed closing agreements, and any necessary supporting documentation, to CP&C for monitoring and file retention purposes.

Case Closing Procedures for Ad Hoc Closing Agreements for Walk In Cases/Cases not Under Examination
  1. When the CA Coordinator receives a check payment with an executed closing agreement, a Form 3244-A, Payment Posting Voucher, must be prepared and sent with a scanned copy of the check via email to the FSL/ET Group Manager to review and sign.

  2. Once approved, the CA Coordinator can mail the payment to Ogden.

  3. The CA Coordinator will close the RCCMS case to the FSL/ET Group Manager.

  4. The FSL/ET Group Manager will review the case, annotate the Form 9984 and close it.

  5. The CA Coordinator will forward one signed copy of the agreement to the taxpayer and retain a copy of the closing agreement in the electronic file sent to CP&C.

TE/GE - Classification Settlement Program
  1. The Classification Settlement Program (CSP) establishes procedures that will enable taxpayers and the IRS to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. The procedures also ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied. By using the CSP, examiners can offer an entity under examination a worker classification settlement using a standard closing agreement.

  2. CSP agreements are closing agreements that bind the Service and the taxpayer to prospective tax treatment for future tax periods. Therefore, all CSP agreements must be reviewed and approved. Group managers must review the CSP agreements.

  3. Except as otherwise provided in situations listed in IRM 4.23.6.6, Eligible CSP Employment Tax Cases, and IRM 4.23.6.7, Cases Included in the CSP, you must present a CSP offer to a taxpayer. The taxpayer has the option of either accepting or rejecting the offer. All examinations that involve worker classification issues must follow the CSP Procedures as explained in the following manuals:

    • IRM 4.23.6, Classification Settlement Program (CSP).

    • IRM 4.23.10, Report Writing Guide for Employment Tax Examinations.

    • IRM 4.70.14.2.1.4.4.1, TE/GE – CSP Offer Case Closing Procedures.

  4. For EO Exam Only:

    • The Group Manager will:

      1. Ensure examiners use the most recent version of the CSP agreement template and the correct CSP agreement form, and ensures that the CSP agreement form is completed correctly.

      2. Review and submit the final CSP package to the Area CSP Reviewer for accuracy and consistency.

      3. Sign the CSP agreement (in triplicate) after the Area CSP Reviewer concurs with, and the taxpayer signs, the agreement.

      4. Send the final CSP package to the CSP Coordinator.

      • The EO Area CSP Reviewer (one per area):

        1. Reviews proposed CSP agreements within two weeks of receipt of the CSP packages from group managers.

        2. Consults with the CSP Coordinator as necessary.

        3. Returns a signed memo to the group manager concurring with the offer.

        4. Find a list of CSP Reviewers on the EO Employment Tax SharePoint site.

      • The EO CSP Coordinator:

        1. Acts as a consultant to the group managers and Area CSP Reviewers on all CSP cases.

        2. Responds to managers’ and examiners’ technical and procedure questions over the CSP.

        3. Participates in calls, as needed, with group managers and examiners or Area CSP Reviewers on CSP procedural problems, technical matters, emerging issues, and on the conduct of the overall program.

TE/GE - CSP Offer Case Closing Procedures
  1. Generally, regular examination case closing procedures apply with a few additional requirements. Those additional requirements are outlined in IRM 4.23.6.14, Procedures for CSP. In part, the additional instructions provide for preparation of a CSP Settlement Memorandum; preparation of a Form 14490, 14491 or 14492, Closing Agreement; use of standard CSP language; and changes to the examination report.

  2. The closing disposal codes in RCCMS are:

    1. DC 102, Agreed Tax Change, for the offer quarters.

    2. DC 104, Closing Agreement (FSL/ET cases).

    3. DC 210, Regulatory/Revenue Protection, for the no-change tax periods in a 25% CSP offer.

    4. DC 210, for the no-change tax periods in the non-CSP offer years for 100% CSP offers, unless a higher priority DC applies for changes in tax resulting from non-worker classification issues such as fringe benefit issues (e.g., DC 03 (102)). For a description of the type of CSP Settlement Offers, see IRM 4.23.6.14.1, CSP Settlement Offers.

  3. For EO, Use the job aids listed below for reference. Find them on the EO SharePoint site at Exam, Exam Job Aids, Employment Taxes, CSP folder:

    • CSP Agreement Flowchart.

    • CSP Guidelines Job Aid.

    • Guidelines for CSP Offer Year Q&A

    • CSP Memorandum Template to GM.

    • CSP Agreement – 530 – Form 14490 (rev. 5-2013).

    • CSP Agreement – CC WC – Form 14491 (rev. 5-2013).

    • CSP Agreement – WC CC – Form 14492 (rev. 5-2013).

    • List of CSP Reviewers.

  4. The examiner will send the signed CSP Settlement Memorandum, the Closing Agreement, the complete examination report (including but not limited to Form 2504-WC, Form 2504, Form 4666, Form 4667 and Form 4668), the pro-forma spreadsheet with the list of reclassified workers, and Forms 886-A to the designated CSP Coordinator in a secured email when closing the case on RCCMS.

    Note:

    For EO, also include the CSP memo signed by both the GM and the Area CSP Reviewer, copy of any workpapers to support the worker classification and Section 530 issues, and Taxpayer contact information.

  5. Per IRM Exhibit 4.23.2-1, Employee Plans (EP) Referral Checksheet, when workers are re-classified during an exam, including the classification from independent contractor to employee, unreported compensation and taxable fringe benefits you must make a referral to Employee Plans (EP). See IRM 4.23.2.2.3.1, Referrals to Employee Plans and Exempt Organizations/Government Entities, for instructions about how to make the referral.

TE/GE - Role of the CSP Coordinator
  1. The role of the CSP Coordinator is to ensure the CSP closing agreement process is consistent throughout TE/GE and to provide a contact point for examiners. The CSP Coordinator has the following responsibilities:

    1. Assisting Examiners and Managers with their CSP Offer.

    2. Maintaining an CSP spreadsheet.

    3. Sending a copy of the CSP package, as outlined in IRM 4.70.14.2.1.4.4.1, TE/GE – CSP Offer Case Closing Procedures, above, and any necessary supporting documentation to CP&C for monitoring and file retention purposes within 30 days of receiving the CSP package.

TE/GE - Tip Compliance Agreements
  1. IRM 4.23.7, Employment Tax on Tip Income, provides information about employment taxes on tip income, tip agreements, employment tax tip examinations, etc. While tip income among government employees is not common, TE/GE examiners should consider, as a possible area of non-compliance, tips provided to employees of a food and beverage establishment that is operated by a government, such as a city-operated museum or convention center restaurant. Baggage handlers at a city- operated airport and employees at a city-operated golf course, recreation center, or tourist service are additional examples of positions that may receive tip income as well.

  2. Developing a tip compliance agreement using the parameters outlined in IRM 4.23.7 may be appropriate.

  3. See IRM 4.70.18, Tip Compliance Agreement Procedures.

TE/GE - IRC 3402(d) Tax Reduction Procedures
  1. To properly assess both income taxes under IRC 3402 or backup withholding under IRC 3406, together with any applicable penalties and interest, examiners will follow a modified Partial Assessment procedure when penalties are to be assessed. The procedures described below supplement IRM 4.23.10.15.2, Examination Procedures for IRC 3402(d) and IRC 3102(f)(3) Relief.

  2. IRC 3402(d) does not apply to the portion of federal income tax computed using IRC 3509 rates. If only IRC 3509 rates are used, line 12 of Form 4668 "Maximum tax available for abatement under IRC 3402(d)" should contain the word "NONE" .

TE/GE - IRC 3402(d) When No Penalties Are Proposed
  1. The Partial Assessment procedures are not used if penalties are not being proposed based on the amount of tax. The examiner will compute the tax due on Form 4668, or Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G, based on the net adjustment using amounts from valid Form 4669, Statement of Payments Received. The amount on line 12 of Form 4668 or line 20 of Form 4668-B will reflect the remaining amount of tax available for abatement after the IRC 3402(d) credit has been allowed during the examination. Form 4666 and the Form 2504 series, as applicable, will also show this net figure. The assessment information and the credits and tax adjustments section of the RCCMS closing record will also reflect the net adjustments using amounts from the valid Forms 4669.

TE/GE- IRC 3402(d) When Penalties are Proposed
  1. The modified Partial Assessment process must be used if penalties are to be assessed. This is a two-step process which ensures that the gross amount of tax, penalties, and interest are computed and assessed. The IRC 3402(d) credit is allowed only against this gross amount. The two-step process results in the generation of an initial billing notice for the gross amounts shown on the Form 2504 series, as applicable. The taxpayer will subsequently receive a second notice containing the abatements allowed in the examination upon final processing of Forms 4669 during the closing process. The examiner should discuss the two-step process with the taxpayer using the statement included on Form 4666. This should alleviate taxpayer concerns that Forms 4669 were not properly processed upon receipt of the first notice. See IRM 4.23.10.15.3, Examination Report Forms for IRC 3402(d) and IRC 3102(f)(3) Abatements.

    1. The first step is to create a partial closing record to assess full tax and penalties as reflected on the Form 2504 series, as applicable; (Form 2504-T if IRC 3509 rates are not used). In RCCMS, create a Closing Record for the Partial Assessment, following the procedures in the RCCMS Case Closing Guide. On the Closing Record for the Partial Assessment, make sure that the "Partial" box is checked. On the Closing Record, complete just the fields that are necessary for the Partial Assessment: ARDI code, disposal code, assessment information, and credit/tax adjustments. All examination adjustments, including any other employment tax issues other than the Form 3402(d) items (fringe benefits, IRC 3509, penalties, etc.), are to be included on the Partial Assessment Closing Record. Enter "TC 308" (or "TC 300" if interest is to be assessed) for the gross tax amount. Enter the appropriate transaction code for the assessment of penalties based on the gross tax amount. Enter applicable reference fields for all adjustments of social security/Medicare wages and FICA/income tax/backup withholding taxes reflected on the Forms 2504 series, as applicable.

    2. The second step is to create a "full" closing record. The IRC 3402(d) credit and all closing record items will be entered on this "full" closing record. The "Partial" box will not be checked. Enter ARDI, Disposal Code, Examiner's Time, Technique Code, and Examiner’s Name. The adjustment on the "full" closing record will reflect only amounts related to the IRC 3402(d) credit-allowed portion. For the transaction code, enter the amount of tax credit allowed based on valid Forms 4669 as a "309" (or "301" if interest is to be assessed) and the corresponding reduction in the income tax withholding or backup withholding in the reference number fields. Other sections to complete include related return information, principal issue codes, and employment tax/GE (under additional data).

    3. Examiners should follow the instructions provided in IRM 4.23.10.15.3, Examination Report Forms for IRC 3402(d) and IRC 3102(f)(3) Abatements, to prepare Forms 4666, 4668, and 2504 series, as applicable, when IRC 3402(d) applies.

Employment Tax Report Writing
  1. This subsection discusses instructions for preparation of examination reports covering employment tax examinations. It also references certain related procedures which are not purely of a report writing nature but which are necessary both for an efficient report writing system and to reduce examination time.

  2. Exam reports (unlike workpapers) are legally binding documents and, when executed, serve as the basis for assessment and collection action. The Examiner’s report is the record of findings and recommendations regarding the investigation of a taxpayer’s liability for tax. It is the document from which reviewers may determine whether the Examiner has properly developed the case and has correctly applied the law, regulations, etc., to the facts in the particular case. Also, it may become the evidence on which the Government relies in a court case. Since the taxpayer ordinarily receives a copy of the report, it serves as a formal presentation to the taxpayer of the findings and recommendations of the Examiner.

  3. Preparation of an examination report is a very important part of the Examiner’s duties. The examination report should be clear, concise, and to the point. All adjustments must be properly explained and supported by appropriate references to the applicable laws, regulations, court decisions, rulings, etc., on which the Examiner based the findings.

Employment Tax Examination Reports
  1. For instruction on the preparation of reports covering examination of employment tax see:

    • IRM 4.23.10, for preparation of employment tax reports.

    • IRM 4.24.20, Excise Tax Report Writing Guide, for guidance on excise reports.

    • IRM 4.10.8, Examination of Returns, Report Writing, and individual exam reports, respectively.

  2. Report Generation Software (RGS) is required for generation of all income tax examination reports. See IRM 4.10.8.18, Reports Generation Software (RGS).

  3. The Examiner prepares and provides the examination report to the taxpayer and solicits agreement. If necessary, various closing letters are available for the Examiner to use when the report is issued by mail. The letter should remain undated until issued.

  4. Where possible, all correspondence with taxpayers should be prepared using standard forms and letters, since the specific language in these documents has been approved for general use. Examiners are never authorized to modify the context of National letters and forms except for short-term changes. (IRM 4.10.1.3.2, Written Communication.)

  5. Any executed Form 2504 series, as applicable, received from a taxpayer must be date stamped on the day received.

  6. Original paper Forms must be date stamped in the upper right corner:

    • If the Form is received via EEFax then the file itself contains the date and time stamp it was sent to the IRS and no further action is required to evidence receipt.

    • If the Form is received via facsimile and the date and time stamped by the sender’s fax machine is correct no further action is required to evidence receipt. If the sender’s date and time stamp is not correct you must treat it as a paper form and use the procedures in (1) above.

  7. The Examiner should include on Form 4668 that the taxpayer needs to send to the Social Security Administration any Forms W-2/W-3 or W-2c/W-3c that are required to be filed, but that are not secured during the exam.

  8. Generally, the Examiner should attach to the Form 4668 a listing of each affected worker and, for each worker, the wage and employment tax adjustment. The list should provide: the worker's name, SSN, amount of adjustment to total compensation, FICA, and Medicare wages, as well as related employment tax adjustments.

Employment Tax No-Change Cases
  1. In general, all quarters of a calendar year concurrently; books and records for the entire year are requested and examined. The taxpayer is entitled to a report that addresses all quarters examined.

  2. When an examination results in no changes to all quarters, all quarters will be closed "no- change" .

  3. If the Examiner notifies a taxpayer that only one period is under exam and limits the examination to that period, then it is appropriate to issue a no-change report on only that quarter.

Employment Tax No-Change Report
  1. The Examiner will provide the taxpayer a no-change report on Form 4666 indicating the year(s) and return form(s) examined and closed as no-change. The report should indicate that the findings are subject to managerial approval. Letter 3381 should be prepared and issued to the taxpayer (unless some periods are changed and others are not changed) with a copy of Form 4666, including the appropriate Section 530 limitation language. The Examiner may draft a custom letter, if needed, as a transmittal if the no change report is issued by mail.

Employment Tax Examination Resulting in Both Change and No-Change Periods
  1. In general, when an agreed examination results in changes to some quarters and no change to others, treat the employment tax case as an agreed "change" case. One letter and one report will be issued that addresses the no-change periods, and the periods with the changes, following the procedures outlined in IRM 4.23.10.10.3 (9). Specifically, the following guidance should be followed:

    1. Always use Form 4666 to summarize all examined periods.

    2. Report the no-changes in the summary section of Form 4666 by entering the period and return form number, writing "No-Change" in the tax column, and entering a dash in the page column.

    3. Do not complete Forms 4668 for the quarters no-changed.

    4. Enter the adjustment information on Form 4668 for only the quarters being changed. On a multiple-year examination, if no quarter during the year is changed, then no Form 4668 is necessary.

Employment Tax Agreed Report
  1. For agreed examinations, prepare, and furnish the taxpayer a copy of the report at the examination’s conclusion. If the taxpayer doesn’t pay the additional tax, indicate the last day for an interest-free adjustment on the report.

  2. Notate on the 3198-A Special Handling checksheet in RCCMS, if the taxpayer is entitled to an interest-free period per IRC 6205. See IRC 20.2.10.5.1, Underpayment Adjustments on Employment Taxes.

Employment Tax Unagreed Report
  1. Any report that is given to the taxpayer must include a statement that the report is subject to the approval of the EO Examination Director, FSL/ET Program Manager, or ITG Program Manager.

  2. With your group manager, examine and confirm the statute date to determine whether a 30-Day Letter, Statutory Notice of Deficiency (90-Day Letter), or Notice of Employment Tax Determination Under IRC 7436 should be issued. Primary guidance and procedures for unagreed cases including the 30-Day letter process can be found at:

    • IRM 4.23.22, Employment Tax Unagreed Employment Tax Case Procedures.

    • IRM 4.10.8.12, Unagreed Case Procedures.

  3. Complete unagreed case write-up. See IRM 4.23.10.16.1, Preparing Explanation of Adjustments.

  4. Separate reports MUST BE prepared for IRC 7436 and non-section 7436 issues. See IRM 4.23.10.10, Preparation of the Employment Tax Report, and IRM 4.23.10.10.4, Employment Tax Change Report.

  5. To assist in the preparation of Tables 1 and 2 of Letter 3523, prepare a list of reclassified workers as defined in IRM 4.23.22.11.1, General Overview of Section 7436 Procedures, (5) and (6). In addition, examiners should prepare a work copy draft of Tables 3 and 4 to assist ITG Technical or EO Mandatory Review in the preparation of Letter 3523. Both the list of workers and the table of taxes should be included with the Employment Tax Examiner's Report (ETER) package in the front of the case file for use by ITG Technical Group or EO Mandatory Review in preparation of the Letter 3523. See IRM 4.23.22.11, Special Procedures for Letter 3523 under IRC 7436.

    Note:

    To assist mandatory review on preparing Letter 3523, examiners should include the ETER spreadsheet and associated workpapers in electronic format and include in the file when closing.

ITG - Concluding the Examination
  1. Meet with the tribal official(s) to inform them of any findings, recommendations or proposed tax adjustments when you finish your examination.

    1. Provide your employee information again when you issue the report. Refer to IRM 4.10.1.6.9, Providing Taxpayers with Employee Contact Information.

    2. Issue the examination report and attach Pub 3498, The Examination Process, or Pub 5146, Employment Tax Returns Examination & Appeal Rights.

    3. Discuss proposed adjustments with the taxpayer and/or taxpayer’s representative including the law, regulations, rulings and court decisions supporting your conclusions.

    4. Solicit agreement

    5. Provide workpapers, if requested.

    6. On agreed cases, request full payment of tax, penalties and interest.

      • If taxpayer indicates an inability to pay the tax due at closing or within 120 days of the first notice, alternative payment methods should be discussed. An installment agreement should be offered if the taxpayer meets the requirements. See IRM 4.70.14.2.1.4.8.6, Installment Agreements.

      • If the taxpayer and/or representative do not wish to pay the deficiency immediately, explain that a statement for the deficiency plus interest will be mailed. Their cancelled check will be their receipt. Encourage them to pay using EFTPS. If they must send a check instruct them to put the entity name, EIN, tax form number and tax period on the face of the check itself. Secure waivers as needed and close the case.

      Note:

      If the tribal leader isn't in the closing meeting, explain your examination results in a letter. Thank the tribal official(s) for their cooperation. Issue all letters, publications and reports per the communication agreement. Send any examination correspondence you send to the designated tribal official also to the tribal leader.

      Example:

      Send all correspondence to both the designated tribal official and the tribal leader for: an examination, examination expansion, or notification to the tribal leader that someone else from the IRS will be working on their reservation.

Employment tax 30-day Letters
  1. IRM 4.23.22, Unagreed Employment Tax Case Procedures, explains the procedures for unagreed cases, including the preparation of 30-day letters; i.e. Letters 950-C & 950-D.

  2. Examiners are responsible for preparing and sending 30-day letters.

  3. The following table provides a list of the most commonly used closing letters and indicates who is responsible for preparing and mailing the letter.

    Letter Number Prepared By Mailed by
    Letter 5376 (Full or Partial Claim Disallowance - Employment Tax) Examiner Examiner
    Letter 570, (Claim Allowed In Full) Examiner
    (undated)
    Manager
    Letter 3381 (No Change) Examiner
    (undated)
    Manager
    Letter 905(Letter Notifying Taxpayer of Partial Refund Claim Disallowance) Examiner Mandatory Review
    Letter 906(Certified Claim Disallowance Letter) Examiner Mandatory Review
    Letter 950-C or Letter 950-D Examiner Examiner
    Letter 3382(Notification Letter- Agreed Audit Changes) Examiner Manager
    Letter 3523, (Notice of Determination of Worker Classification) Mandatory Review Mandatory Review
Special Procedures for Notices of Determination of Worker Classification or Section 530 Relief
  1. IRM 4.23.10.10, Preparation of the Employment Tax Examination Report, provides general information about IRC 7436, which provides Tax Court review when a part of the examination includes a controversy involving a determination that at least one worker should be reclassified as an employee of the taxpayer for employment tax purposes and/or that the taxpayer is not entitled to relief under section 530 of the Revenue Act of 1978.

  2. Special procedures must be followed when unagreed issues are subject to IRC 7436.

530 Limitation Language
  1. The examination of a taxpayer’s employment tax returns may or may not include the classification of the taxpayer’s workers as employees rather than independent contractors.

  2. Section 530 of the Revenue Act of 1978, as amended, provides that: Taxpayer may not rely on an audit begun after December 31, 1996, for purposes of subparagraph (B) [of subsection (a)(2), past IRS audit] thereof "unless such audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer."

  3. Language must be included on information document requests and examination reports to address Section 530 including identification of or development of worker classification issues, the specific classes of workers examined, etc. The purpose of this language is to limit Section 530 exposure for subsequent periods to only classes of workers examined. Information on the location of worker classes is needed only when the examination was limited to worker classes within a particular agency, department, or school, in order to limit Section 530 prior audit exposure to the particular agency, department, or school examined.

530 Limitation Language on IDRs
  1. Whenever worker classification issues are raised on an information document request (IDR), the IDR must specify the worker classification(s) (including location(s)) that are being examined. In addition, language should be used that limits Section 530 exposure to only classes of workers being examined and that are not reclassified. The following is an example of language that is appropriate when requesting information related to a specific class of workers: Please answer the following questions related to [CLASS OF WORKER(S)/LOCATION(S)]. The only class of worker that will be examined based upon information provided in response to this document request is [CLASS OF WORKER(S)/LOCATION(S)].

530 Limitation Language on Form 4666
  1. Upon closing an examination, 530 limitation language must be inserted on all Form(s) 4666. This applies regardless of whether or not worker classification was an issue identified during the exam. The appropriate 530 limitation language to use will vary depending upon whether any worker issues were examined, and whether a worker classification examination resulted in a worker reclassification. The following scenarios capture the most common examination results.

    • Scenario #1: The results of the examination include an employment tax assessment, but the examination did not include either the identification of or the development of the worker classification issue, including requests for information or discussion regarding a reclassification issue. The following language will be inserted in the "other information" section of Form 4666. "The examination of your employment tax returns as reflected on this Agreement did not include an examination for employment tax purposes of whether any individuals should be treated as your employees for purposes of Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996."

    • Scenario #2: An examination assessment will be made, and includes identification of or the development of worker classification issues, including requests for information or discussion regarding a reclassification issue but there will be no change related to the worker classification issue. Language will be inserted in the "other information" section of Form 4666 that specifies the classes of workers examined and limits Section 530 exposure to those classes of workers examined. For example, the following language is appropriate: "The examination of your employment tax returns as reflected on this Agreement included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may rely only on the audit of [CLASS OF WORKER(S)/LOCATION(S)] for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530."

    • Scenario #3: An examination assessment will be made and the examination included identification of or the development of worker classification issues, including requests for information or discussion regarding a reclassification issue, and there will be a Notice of Determination of Worker Classification; specify classes of workers examined, limits of Section 530 exposure. Language will be inserted in the "other information" section of Form 4666 that specifies the classes of workers examined and limits Section 530 exposure to those classes of workers examined and not reclassified. For example, the following language is appropriate: "The examination of your employment tax returns as reflected on this Agreement included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may rely only on the audit of [CLASS OF WORKER(S)/LOCATION(S)] that did not result in a reclassification for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530."

    • Scenario #4: Where the results of the examination includes reclassification of all workers examined. This language specifies the classes of workers examined and indicates that no worker classifications are covered under Section 530, because all workers audited were reclassified. For example, the following language is appropriate: "The examination of your employment tax returns as reflected on this Agreement included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may not rely on any classes of workers for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530, because all workers audited were reclassified as employees."

    • Scenario #5: The examination results in no-change, and the examination did not include either the identification of or the development of the worker classification issue, including requests for information or discussion regarding a reclassification issue. The following language will be inserted in the "other information" section of Form 4666: "The examination of your employment tax returns did not include an examination for employment tax purposes of whether any individuals should be treated as your employees for purposes of Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996."

    • Scenario #6: The examination results in no-change, but the examination included identification of or the development of worker classification issues, including requests for information or discussion regarding a reclassification issue. Language should be inserted in the "other information" section of Form 4666 that specifies the classes of workers examined and limits Section 530 exposure to those classes of workers examined. For example, the following language is appropriate: "The examination of your employment tax returns included an examination for employment tax purposes of whether [CLASS OF WORKER(S)/LOCATION(S)] should be treated as employees of the taxpayer. Section 530 of the Revenue Act of 1978 as amended by Section 1122 of the Small Business Job Protection Act of 1996 provides that taxpayers may rely on a prior audit commenced after December 31, 1996, for Section 530 purposes when the audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer. Based upon this examination, you may rely only on the audit of [CLASS OF WORKER(S)/LOCATION(S)] for purposes of the prior audit safe haven for satisfying the reasonable basis requirement of Section 530."

Publications to Include with Examination Reports
  1. The Internal Revenue Service Restructuring Act of 1998 (RRA 98) requires the IRS to include an explanation of the examination and collection process, as well as information about assistance from the Taxpayer Advocate with any first examination report and with any formal 30-Day letter. Pub 3498, The Examination Process, or Pub 5146, Employment Tax Returns, Examinations & Appeal Rights, will be used for this purpose. These publications incorporate Pub 1, Your Appeal Rights as a Taxpayer; Pub 5, Your Appeal Rights and How to Prepare a Protest If You Disagree; and Pub 594, The IRS Collection Process, into one document.

  2. The following procedures will be followed:

    • Although Pub 3498 or Pub 5146 were provided with the initial opening letter these publications must also be provided to the taxpayer with the first report that is given to the taxpayer and with all 30-Day letters.

    • Pub 3498 is not required to be provided again to the same taxpayer for reports issued after the first report (in other words, corrected and supplemental reports) unless they are issued with a formal 30-Day letter.

    • Publications sent to the taxpayer should always agree with the enclosures listed on the cover letter to avoid confusion.

    • Publications are not required to be included with no-change reports but must be included with no-change with adjustment reports.

Reports Sent to the Taxpayer’s Representative
  1. If Form 2848, Power of Attorney and Declaration of Representative (POA), is on file for a taxpayer, it will be reviewed before the issuance of a report to determine who should receive a copy of the report. Centralized Authorization File (CAF), research on IDRS should be conducted because the POA may have been changed by the taxpayer submitting a new POA through channels other than the examiner. Refer to IRM 21.3.7, Processing Third Party Authorizations onto CAF, for more information regarding duties and responsibilities when dealing with a taxpayer’s representative.

  2. Per 26 CFR § 601.506 (Statement of Procedural Rules), the examiner should forward any correspondence (or copies), discussions, reports and/or other materials to the taxpayer at the same time they are sent to the representative. Refer to IRM 4.11.55, Examining Officer’s Guide (EOG), Power of Attorney, Rights, and Responsibilities, for more detailed information about how to mail correspondence when a POA is involved.

  3. Blank forms, notices and publications available on IRS.gov should not be sent to the taxpayer’s representative or appointee, including, but not limited to:

    • Form 9465, Installment Agreement Request

    • Form 12203, Request for Appeals Review

    • Notice 609, Privacy Act Notice

    • Pub 1, Your Rights as a Taxpayer

    • Pub 1035, Extending the Tax Assessment Period

Execution of Examination Reports and Payments
  1. Agreement forms are considered executed when the taxpayer(s) signs the form. The executed agreement form should indicate the date the IRS received it. For this reason, the agreement form should be date-stamped upon receipt. Alternatively the specialists may, on the face of the agreement form, write the date it was received and authenticate the document with their initials.

  2. A taxpayer, upon receipt of a report, may wish to pay the deficiency immediately. Form 3244-A, Payment Posting Voucher, should be processed with the funds, if payment is received. A copy of the completed Form 3244-A should be attached to the face of the return. See IRM 4.70.14.2.1.4.8, Employment Tax Remittance Processing Procedures.

ITG - Fax Signatures
  1. In May 2003, the Tax Administration Council approved the use of faxes for receiving information and documents from taxpayers and practitioners when contact with the taxpayer has been made and documented on Form 9984, Examining Officer’s Activity Record (case activity record).

  2. On November 19, 2015, a revision to the IRS’s fax policy was announced by the Deputy Commissioner for Services and Enforcement, which eliminated the dollar ceiling for acceptance of consents to assess additional tax and taxpayer closing agreements received by fax.

  3. Specifically, consents to assess additional tax (Forms 2504, 2504-T, 2504-S, 870 and others) can be accepted by fax if taxpayer contact has been made and the case activity record documents:

    • The date of contact, and

    • The desire of the taxpayer to submit the consent by fax.

  4. The term "faxed signatures" should be construed to include electronic images of scanned original signatures transmitted by Enterprise Electronic Facsimile (EEFAX) or email.

Employment Tax Remittance Processing Procedures
  1. The following procedures should be followed for processing payments.

  2. Use the following mailing address:

    Payment Amount Mailing Address
    Less than $100,000 Internal Revenue Service
    1973 North Rulon White Blvd.,
    Mail Stop 1999
    Ogden, UT 84404
    Attention: Teller Unit / Receipt & Control Operations Manager
    $100,000 or more Internal Revenue Service
    1973 North Rulon White Blvd.,
    Mail Stop 2003
    Ogden, UT 84404
    Attention: Teller Unit / Receipt & Control Operations Manager

Employment Tax Advanced Payments
  1. Taxpayers may prepay their deficiency or proposed deficiency by making an advance payment. Taxpayers can use checks, money orders or electronic funds transfers.

  2. There are two types of advance payments:

    • IRC 6603 deposit, and

    • A payment of tax deficiency.

    Note:

    Make sure to properly identify the type of taxpayer payment.

  3. Do not solicit a payment from a taxpayer until you finish the exam and secure an agreement. If the taxpayer offers to pay before you finish the exam to stop accruing interest, accept the payment. This stops the interest accruing on the amount paid as of the date of payment.

  4. Payments of less than $100,000 secured as "Advance Payment on Deficiency" (TC 640) - secured as part of an exam should be sent (overnight delivery) with Form 3244-A via Form 3210.

  5. Payments of $100,000 and more secured as "Advance Payment on Deficiency" (TC 640) - secured as part of an exam require additional steps.

    • Email a copy of Form 3210 to &CTR ODN Ogden Tellers and your manager. Use secured email and include the following in the email:


      --Date payment was mailed
      --Amount of payment
      --Name and address/post of duty of the submitter
      --UPS tracking number, if payment is $1 million or more
      --If secure email is unavailable, contact the Ogden Remittance Liaison at 801-620-3972

    • The payment should be sent overnight with Form 3244-A via Form 3210. Write "TE/GE over $100,000" in the upper left-hand corner on the inside envelope of the double-wrapped envelope.

IRC 6603 Deposits
  1. IRC 6603 permits a taxpayer to make a deposit in lieu of a payment to stop the accrual of interest on a potential deficiency. It also allows for the accrual of interest on a deposit returned to the taxpayer to the extent that the deposit is attributable to a disputable tax. Rev. Proc. 2005-18 gives all the requirements for to treat a payment as a 6603 deposit. Taxpayers must include a written statement designating the payment as a deposit, including:

    • Type(s) of tax

    • Tax year(s)/tax period(s)

    • Amount(s) in dispute (enclosing the 30-Day letter is sufficient)

  2. Without the written statement, the you can treat it as a tax payment and the taxpayer can’t contest the determination in Tax Court. The taxpayer can only sue for a refund in federal district court or the Court of Federal Claims. (If the taxpayer pays the full deficiency, there is no deficiency and the Tax Court doesn’t have jurisdiction.)

  3. For more information, see IRM 4.20.1.3.1(4), Request Full Payment, IRM 4.23.11.4(4)(a), Advance Payments - IRC 6603 Deposits, and IRM 20.2.4.8.2, IRC 6603 Deposits.

Completing Form 3244-A for IRC 6603 Deposits
  1. Form 3244-A, Payment Posting Voucher — Examination, contains a check box on the form to mark a payment as an IRC 6603 deposit. If you fill out the form electronically and check the 6603 Box, it adds a Designated Payment Code (DPC) 12. If you fill out the form by hand, enter DPC 12.

  2. Apply as a Transaction Code (TC) 640, Advance Payment on Deficiency, and enter the amount of payment.

Employment Tax Processing Check Payments
  1. Upon receipt of a payment, the Examiner should prepare Form 3244-A. Complete a separate Form 3244-A for each tax year and class of tax involved. See IRM 23.11.5, Form 3244-A, Payment Posting Voucher - Examination, for detailed instructions.

  2. Checks should be made payable to "United States Treasury" . If the payee section is blank or illegible, it must be over-stamped "United States Treasury."

  3. The Examiner will transmit the payment(s) and related Form(s) 3244-A to Ogden via Form 3210 within 24 hours. All payments must be double-wrapped (with the payment placed in a security envelope inside of the overnight mail envelope) and marked or delivered via overnight traceable method. (A receipted copy of Form 3244-A may be used in lieu of Form 3210 only for payments which are hand-carried to a local remittance processor. This occurrence is not common.)

  4. If a remittance must be held overnight, it must be stored securely in a locked container.

  5. Form 3210 should be prepared in triplicate. Two copies should accompany a payment being sent to the processing center. If the payment applies to more than one tax period, the breakdown should be on Form 3210. The payment should be stapled to the front of Form 3244-A, and sent with Form 3210 by overnight mail.

  6. The mail service tracking number should be included on Form 3210. Form 3210 should also include taxpayer name, TIN, tax return form number, payment amount, and check number. Copies of all forms should be retained in the case file. Electronic copies may be imported to RCCMS.

  7. To comply with the concept "segregation of duties" copies of Form 3210, 3244-A, and the checks should be faxed (or scanned/email) to the employee's manager. The manager will approve the copies and alert the employee to transmit the originals to Ogden. Maintain a log at the managerial level. The Examiner should maintain a separate log of Forms 3210.

  8. The remittance package will consist of the payment(s), Form(s) 3244-A, and Form 3210. Send the package to the Ogden address shown in the Case Closing Desk Guide.

  9. The sender must establish a control to ensure delivery of tax receipts. The control must include amounts of taxpayer receipts by TIN, correlated to the package tracer information.

  10. Copies of Form 3244-A are not required to be attached to the return document in a paper case file as long as electronic copies are in the RCCMS file. However, if a paper case is going to Appeals, attach Form 3244-A to the return document.

  11. Submission processing centers must return acknowledgment copies of transmittals to originators within five workdays. The Examiner must follow up with the processing center within ten workdays if payment packages have not been acknowledged.

EFTPS Option
  1. Taxpayers have the option to pay deficiencies using EFTPS (Electronic Federal Tax Payment System). Although not required, EFTPS streamlines payment processing.

  2. Payments will post to IDRS within days if the taxpayer uses EFTPS. Verify the payments posted to the proper periods on IDRS and attach a TXMOD printout to the front of the return showing the payment posted before you close the case from the group. If the case is all electronic, upload a copy of the TXMOD into the "Office Documents" folder in RCCMS and note in Form 9984, Examining Officer’s Activity Record, that the EFTPS payment posted properly.

Installment Agreement
  1. If you can’t secure payment of an agreed unpaid tax case and the taxpayer can’t pay immediately or upon receipt of the first notice, consider an installment agreement. Coordinate with SB/SE Collection, per IRM 4.20.1.3, Examination Collectibility, Issue Resolution - Solicit Payment.

    Note:

    The taxpayer owes interest if the tax is not fully paid by the assessment date, even if the interest-free provisions otherwise apply.

  2. If the taxpayer asks for an installment agreement beyond your installment agreement criteria or the agreed unpaid deficiency is over $100,000, coordinate contact between the taxpayer and a revenue officer through your manager. See IRM 4.20.1.4, Examination Collectibility, Installment Agreements, for more information.

TEB – Agreed Case Processing
  1. An agreed Tax-Exempt Bond examination is one for which:

    1. The examiner concludes the bonds are in compliance.

    2. Operational changes were made and did not result in a change to bond qualification.

    3. A delinquent Form 8038 series or Form 8703 is received.

    4. An issuer agrees with proposed resolution of non-compliance determined in the examination and completed a closing agreement.

TEB - Resolution of Noncompliance
  1. During an exam, it might be determined that the bonds are not in compliance with applicable tax laws. When this occurs, try to resolve the issue.

  2. The goal of the resolution phase of the examination is to reach agreement, if possible, on the tax or compliance treatment of each issue examined and, if necessary, to issue a Revenue Agent Report (RAR) to, or enter into a closing agreement with, the taxpayer. The examiner should consider Alternative Dispute Resolutions such as Fast Track Settlement where appropriate.

TEB - No Change Examinations
  1. As a result of the examination, you may conclude that the bonds are in compliance. You must obtain your manager’s concurrence with this conclusion.

  2. Prepare the closing letter (Letter 6049, Examination Closed - No Change). Close the case in accordance with IRM 4.70.14.4, Closing A Case, and forward it to the manager.

  3. The Field Exam group manager reviews the case file and issues the closing letter. Then, the manager documents these actions on the Case Chronology Record.

  4. Close exams when you issue Letter 6049 with the appropriate RCCMS disposal code 02 (107 - No Change)

    Note:

    Use the appropriate RCCMS disposal code for TEB from GE Computer Systems Codes Book, Document 11308.

TEB - Examinations Resulting in Change due to Correction of Operations
  1. You may conclude from the examination that the bonds are currently in compliance. However, Operational changes were made and did not result in a change to bond qualification.

  2. In the event an examination results in a change of operations, and no change in bond qualification, use disposal code 52 (214 in RCCMS), Change due to Correction of Operations, unless a higher priority disposal code applies.

  3. The following TEB examples would result in a no change (DC 02 / 107) (assuming there are no other issues), not a change due to correction of operations (52/214), in situations such as:

    1. The examiner finds that a payment of rebate will likely be due for the first computation date. However, the first date for payment of rebate hasn’t occurred, and there were no corrections made during the examination.

    2. The examination shows an incorrect bond yield calculation. The bond yield adjustment didn’t affect arbitrage rebate or yield restrictions for the first computation period.

    3. The examination shows that the taxpayer didn’t timely allocate bond proceeds to expenditures. However, there were no proposed compliance changes and no corrections made during the examination to ensure timely allocations.

    4. The examiner finds the return didn’t have an attached copy of the volume cap allocation for the bonds and doesn’t secure it.

    5. The taxpayer filed the return using an incorrect employer identification number.

    Note:

    These examples are not intended to be all inclusive.


    Discuss future noncompliance with the group manager to determine whether a referral or information notice for a future year examination should be recommended. If so, prepare referral Form 5666, TE/GE Referral/information Report, requesting a subsequent examination and secure email it to: eoclass@irs.gov. Ensure the subject line references the referral type and TEB’s functional unit. If the file is too large to scan or email, mail to:
    Internal Revenue Service
    ATTN: Referrals Group Manager
    MS 4910 DAL 1100 Commerce Street
    Dallas, TX 75242-1027

  4. When using DC 52/214, Change due to Correction of Operations, prepare Letter 1744 and attached Form 886-A for review and issuance by the group manager. See IRM 4.70.14.4.3.1, TE/GE Change due to Correction of Operations.

  5. Close exams with the Letter 1744, using the RCCMS disposal code 214.

    Note:

    Verify the appropriate RCCMS disposal code for TEB from GE Computer Systems Codes Book, Document 11308.

TEB - Rebate or Yield Reduction Payment Due
  1. If you identify a failure to pay rebate or a yield reduction payment, then the bonds are arbitrage bonds under IRC 148. However, it might be appropriate to resolve the noncompliance by securing delinquent or amended Form 8038-T. If so, solicit the returns, place the returns under examination through RCCMS and assert the appropriate penalties. See IRM 4.70.13.9.5.9, TEB Procedures For Secured Delinquent and Late Filed Returns and Forms, for instructions on processing these returns.

TEB - Annual Certification of a Residential Rental Project (Form 8703)
  1. If you determine that the operator of a facility failed to file the Form 8703, Annual Certification of a Residential Rental Project, when required, solicit the certification for the delinquent periods and forward the delinquent forms for processing per the instructions in IRM 4.70.13.9, Delinquent, Amended, Substitute for Returns. Consider assessing the penalty provided under IRC 6652(j). Discuss assertion of appropriate penalties with your manager before proposing any penalty to the operator of a facility. See the penalty handbook, IRM 20.1.10, Penalty Handbook, Miscellaneous Penalties.

TEB - Closing Agreement
  1. The examiner or manager should not initiate closing agreement discussions with an issuer/POA. Closing agreement discussions are initiated solely at the request of the issuer/representative. It is permissible to inform an issuer or representative that closing agreements may be used to resolve tax matters.

  2. If the issuer requests resolution of noncompliance determined during the exam, then with your manager’s agreement, begin the closing agreement process outlined in IRM 4.81.6, Tax Exempt Bonds Closing Agreements.

TEB - Unagreed Potential Noncompliance
  1. If the identified noncompliance determined during the examination is unresolved, with your manager’s concurrence, follow the procedures for unagreed issues in IRM 4.70.14.2.4, Unagreed.

TEB - Secured Delinquent and Late Filed Returns and Forms
  1. During the course of an examination, an examiner may secure a delinquent or late filed return or form, including forms from the Form 8038 series and Form 8703 (a "Delinquent Return" ). Processing secured Delinquent Returns in accordance with the applicable procedures in IRM 4.70.13.9.5.9.1, TEB Procedures for Processing Delinquent Returns, helps to ensure the accuracy of reported exam results. Consider assessing the penalty provided under IRC 6652(j). Discuss assertion of appropriate penalties with your manager before proposing any penalty to the operator of a facility. See the penalty handbook, IRM 20.1.10, Penalty Handbook, Miscellaneous Penalties.

TEB - Tax Exempt Bonds Closing Agreements
  1. A closing agreement may be entered into to resolve violations of the federal tax laws applicable to tax-advantaged bonds. A closing agreement is the vehicle used to permanently and conclusively resolve such violations. By doing this, the holders of the bonds or investors in the credits, who generally don’t know how the proceeds were used, continue to receive tax benefits on the bonds and issuers of direct pay bonds protect the subsidy associated with their bonds.

  2. The Internal Revenue Service (IRS) may enter into and approve a written closing agreement with any person for his/her liability (or the person or estate for whom she/he acts) in respect of any internal revenue tax for any taxable period (IRC 7121 and the corresponding Regulations). This authority includes conclusively resolving any specific matters jeopardizing the tax-advantaged status of bonds with the issuer of the bonds even though the issuer may not have tax liability for the bonds.

  3. Regulation section 301.7121-1(a) further provides that a closing agreement may be entered into in any exam case in which there appears to be an advantage in having the exam permanently and conclusively closed, or if good and sufficient reasons are shown by the taxpayer for desiring a closing agreement and it is determined by the Commissioner that the United States will sustain no disadvantage through consummation of such an agreement.

  4. The Commissioner delegates to the Director, GE (the Director) and the TEB Program Manager the authority to enter into and approve written closing agreements involving examinations under their jurisdiction (Delegation Order Number 8-3 (formerly Delegation Order 97, Rev. 34) in IRM 1.2, Servicewide Policies and Authorities).

  5. Typically, TEB enters into a single closing agreement covering all identified violations and all known tax periods. However, TEB may enter into a series of closing agreements for a single tax-advantaged bond transaction when appropriate.

    Example:

    The IRS may enter into a subsequent closing agreement when it identifies a matter not previously identified and resolved in the prior closing agreement. Or, it may enter into a subsequent closing agreement to cover additional tax periods or additional amounts of bonds not covered in the prior closing agreement.

TEB - General Rules Applicable to Closing Agreements
  1. Closing agreements are:

    1. Final and conclusive and may not, in the absence of fraud, malfeasance, or misrepresentation of material fact, be reopened as to matters agreed upon or be modified by an officer, employee or examiner of the United States. See IRM 4.81.6.7 for further details.

    2. Subject to Code sections that expressly provide that effect be given to their provisions (including any stated exception for Code section 7122) notwithstanding any other law or rule of law.

    3. Subject to any change in, or modification of, the law enacted after the agreement’s date and that apply to that taxable period(s) when they cover taxable period(s) ending after the closing agreement effective date.

TEB - Negotiating and Drafting of Closing Agreements
  1. Issuers may:

    1. Request a closing agreement with the IRS to preserve the tax-advantaged status of their bonds.

    2. Be joined by other parties to a tax-advantaged bond transaction in entering into a closing agreement.

  2. TEB enters into closing agreements with the issuer of the bond issue.

    1. In certain exam cases, other parties to the bond transaction may also participate in the negotiations and jointly execute the agreement.

    2. The issuer must complete a Form 8821, Tax Information Authorization, to allow parties who have not been designated as a representative under Form 2848, Power of Attorney and Declaration of Representative, to participate in the negotiations.

    3. The conduit borrower or other party may designate its own representative under Form 2848.

      Note:

      The 6700 penalties may apply to parties other than issuers and therefore, closing agreements regarding the 6700 penalties may not include the issuer of the bonds. See IRM 4.70.14.2.1.5.9.13, TEB – IRC Section 6700 Penalty.

  3. To ensure that taxpayers are treated consistently and that agreements are enforceable, the TEB Closing Agreement Committee (Committee) reviews all nonstandard closing agreements (See IRM 4.81.6.5(3)). The Committee consists of two members from TEB Technical appointed by the TEB Technical Manager. The Committee may consult with designated counsel from Associate Chief Counsel, Financial Institutions & Products (Branch 5) and designated counsel from Associate Chief Counsel, Procedures & Administrative.

  4. In an open exam case, the issuer may initiate closing agreement negotiations at any time. In most cases, the examiner or group manager negotiates the terms of the closing agreement. In some cases, the examiner and group manager may ask TEB Technical to help draft the closing agreements.

  5. In negotiating the terms of a closing agreement, the examiner, specialist, group manager and the Committee ensure the terms:

    • Are fair and equitable.

    • Promote voluntary compliance and encourage due diligence in complying with all applicable federal tax laws.

    • Recognize the difference between the IRS enforcement and voluntary compliance programs.

  6. Closing agreements with issuers generally don’t contain terms that address any potential IRC 6700 promoter penalty liabilities unless the agreement specifically resolves an open IRC 6700 exam case on a party to the agreement.

    Note:

    When TEB completes a bond exam, it may enter into a closing agreement that resolves all identified specific matters relating to that issue and, when appropriate, any potential IRC 6700 promoter penalty liability of the issuer.

  7. The examiner drafts the closing agreement covering specific matters, following the appropriate model closing agreement (https://www.irs.gov/tax-exempt-bonds/model-closing-agreements-for-vcap-and-examinations). The drafter must clearly state the violation that is being resolved with the closing agreement so the agreement, read on its own, has only one reasonable interpretation as to the specific matter being resolved.

  8. Some of the model closing agreement terms apply only to specific situations so the examiner must consider whether the terms in IRM 4.70.14.2.1.5.9.3, TEB – Closing Agreement Terms, are appropriate for the agreement. The agreement may also cover related tax issues if the impacted taxpayer is a party to the agreement, such as:

    1. Denial of interest deductions under IRC 150(b).

    2. Depreciation adjustments under IRC 168.

  9. Closing agreement terms generally follow the model closing agreements created for exam.

  10. The GE Director executes exam closing agreements under the process in IRM 4.70.14.2.1.5.9.3, TEB – Closing Agreement Terms.

TEB - Closing Agreement Terms
  1. TEB prepares the closing agreements. This section discusses some of the general terms we use to resolve specific matters.

  2. Some violations are covered by a special closing agreement program. Generally, this program is described in a public announcement or notice and includes the closing agreement template to use. When this program applies, the issuer and the IRS must use the closing agreement template that is provided.

  3. To determine a closing agreement’s resolution terms, the examiner, group manager, TEB Program Manager and the Committee consider the compliance failure’s facts and circumstances.

  4. If the issuer or other party that executes the agreement fails to comply with its terms, TEB considers the significance of that failure. If a failure to comply with a material term of the closing agreement constitutes a new deliberate action or intentional act within the meaning of the Regulations and constitutes a new violation with respect to the bond issue, you may need to prepare a later closing agreement to resolve a new violation arising after the execution of a closing agreement (See IRM 4.70.14.2.1.5.9.1, TEB – General Rules Applicable to Closing Agreements).

TEB - Bond Redemption
  1. TEB may require as a prerequisite to entering into a closing agreement that the issuer redeem, retire or defease callable bonds of the issue at the earliest possible date.

  2. For exam closing agreements, if the issuer can’t redeem, retire or purchase and cancel the callable bonds before the closing agreement execution date, the closing agreement must:

    1. Specify the date on which the bonds will be redeemed.

    2. Require the issuer to call the bonds for redemption on that date.

    3. Require the issuer to provide the bondholders with an irrevocable call notice. The irrevocable call notice must include the specific date on which the issuer has stated that the redemption will occur. The issuer must provide TEB with documentation of this call notice prior to TEB executing the closing agreement.

    4. Require the issuer to establish, prior to TEB executing the closing agreement, a fully funded irrevocable defeasance escrow or similar escrow satisfactory to TEB to provide for the payment of the principal and interest on the bonds to the call date. The issuer must provide TEB with documentation that it has established the irrevocable defeasance escrow prior to TEB executing the closing agreement.

    Note:

    The issuer’s statement, made under penalty of perjury, that the bonds have been irrevocably defeased and an irrevocable call notice was given to bondholders is sufficient documentation.

    Note:

    For bonds that are noncallable, payment through maturity of the applicable tax-exposure, credit maintenance amount or other basis for the resolution amount eliminates the requirement for irrevocable call notice and defeasance of the bonds.

  3. If an issuer redeems 100% of the outstanding principal amount of the bonds during an exam, consider closing the exam without further action if your group manager concurs and obtains written approval from the PM.

  4. Factors for consideration in whether to close the examination pursuant to this subsection:

    • What are the reasons for noncompliance?

    • Is the transaction abusive?

    • Were interested parties involved in aspects of the transaction that resulted in noncompliance?

    • Were reasonable steps taken by the issuer/borrower to ensure compliance with the law?

    • Did the issuer/borrower take steps to self-correct prior to the start of the exam?

  5. If your manager concurs and the Program Manager approves closing the case pursuant to this subsection, and you have a basis to conclude that the bonds do not comply with the law:

    1. Issue Letter 5859, Full Bond Redemption - Compliance Issue Identified.

    2. Report the Principal amount of bonds redeemed and the present value of the tax on the interest that would have accrued on the bonds to their stated redemption date in the RCCMS closing record.

    3. On RCCMS, use disposal code 115, Full Bond Redemption Without Agreement, and ARDI Code 1-Fully Paid.

    Note:

    There may be circumstances that warrant referring a bondholder or other party to the transaction to another business unit under current referral procedures. Consider, among other factors, whether the bondholder holds a significant amount or percentage of the bonds. Consult your manager to determine if a referral is warranted.

  6. If your manager concurs and the PM approves closing the case pursuant to this subsection, and there is no indication that there is a compliance problem with the bonds:

    1. Issue closing letter (Letter 649, Examination Closed -, No Change)

    2. Close on RCCMS with disposal code 107, No Change.

  7. This resolution method does not apply if:

    • The bonds are redeemed with other tax-advantaged bonds.

    • The bonds are direct pay bonds.

    • The issuer did not make appropriate rebate payments on the bonds.

    • The issuer asks to negotiate or enter into a closing agreement. (See IRM 4.70.14.2.1.5.9, Tax Exempt Bonds Closing Agreements, if they request a closing agreement.)

TEB - Alternative Use of Proceeds or Facility
  1. Closing agreement terms may require:

    1. The issuer to expend any disposition proceeds for an alternative qualifying use.

    2. The issuer to use the bond-financed property for an alternative qualifying use.

    Note:

    All arrangements and contracts must be finalized prior to the execution of the closing agreement.

TEB - Resolution Amount
  1. Generally, a closing agreement resolution amount for a tax-exempt bond issue is based on 100% of the present value of the taxpayer exposure of the bond issue, as computed in IRM 4.70.14.2.1.5.9.7, TEB – Computation of Taxpayer Exposure, below. However, as appropriate, you can also base closing agreement resolution amounts on:

    • The present value of an alternative minimum tax adjustment.

    • IRC 150(b) adjustments.

    • IRC 168(g) adjustments.

    • Any excessive arbitrage profits.

    • IRC 6700 penalties.

  2. Generally, a closing agreement resolution amount for a tax credit bond issue or direct pay bond issue is based on 100% of the credit maintenance amount, as computed in IRM 4.70.14.2.1.5.9.8, TEB – Computation of Credit Maintenance Amount, below. For direct pay bonds, an issuer and TEB may agree to modify the amount of future allowable credit payments the issuer may claim by excluding a portion of interest payments on those bonds from the calculations of the credits, as appropriate under the facts and circumstances.

  3. In certain exam cases, the closing agreement resolution amount may be based on a specified amount. Generally, a specified amount is only appropriate when described in a closing agreement program in the IRM, published guidance (including Notices and Announcements) and IRM 4.70.14.2.1.5.9.9, TEB – Resolutions Involving Specified Amounts.

  4. A resolution amount may consist of one or more amounts described in or computed under IRM 4.70.14.2.1.5.9.7 through IRM 4.70.14.2.1.5.9.15, including but not limited to an amount representing taxpayer exposure, a credit maintenance amount and/or a specified amount. The IRS requires a minimum amount even if the computations in IRM 4.70.14.2.1.5.9.7 through IRM 4.70.14.2.1.5.9.14 produce a lower amount. For an examination-related closing agreement, the minimum resolution amount is $5,000 per bond issue.

TEB - Computation of Taxpayer Exposure
  1. Taxpayer exposure represents the estimated amount of tax liability the United States would collect from the bondholders if the bondholders were taxed on the interest they realized from the bonds during the calendar year(s) covered under the closing agreement.

  2. Compute the taxpayer exposure for an exam closing agreement as follows:

    1. Step 1. Determine the closing agreement period. This is the period to be covered under the closing agreement by identifying each past calendar year (as determined below) and each future calendar year during which the bonds were or will be outstanding.

      • Bonds that have been called for redemption and defeased by a defeasance escrow are considered outstanding until their date of redemption; other bonds are considered outstanding until their maturity date.

      • Past calendar years generally include calendar years that have a tax payment date that falls within three years of the date TEB identified the compliance failure.

      • A tax payment date for a calendar year is April 15th following the conclusion of that calendar year.

      • For exam purposes, TEB identifies a compliance failure on the date it notifies the issuer in writing of that identified issue.

    2. Step 2. Determine the amount of interest accrued or scheduled to accrue on the bonds in each calendar year within the closing agreement period based on the yield of those bonds.

      • For bonds originally sold at a discount or premium of less than 5%, you may use the actual amount of interest paid or to be paid.

      • For variable rate bonds, you may determine the interest scheduled to accrue in future years by using the average of the interest rates paid to date, the last interest rate paid on the bonds, or the appropriate fixed swap rate less up to 50 basis points, as appropriate under each exam’s facts and circumstances.

    3. Step 3. Multiply the amount determined in Step 2 for each calendar year by the relevant tax percentage. Unless specifically instructed otherwise or a more accurate measure of the particular holder’s tax rate is available, use the rates below.