4.71.26 Case Selection Criteria

Manual Transmittal

March 10, 2016

Purpose

(1) This transmits revised IRM 4.71.26, Employee Plans Examination of Returns, Case Selection Criteria

Material Changes

(1) IRM 4.71.26.1.1, Establishment of Examinations, was added. This section includes a link to the EP Classification Examination Return Order Request Form, which is incorporated as Exhibit 1.

(2) IRM 4.71.26.5.3.2, Risk Modeling - IRC 401(k) Project, was eliminated because the project was completed.

(3) Minor editorial changes were made throughout the document.

Effect on Other Documents

This supersedes IRM 4.71.26 dated February 26, 2015.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(03-10-2016)


Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

Overview of Case Selection of Employee Plans (EP) Examinations

  1. This IRM discusses procedures for ordering casework, case selection criteria, and preparing and establishing case files for EP agents.

  2. Employee Plans Classification (EP Classification) will gather return information through the Return Information and Classification System (RICS).

  3. EP Classification will use this information and other classification tools to identify the plans for examinations or compliance checks.

  4. This IRM specifies the case selection criteria for general examinations, plan specialty programs, risk-based examination projects, abusive transactions and technical issues (ATTI), compliance checks and other EP programs.

Establishment of Examinations

  1. All examination cases will be established by EP Classification, although the decision to examine specific plans is made by EP Examinations Planning & Programs, and the EP examination Areas, following the established case selection criteria contained in this IRM.

  2. All exams are established on Audit Information Management System (AIMS) and on the Reporting Compliance Case Management System (RCCMS) by EP Classification.

  3. Group managers should use the EP Classification Examination Return Order Request Form to request case work from EP Classification. See IRM 4.71.26 Exhibit 1 at IRM 4.71 - Employee Plans Examination Exhibits for the EP Classification Examination Return Order Request Form.

General Classification Guidelines

  1. EP Exam uses several formulas to select entities for audit. These formulas are applied against the actual filings of EP customers to select the entities most likely to have compliance concerns.

  2. The classification process determines whether a return is selected for examination or compliance check.

  3. Based on the project or program, the classification process also determines the examination or compliance check primary focus.

  4. To avoid the appearance of case selection bias, EP Classification will work under an internal control structure by using:

    1. Checks and balances to guarantee that no one person has the ability to initiate an examination or compliance check

    2. An objective case selection criterion

    3. Bi-weekly group discussions about recent group examination orders and examination order issues and concerns

  5. Services provided by EP Classification include:

    1. Reviewing and classifying returns

    2. Establishing cases on the Audit Information Management System (AIMS) and TE/GE Reporting Compliance Case Management Systems (RCCMS)

    3. Filling orders for cases

General Case Selection

  1. EP examination casework is normally conducted under a focused audit approach. See IRM 4.71.1.5, Scope of the Examination for a description of this approach.

  2. Full scope examinations will be conducted on training cases, certain designated special project cases and with the group manager's written approval. Training case selection criteria is discussed in IRM 4.71.26.3.1, Training Case Selection.

  3. Group managers submit a request (examination order) for their group for general examinations.

    1. EP examination groups use Post of Duty (POD) codes to designate the area for which the work is requested. These POD codes consist of the zip codes in the audit coverage area for the group.

    2. The case selection criteria for these cases are case location (specific POD) and case grade.

  4. To ensure the best use of our examination resources, EP Classification fills the group case requests in this order:

    1. Priority project examinations (EP Examination Workplan)

    2. Other examinations using RICS queries by plan type, geographic location (POD) and case grade

  5. EP Classification tests all queries to confirm that the results meet the selection criteria.

  6. EP Classification uses the WebRICS program to randomly select the number of returns requested.

  7. The number requested in the examination order will equal the number EP Classification selects and assigns to the group.

    Note:

    The group has the discretion to conduct an examination or survey the return. See IRM 4.71.7, Survey Returns for case survey procedures.

Training Case Selection

  1. All EP agents will go through a training program when they begin examining EP cases.

  2. A Training Coordinator will be appointed to oversee the training process and an on-the-job training instructor (OJI) will be assigned to each trainee.

  3. The Training Coordinator determines the on-the-job training examination needs for the trainee(s).

  4. The Training Coordinator contacts EP Classification and discusses the examination selection criteria.

  5. The case selection criteria for training cases are:

    1. Plan type introduced during formal training

    2. Geographical location

    3. Case grade

  6. EP Classification develops a RICS query based on these examination selection criteria.

  7. EP Classification tests the query to confirm the results meet the selection criteria.

  8. EP Classification uses the WebRICS program to randomly select the number of returns requested.

  9. The OJI(s) will assess the returns to confirm the returns meet the trainees’ needs.

    Note:

    The OJIs have the discretion to conduct an examination or survey the return if the return does not meet the training criteria. See IRM 4.71.7, Survey Returns for case survey procedures.

Plan Specialty Programs

  1. EP Exam dedicates staff resources to ensure consistency in its compliance activities for certain plan specialties.

  2. The following Plan Specialty Programs have their own Compliance Planning Group (CPG):

    1. IRC 403(b) and IRC 457 plans

      Note:

      Examination of IRC 403(b) plans and IRC 457 plans are coordinated under a single CPG (the 403(b)/457 CPG).

    2. Multiemployer plans (MAP)

    3. Large Case (EPTA) and International

  3. CPGs include some or all of the following, depending on the specialty area:

    1. An EP senior program analyst

    2. A champion Area Manager

    3. Champion group managers

    4. A coordinator from each Area

    5. A revenue agent from each Area

    6. An EP Examination Programs & Review (EP&R) representative

    7. A TE/GE Counsel representative

    8. An actuary

    9. Rulings and Agreements tax law specialists

  4. Each CPG coordinates regularly to plan compliance activities to ensure EP personnel achieve a consistent approach to customers, a uniform application of pension law and EP Exam procedures, information sharing and the leveraging of EP's resources for the greatest impact on compliance.

  5. Each CPG coordinates with EP Classification for examination case selection.

IRC 403(b) and IRC 457 Plans

  1. An IRC 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain IRC 501(c)(3) tax-exempt organizations.

    Note:

    In an IRC 403(b) plan, employees save for retirement by contributing to individual accounts and employers can also contribute to employees' accounts.

  2. Plans of deferred compensation described in IRC 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC 501.

    1. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f).

    2. Plans eligible under IRC 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years.

  3. The 403(b)/457 CPG has at least one face-to-face meeting annually and meets virtually or by conference call periodically as needed to discuss case selection criteria and methodology to make the workload selections.

    1. Generally, there is no requirement for IRC 403(b), IRC 457(b) or IRC 457(f) plan sponsors to file a Form 5500 series return.

    2. For IRC 403(b) and IRC 457(b) plans, Form W-2 salary deferral data is prepared for the case selection meeting. This data provides the 403(b)/457 CPG with information needed to develop the workload selections.

    3. IRC 457(f) plans cover highly-compensated individuals with employment contracts and, therefore, there is no pre-identifying information available. Agents review the employment contracts and supporting documents to discover these plans, which are then reviewed as part of their IRC 403(b) or IRC 457(b) examination.

  4. The 403(b)/457 CPG will consider these items when developing the workload selections in a general priority order:

    1. Exempt Organizations (EO) and Federal, State, and Local Governments (FSLG) referrals submitted to the CPG

    2. Other IRS business units referrals

    3. Public referrals

    4. Main market segments (Health Care & Hospitals, Universities & Colleges, Public Schools, Private K through 12)

      Note:

      Each market segment is considered at every case selection meeting.

    5. Entities with participants' deferrals over the IRC 402(g) limitations

    6. Entities with participants' deferrals over the IRC 414(v) catch-up limitations

    7. Form W-2 indication of low plan participation rates

  5. The 403(b)/457 CPG generally uses "The Other 501(c)(3) Organizations" segment only for 403(b)/457 trainee work.

  6. Entities examined within the past five years with a no-change result will not be selected (unless referral received).

  7. The 403(b)/457 CPG will also consider:

    1. Plans with designated Roth features

      Note:

      Plans over the designated Roth limits, standing alone or combined with an IRC 401(k) designated Roth feature, will have strong consideration for selection.

    2. Geographic coverage

  8. The 403(b)/457 CPG ensures to cover a representative cross-section of entities and taxpayers across the country.

    1. The 403(b)/457 Project Analyst will complete a geographic coverage analysis and share this report prior to case selection meetings.

    2. The 403(b)/457 Area coordinators will monitor their respective geographic coverage over a five-year rolling period.

    3. Area coordinators will attempt to select work in their states showing historically low exam coverage compared to other states, focusing primarily on higher population areas.

  9. The Director, EP Examinations, reviews and approves the methodology and case selection criteria.

  10. The 403(b)/457 Area coordinators will work with management in their respective Areas to develop a potential list of organizations to examine.

  11. Each Area develops these lists using the consistent methodology as agreed in the case selection meeting.

  12. The 403(b)/457 Project Analyst reviews and approves each Area’s list.

  13. After approval, the Area coordinators contact EP Classification to build and assign a case.

  14. Generally, workload selection will not deviate from the approved lists. Exceptions include:

    1. An EO referral reviewed and accepted

    2. An FSLG referral reviewed and accepted

    3. An EO or FSLG collateral examination

  15. Any examinations that deviate from the list must include an explanation and secure approval from the 403(b)/457 Project Analyst and the respective Area Manager.

Multiemployer Plans (MAP)

  1. Multiemployer Audit Program (MAP) is a specialty exam program focusing on multiemployer retirement plans maintained pursuant to a collectively bargained agreement.

    1. Such plans are administered by a board of trustees, comprised of 50% union representatives and 50% employer representatives.

    2. Under these plans, retirement benefits are funded in accordance with negotiated terms.

    3. Over 2,000 of these plans exist.

  2. The MAP CPG will separate the plans based on the number of plan participants for determining coverage rates:

    1. Less than 1,000 participants: 30% coverage rate

    2. 1,001-2,500 participants: 30% coverage rate

    3. 2,501-7,500 participants: 30% coverage rate

    4. 7,501-50,000 participants: 30% coverage rate

    5. 50,001-100,000 participants: 40% coverage rate

    6. Over 100,000 participants: 100% coverage

  3. The MAP CPG will focus on all 20 industry codes when selecting returns for examination.

  4. Each EP Area will develop and maintain a long term plan, which identifies the status of MAP plans in their Area based on the coverage rates above.

  5. Around the end of the second quarter of the fiscal year (March), each Area Manager will provide projections of the number of cases that will be closed and the number of cases that will be assigned by the end of the current and following fiscal years.

  6. Assignment of general program MAP cases and EPTA MAP cases are handled separately.

  7. The MAP Project Analyst will:

    1. Review the master listing of MAP plans obtained through RICS.

    2. Remove incorrectly identified MAP plans.

    3. Remove plans previously examined.

    4. Separate the plans into the five EP geographic Areas.

  8. The MAP Project Analyst will share the lists with respective Area Managers.

  9. From these lists, the MAP Project Analyst and the five Area Managers will determine the MAP cases that will be examined.

    Note:

    The Area Managers can defer case selection to the MAP Project Analyst.

  10. The MAP Project Analyst will then work with EP Classification to secure the returns needed for each Area.

Large Case (EPTA) and International

  1. Employee Plans Team Audit (EPTA) is directed at the largest qualified retirement plans.

    Note:

    See IRM 4.71.16, Employee Plans Team Audit (EPTA) Program, for a description of the EPTA exam program.

  2. Employee Plans, working in partnership with Large Business & International (LB&I) and Exempt Organization (EO), conducts examinations directed at very large employers where the participant population is 2,500 or more. In addition, many other examinations are completed without LB&I or EO participating.

  3. Using the RICS system, the EPTA Classification Identification Specialist (CIS) develops the case selection criteria by initially identifying all returns meeting the EPTA CPG criteria.

    Note:

    The EPTA CIS normally removes any returns audited within the past ten years.

  4. The EPTA CIS creates the general list (General List) of potential EPTA returns for examination based upon EPTA CPG criteria.

  5. The General List is primarily grouped into three categories: Step One, Step Two and Step Three cases.

    Note:

    As described below, the EPTA Case Selection Committee (CSC) will select EPTA exams from the General List.

  6. Step One cases. Step One cases are EPTA cases with one or more of the following characteristics:

    1. Submitted to the Voluntary Correction Program (VCP) but withdrew

    2. Had a funding deficiency but no funding waiver

    3. Involved in a listed transaction (Form 8886 filed)

    Note:

    Step One cases are the highest priority step. All returns in this group must be included in the general list of returns from which the CSC selects returns.

  7. Step Two cases. Step Two cases are EPTA cases with one or more of the following characteristics:

    1. Mergers and terminations (Form 5310-A filed)

    2. Late amenders or non-amenders

    3. A 25% or higher change in assets, income, or participants

    4. Greater than 10% (from beginning of year) of asset distributions

    5. Plan type concerns

    Note:

    Depending on the number of cases in the group, Step Two cases will be included, sampled, or restricted for CSC consideration.

  8. Step Three cases. Step Three cases are only used to the extent additional cases are needed. They include:

    1. EO and/or LB&I audits where EPTA will participate as a team member

    2. CPG special projects

    3. Random sample of the EPTA population determined by Area and industry code needs

  9. EPTA cases with international implications are selected separately as directed by the workplan.

  10. The EPTA CSC consists of:

    1. The EPTA Champion

    2. The EPTA Project Analyst

    3. Two Area Managers

    4. Three to five EPTA group managers

    5. The EPTA Case Identification Specialist (CIS)

    6. One field actuary

      Note:

      See IRM 4.71.16.8.1, Selection of Plans to Be Examined for a more detailed description of the EPTA case selection process.

  11. The MAP Project Analyst and the 403(b)/457 Project Analyst also provide the EPTA CSC with respective lists of potential returns/entities that meet their respective case selection criteria for EPTA case selection consideration. The MAP List and the 403(b)/457 List are provided to the EPTA CSC during the last quarter of the fiscal year.

  12. The EPTA CSC meets annually and receives the General List, the MAP List, and the 403(b)/457 List to select a specific number or returns for each Area, based on the workplan.

    Note:

    The EPTA actuary generally reviews the defined benefit returns selected for review by the CSC prior to the beginning of the meeting to note any actuarial issues that should be given consideration.

  13. The final lists are forwarded by the EPTA CIS to the respective Area Manager, EPTA group managers, and the EPTA Project Analyst.

  14. EPTA Case Managers, with close coordination with the EPTA CIS, review the list and select the next taxpayer the EPTA Team will examine.

  15. The EPTA Team Coordinator requests the RICS returns from the EPTA CIS.

  16. The EPTA Team Coordinator researches for plan information among resources available.

  17. The EPTA Team Coordinator and the EPTA Case Manager discuss any research findings and then select the plan(s) and year(s) for examination.

  18. The EPTA Case Manager contacts the EPTA CIS and requests group assignment for the plan(s) and year(s) selected.

IRA-based Plans

  1. The IRA-based examination program is comprised of three plan types:

    1. Simplified Employee Pensions (SEPs) allow employers to contribute to traditional IRAs (SEP IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP. There is a universe of approximately 490,000 SEP IRA plans in the U.S.

    2. Savings Incentive Match Plan for Employees (SIMPLE) allow employees and employers to contribute to traditional IRAs set up for employees. SIMPLE IRA plans are ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. There is a universe of approximately 290,000 SIMPLE IRA plans in the U.S.

    3. Salary Reduction Simplified Employee Pensions (SARSEP) permit salary reduction contributions. These plans were established prior to 1997. There is a universe of approximately 18,000 SARSEP IRA plans in the U.S.

  2. The IRA-based plan examination program does not have a CPG. The IRA-based Plan Project Analyst oversees the case selection process.

  3. Generally, there are no requirements for IRA-based plans to file an annual Form 5500 series return.

  4. The IRA-based Plan Project Analyst identifies IRA-based plans for examination by reviewing:

    1. Form W-2, Box 12, Code "S" entry (SIMPLE)

    2. Form W-2, Box 12, Code "F" entry (SARSEP)

    3. Form 1040, line 28, Schedule C, Form 5498, & Form W-2 (SEP)

    4. Secondary identifying information (SEP, SARSEP and SIMPLE)

    5. Examination history (SEP, SARSEP and SIMPLE)

  5. IRA-based referrals received from other IRS functions are priority for work assignment consideration.

  6. The IRA-based Plan Project Analyst prepares a Compliance Incentive Proposal (CIP) to propose examination projects for IRA-based plans. The CIP includes:

    1. Project objective

    2. Project in relation to program goals

    3. Customer satisfaction impact

    4. Employee satisfaction impact

    5. Business result expectations

    6. The information available for review

    7. Project process

    8. Resources needed to complete proposal

  7. The Director, EP Examinations; the Area Manager, EP Examinations Programs and Review (Area Manager, EP P&R); and the Manager, EP Examinations, Planning & Programs (Manager, EP EP&P) separately review and approve the CIP.

  8. After CIP approval, the IRA-based Plan Project Analyst determines the universe of plans that meet the specified criteria.

  9. Using standard sampling techniques, a random sample of taxpayers is selected for examination. The IRA-based Plan Project Analyst insures the sample includes a fair cross-section of taxpayers.

  10. EP Classification assigns work from the random sample.

  11. The IRA-based Plan Project Analyst periodically reviews project checksheets, RICS data, and Checksheet for EP Compliance Activities (CECA checksheet) data to update EP Classification’s random sample listing for current year data and any new risk areas.

  12. The IRA-based Plan Project Analyst monitors the annual workplan and provides additional taxpayer listings if necessary to meet the workplan goals.

  13. Additional IRA-based projects could also be worked in conjunction with the Employee Plans Compliance Unit (EPCU).

Risk-Based Examination Projects

  1. EP Exam dedicates staff resources to ensure consistency in its compliance activities relating to market segments and retirement plan issues of interest.

  2. Risk-based examination projects are the largest single source of examination casework.

  3. The information derived from these projects enable EP Exam to meet IRS strategic goals and make the most efficient use of future audits by:

    1. Focusing on returns that will strengthen enforcement activities.

    2. Enhancing customer satisfaction in that we will spare time and expense in avoiding selecting taxpayers’ returns that are compliant with tax laws.

Risk Assessment

  1. EP EP&P provides a Risk Assessment Project Analyst to oversee this project.

  2. The Risk Assessment project categorizes retirement plans into these market segments:

    1. Retirement plan type (e.g., profit-sharing, 401(k), defined benefit plans, etc.)

    2. Business industry (using North American Industry Classification System [NAICS] codes)

  3. There are over 170 market segments.

  4. The long-term plan is to identify the compliance level of all market segments.

  5. The Risk Assessment Project Analyst provides:

    1. EP Classification with a list of market segments to select returns for examination.

    2. The focused audit issues the agent should address.

  6. This market segment list consists of four categories. EP Classification will assign returns for examination in the following order using these categories:

    1. Risk Based Targets segment (RBTS) returns. These are returns where the Risk Assessment Project Analyst completed a baseline analysis and recommended follow-up due to noncompliance. Returns assignment will continue until 5% of the universe is assigned.

    2. General Examinations Targeted (GET). These are returns where the Risk Assessment Project Analyst determined the market segment compliance level and target areas.

    3. General Examinations Baseline (GEB). These returns associate with market segments with little or no examinations. These returns generally require higher grade field agents. Returns assignment is staggered from the identified market segments.

    4. General Examinations Full Production (GEFP). These returns associate with market segments with a known compliance level and the entire segment is noncompliant.

  7. Group managers contact EP Classification with their return request, which includes the:

    1. Number of returns needed by case grade

    2. Geographic location

  8. EP Classification fills the order in the priority described above by:

    1. Running a standard query for each segment, and

    2. Then using RICS to randomly select returns for the group.

  9. The Risk Assessment Project Analyst provides monthly updates to EP Classification and the Manager, EP EP&P of the market segments’:

    1. New and discontinued return assignments

    2. Audit result data

Learn/Educate/Self-Correct/Enforce (LESE)

  1. EP EP&P provides a LESE Project Analyst to lead this project.

  2. LESE are small examination projects (about 50 Grade 11 or 12 returns spread across all five geographic Areas) with potential non-compliance based on the field’s anecdotal evidence. The process is:

    1. Learn (L) – Discover all we can about compliance issues using small samples.

    2. Educate (E) - Publish examination results to inform the public about our findings.

    3. Self-Correct (S) - Provide plan sponsors an opportunity to use our published information about a specific compliance problem to perform a self-audit, and, if necessary, self-correct as authorized under Rev. Proc. 2013-12 and modified by Rev. Proc. 2015-27 and Rev. Proc. 2015-28.

    4. Enforce (E) - Expand the scope of the examination to other plans with the same plan characteristics as warranted. These examinations begin after at least one year has passed enabling the retirement plans community to review the results and correct as needed.

  3. A LESE team oversees the program. The team consists of:

    1. The LESE Project Analyst

    2. EP Exam field agents (two per geographic Area)

    3. Members representing Research, Rulings and Agreements, Actuarial Branch, EPCU, and TE/GE Communications and Liaisons (C&L)

  4. The LESE team meets as needed via conference call to discuss potential:

    1. Project ideas

    2. Compliance risks

  5. The LESE Project Analyst will:

    1. Discuss potential project ideas with other analysts and teams to determine the best team to work the project and avoid project duplication.

    2. Release the project if determined that another team is better suited to work the project (e.g., EPCU).

    3. Analyze teams’ similar completed project results.

    4. Delay starting a project until the other teams’ results are known.

  6. Once EP decides to create a LESE project, the LESE Project Analyst will perform data queries to confirm the issue is present.

  7. If the issue is not present, the LESE Project Analyst will close the project.

  8. Once a year, the LESE team ranks the projects ready to be worked.

  9. The LESE starts projects one at a time, starting with the top ranked project. Historically, EP Exam has started one to four projects each fiscal year.

  10. The LESE Project Analyst, with input from LESE team field agent members, EP Classification, the Manager, EP EP&P, and other teams as needed, pulls data queries to identify and select the project return universe.

  11. Return selection is either:

    1. A random sample (not statically valid), or

    2. A judgment sample (e.g., selection of returns with the highest likelihood of non-compliance).

      Note:

      The returns are evenly spread over the five Areas.

  12. The LESE Analyst will prepare a Compliance Initiative Proposal (CIP), which includes:

    1. The project objective

    2. A data query process explanation

    3. An explanation of the final return selection methodology

  13. The LESE Project Analyst, the Area Manager, EP P&R, the Manager, EP EP&P; and the Director, EP Examinations all review and sign-off on:

    1. The CIP

    2. The project information sheet (for agents working the cases in the Areas)

    3. The final case listing

  14. After approval, the Manager, EP EP&P informs all EP Exam Area Managers of the project’s pending release.

  15. The LESE Project Analyst sends the case listing to each Area Manager and their respective staff assistants and to EP Classification for group case assignment.

  16. Classification then assigns the returns to each group as instructed.

  17. Returns can only be surveyed under certain circumstances. The LESE Project Analyst and group manager discuss survey approval and possible replacement.

  18. The LESE Project Analyst continuously monitors the project returns to ensure the correct returns are assigned and examined.

Risk Modeling (RMII or Machine Learning)

  1. These programs use data modeling methods, sometimes used in other IRS business units, to select returns for examination.

  2. EP EP&P assigns a Risk Modeling Project Analyst to oversee risk modeling projects.

Risk Modeling – General
  1. Software is used to analyze past examination results to predict a return’s audit potential. Input on "positive" and "negative" audit results (e.g., ranking disposal codes) were included.

  2. Separate models are created for each return grade level as audit results can vary among these grades.

  3. EP EP&P makes the final case selections using this criteria:

    1. Returns that ranked the highest

    2. Keeping the number of returns assigned equal in each Area

  4. If a larger number of returns than needed are evenly ranked, selections become random in that rank.

  5. The Risk Modeling team includes members of:

    1. Research Analysis & Statistics (RAS) (lead)

    2. TE/GE Research

    3. EP EP&P

    4. EP Classification

    5. EPCU

Risk Modeling – Approval Process
  1. The Risk Modeling Project Analyst, with input from any applicable team, EP Classification, and the Manager, EP EP&P, pull data queries to identify and select the project return universe.

  2. The Risk Modeling Project Analyst prepares a Compliance Initiative Proposal (CIP). The CIP includes:

    1. The project objective

    2. Data query process explanation

    3. Final return selection methodology

  3. The Risk Modeling Project Analyst; the Manager, EP EP&P; the Area Manager, EP P&R; and the Director, EP Examinations all review and sign-off on:

    1. The CIP

    2. The Lead Sheet or Coversheet (for agents working the cases in the areas)

    3. The final case listing

Risk Modeling – Case Assignment & Monitoring
  1. After approval, the Risk Modeling Project Analyst informs all EP Exam Area Managers of the project’s pending release.

  2. The Risk Modeling Project Analyst sends the case listing to each Area Manager and their respective staff assistants and to EP Classification for group case assignment.

  3. EP Classification then assigns the returns as instructed.

  4. Returns can only be surveyed under certain circumstances. The Risk Modeling Project Analyst and group manager discuss survey approval and possible replacement.

  5. The Risk Modeling Project Analyst continuously monitors the project returns to ensure the correct returns are assigned and examined.

Abusive Tax Avoidance Transactions & Technical Issues (ATTI)

  1. An abusive tax avoidance transaction includes the organization or sale of any plan or arrangement promoting false or fraudulent tax statements or gross valuation misstatements, aiding or assisting in the preparation or presentation of a return or other document to obtain tax benefits not allowed by law, and actions to impede the proper administration of Internal Revenue laws.

    1. This general definition includes both tax shelters as defined in various sections of the IRC and other types of abusive tax promotions.

    2. These strategies may be organized and marketed, often through the internet.

    3. The definition is not merely limited to activities that reduce tax liability but may also include transactions that conceal assets and/or income from collection

  2. The IRS is engaged in extensive efforts to curb ATTI schemes. EP Exam participates in this IRS-wide effort by devoting resources to identifying, analyzing and examining abusive tax shelter schemes and promotions.

Promoter Investigations

  1. Promoter investigations involve the investigation of practitioners and tax return preparers who are endorsing potential abusive tax avoidance schemes.

  2. EP Examinations coordinates with other IRS business units to deter and stop promoter schemes, including:

    1. Small Business/Self Employed (SB/SE)

    2. SB/SE Lead Development Center (LDC)

    3. Large Business & International (LB&I)

    4. Office of Tax Shelter Analysis (OTSA)

  3. EP EP&P provides a senior analyst to be the EP Functional Promoter Coordinator.

  4. Information sharing agreements are in place for cross functional reporting and coordination.

  5. When potential promoter leads are identified, referrals are submitted to the LDC.

  6. The LDC will coordinate as needed with the EP Functional Promoter Coordinator when developing EP related leads.

  7. Cross-functional deconfliction processes are in place to ensure that any investigation initiation will not interfere with another operating division’s investigation or examination.

  8. The LDC contacts the EP Functional Promoter Coordinator once it authorizes an investigation.

  9. The LDC provides the TE/GE Promoter Investigation Coordinator with a copy of the authorization memorandum and other appropriate information.

  10. Cross functional coordination is used to determine which operating division will lead the investigation.

  11. Counsel and specialists as needed are assigned to the investigation.

  12. When EP is the investigation lead:

    1. The TE/GE Promoter Investigation Coordinator and the EP Functional Promoter Coordinator provide the LDC with the contact information for the agents, Counsel, and specialists assigned.

    2. EP will notify the LDC if EP needs SB/SE assistance with the examination of participant examination related returns under SB/SE jurisdiction.

    3. The EP Functional Promoter Coordinator evaluates the case file and verifies EP jurisdiction.

    4. The EP Functional Promoter Coordinator prepares a written recommendation and provides other necessary information to the Director, EP Examinations.

    5. The Director, EP Examinations confers with the impacted Area Manager to ensure availability and commitment of resources needed to conduct the investigation and supporting examinations.

    6. The Director, EP Examinations and the Director, EP decides on investigation concurrence/non-concurrence. The Director, EP Examinations writes his or her conclusion on the recommendation memorandum.

    7. The EP Functional Promoter Coordinator helps the investigator with case identification and then shares with EP Classification.

  13. When SB/SE is the investigation lead:

    1. The TE/GE Promoter Investigation Coordinator receives SB/SE contact information for the agents, Counsel, and specialists assigned.

    2. SB/SE can request assistance with the examination of participant examination related returns under TE/GE jurisdiction.

    3. SB/SE coordinates with EP to determine EP returns to be examined.

  14. The LDC tracks promoter investigations and provides periodic reports. EP validates report data and contacts the LDC with changes and updates.

  15. The LDC and all TE/GE points of contact hold quarterly conference calls to:

    1. Discuss promoter investigations

    2. Share best practices

    3. Address any case and issue coordination matters

  16. The TE/GE Compliance Issues Council (CIC) periodically gets briefed on the promoter investigation status by the TE/GE Promoter Investigation Coordinator and/or the designated CIC Executive.

Emerging Issues

  1. EP EP&P has an Emerging Issues Analyst to lead and monitor Emerging Issues.

  2. EP Exam has an Emerging Issues Team (EIT) comprised of EP agents and management employees from:

    1. Examination

    2. Rulings and Agreements

    3. Actuarial

    4. Counsel

  3. An EP Area Manager is named EIT Champion.

  4. The EIT meets monthly via conference call to discuss and identify issues that have surfaced from EP work as well as from internal and external referrals.

  5. The EIT then reaches a consensus on whether a compliance issue exists.

  6. The EIT Champion approves the decision to address each issue the EIT identifies.

  7. Based on return information that indicates the non-compliance issue may exist, a very small sample of cases (5-10) may be selected for examination with EP Classification’s help.

  8. A Compliance Initiative Proposal (CIP) will be prepared if examinations are to be conducted.

  9. EIT field agents conduct the examinations to gain first-hand knowledge and report their findings to the EIT.

  10. Depending on the findings and other factors, the EIT recommends one or more actions and develops the related guidance and compliance recommendations:

    1. Examination/EPCU project

    2. Internal outreach

    3. External outreach

  11. If the EIT determines a larger examination is warranted, a Compliance Initiative Proposal (CIP) is developed and forwarded for management approval.

  12. Specific field agents are identified to conduct the examinations.

  13. Returns selected for each issue is based on several factors, including:

    1. Return information

    2. Agent geographic location

    3. Agent grade

    4. Case grade

  14. The total number of returns selected depends on available resources at that time.

  15. The EIT expects the field agent to examine all assigned returns. If the exam group decides to survey a return, the Emerging Issues Analyst must approve that decision.

  16. The EIT will ensure examination consistency by developing:

    1. Audit tools, letters, workpapers, etc. for the field agents.

    2. Resolution strategies for issues raised during the examination.

    3. Communication strategies to share any information with the field agents.

  17. The Emerging Issues Analyst consistently evaluates all open projects and prepares a monthly report for the Director, EP Examinations.

Employee Plans Compliance Unit (EPCU)

  1. The EPCU develops compliance projects and performs data analysis to focus on areas of potential non-compliance.

  2. Taxpayers are initially contacted by correspondence.

  3. Most issues are resolved without an examination of the plan's books and records, saving time and money for both the taxpayer and the IRS.

  4. EPCU receives project ideas from both internal and external sources.

  5. EPCU evaluates all project ideas and performs preliminary research to verify the project feasibility.

  6. EPCU managers maintain a Project Summary List, which includes:

    1. Projects currently in process

    2. Completed projects

    3. Approved projects

    4. Potential projects with a brief narrative on the project purpose

  7. Projects are assigned to an EPCU Project Manager.

  8. A senior EP analyst from EP EP&P or a Computer Audit Specialist (CAS) or the Computer Research Analyst works with the EPCU Project Manager to identify a case universe meeting specific criteria. Some criteria examples are:

    1. Asset level

    2. Participant count

    3. Plan years

    4. Years plan is in existence

    5. Project- related Form 5500 questions

    6. Form W-2 data

  9. Once EPCU identifies the universe for the project, the decision is made on how many and which taxpayers are contacted. The choices include:

    1. The entire universe – if warranted and reasonable size

    2. Statistically valid sample, using appropriate confidence levels and margin of error

    3. Randomly selected sample, using a randomizer to generate a set of unique numbers

    4. Judgment sample based on specific criteria (ex: participation rates under 10%)

    5. Combinations of sampling techniques

  10. The EPCU Project Manager prepares a Project Prospectus which includes:

    1. Project purpose

    2. Project scope

    3. Project procedures

    4. Explanation of possible non-compliance

    5. Instructions on handling taxpayer questions and responses

  11. Approval by the Project Selection Committee (PSC) is required for the:

    1. Project prospectus

    2. Letters and requests for information sent to the taxpayers

    3. External web content on the project

      Note:

      See paragraphs (2) through (4) of IRM 4.71.22.3, EPCU Project Life Cycle, for a description of the PSC and the approval process.

Other Programs

  1. In addition to the examination projects discussed above, EP Exam has other examination projects as follows:

    1. Form 5500EZ examinations

    2. Nonbank trustee investigations

    3. Various referral projects

Form 5500EZ Examinations

  1. Form 5500EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, is filed by one-participant plans that are not subject to the requirements of section 104(a) of the Employee Retirement Income Security Act of 1974 (ERISA) and that are not eligible or choose not to file Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, electronically to satisfy certain annual reporting and filing obligations imposed by the Internal Revenue Code.

  2. EP EP&P provides a senior analyst to oversee the program.

  3. The Form 5500EZ Project Analyst regularly reviews the Form 5500EZ filer universe and past examination history to find the examinations that meet workplan goals.

  4. The Form 5500EZ Project Analyst prepares a Compliance Incentive Proposal (CIP) to propose examination projects for Forms 5500EZ. The CIP includes:

    1. Project objective

    2. Project in relation to program goals

    3. Customer satisfaction impact

    4. Employee satisfaction impact

    5. Business result expectations

    6. The information available for review

    7. Project process

    8. Resources needed to complete proposal

  5. The Director, EP Examinations and the Manager, EP EP&P separately review and approve the CIP.

  6. The Form 5500EZ Project Analyst develops selection parameters that reflect areas of concern based on the initial Form 5500EZ review.

  7. Selection parameters are defined and captured using RICS codes.

    1. The RICS codes define risk segment areas for EP Classification to select returns as groups request examination work.

    2. Risk areas defined are selected by factors, including plan type, non-cash contributions, asset values over a certain number, plan contribution over a certain number, and final plan year filer.

  8. The Form 5500EZ Project Analyst works with EP Classification to determine the number of Form 5500EZ filers that fall into the defined examination categories.

  9. EP Classification builds the Form 5500 examination inventory and assigns work as requests are received.

  10. The Form 5500EZ Project Analyst regularly reviews the issues found on exam and the change rate from the RICS system and CECA checksheet database.

    1. If the 5500EZ Project Analyst finds problem areas, the project will continue.

    2. As the project analyst finds additional problem areas, new condition codes will be developed.

    3. Condition codes that have already been developed and are being used will continue for case selection if review of exam case results shows that significant problem areas are being identified and addressed.

Nonbank Trustee Investigations

  1. A nonbank trustee or nonbank custodian (NBT) is an entity that is not a bank (as defined in IRC 408(n)), or in some cases an insurance company (within the meaning of IRC 816), that is permitted to serve as a trustee or custodian for the arrangements listed below, if it demonstrates to the Commissioner's satisfaction that the requirements specified under Treasury Regulations (Treas. Regs.) 1.408-2(e)(2) through (e)(5)(viii)(F) are met:

    1. Archer Medical Savings Accounts (MSA)

    2. Health Savings Accounts

    3. Qualified Retirement Plan Custodial Accounts

    4. IRC 403(b)(7) Custodial Accounts

    5. Individual Retirement Arrangements (IRAs)

    6. Roth IRAs

    7. Deferred Compensation Plans of State & Local Governments and Tax Exempt Organizations Custodial Accounts

    8. Coverdell Education Savings Accounts

  2. If the requirements described in Treas. Regs. 1.408-2(e)(2) - (e)(5)(viii)(F) are met, the NBT applicant will receive a written notice of approval.

  3. Annually the EPCU reminds the approved NBTs that the organization must notify the IRS in writing of any change that affects the continuing accuracy of any representation made in their application. Notifications are used in the preparation of a Nonbank Trustee/Custodian List that will be published in the Internal Revenue Bulletin each February. The list may be accessed through the following link: Approved Nonbank Trustees and Custodians.

  4. A database containing information on each NBT is maintained on a shared computer drive that can be accessed by EP Rulings & Agreements and EP Exam employees who are involved with the NBT program.

    1. Updates to this database are limited to only key employees in EP Rulings & Agreements, EP Exam, and the EPCU.

    2. The database tracks approvals, withdrawals, suspensions, revocations, as well as the type and frequency of contact made to each NBT on a continuous basis.

    3. The database is used to produce the list of approved NBTs that is published periodically.

  5. Each fiscal year, EP Classification will select a minimum of four approved NBTs from the approved list for each Area to investigate for continued compliance with the NBT regulations (additional approved NBTs may be selected for investigation based on operating priorities and resource availability).

    1. The goal is to conduct 20 NBT investigations each fiscal year, and each NBT will be investigated at least once every five years.

    2. The actual number of NBTs that will be investigated will be dependent on how many NBTs have not been investigated in the prior 5 years.

    3. There may be years where 20 NBTs are not available for investigation.

  6. If the IRS receives information that a specific approved NBT may not be in compliance with the NBT regulations, a request or recommendation to EP Classification will be submitted for investigation of the approved NBT.

Referrals

  1. EP Exam receives referrals involving retirement plans from various sources. The following types of referrals are reviewed and considered for examination:

    1. General referrals

    2. "Sensitive Case" referrals

    3. Whistleblower referrals

General Referrals
  1. EP Classification is responsible for controlling and processing referrals submitted to EP.

  2. EP Classification receives referrals submitted by forms, letters, or emails from:

    1. TE/GE operating divisions

    2. Other IRS operating divisions

    3. Other governmental agencies

    4. Third parties

  3. EP Classification notifies third party referral submitters of receipt and IRS disclosure laws.

  4. Referrals are assigned to classifiers in EP Classification for assessment of audit potential, using factors such as:

    1. Law

    2. Internal Revenue Manual (IRM) guidelines

    3. Referral source (pension law knowledge)

  5. There is no formal approval process for referrals.

    1. EP Classifiers have bi-weekly conference calls to discuss referral receipts and issues.

    2. EP Classification considers any feedback received from EP Examination managers.

  6. EP Classification assigns referrals with audit potential to EP Examination groups that submit work order requests, based on:

    1. Case grade

    2. Location of the taxpayer

    3. Statute of limitations considerations

  7. There is no referral post-review.

  8. The referral inventory is regularly monitored.

"Sensitive Case" Referrals
  1. The EP Classifier determines whether a referral is a "sensitive case" based on facts and circumstances. Situations and issues the EP Classifier must consider include cases:

    1. Involving high profile individuals, companies, or issues that will draw media attention.

    2. Involving an Indian Tribal Government or State or Local Government where someone alleges financial wrongdoing.

    3. Likely to attract Congressional attention.

    4. Containing evidence or allegations of financial transactions with individuals or organizations with known or suspected terrorist connections.

    5. Where a referral informant indicates an intent to elevate the issue to Senior IRS Managers or Executives.

    6. With other factors indicating Sensitive Case Committee review for reasons of fairness and integrity.

  2. The EP Classifier does not automatically deem EP Team Audit (EPTA) cases as sensitive. The EP Classifier will discuss the referral with the EPTA Champion prior to making any decision.

  3. When a referral is labeled "sensitive" , the EP Classifier will advise the Manager, EP Classification and send the case to the Sensitive Case Committee to evaluate the referral.

  4. The Sensitive Case Committee includes:

    1. The EP Classifier

    2. The Senior EP Classifier

    3. Manager, EP Classification (or designee)

    4. Area Manager, EP P&R (or other Senior EP Manager designee)

    5. Other employees deemed appropriate to evaluate the case

  5. The Sensitive Case Committee will convene within 30 days of receipt of the referral to reach a consensus to examine or survey the sensitive case.

  6. The Sensitive Case Committee will prepare a memorandum to document the decision and the reasons for the decision.

  7. Procedures for sensitive cases involving whistleblowers (WB) are found in IRM 4.71.26.8.3.3, Whistleblower Referrals.

Whistleblower Referrals
  1. IRM 4.71.24.2.1.1, Special Instructions for Category A Cases That Are Determined to Be "Sensitive Cases" , and IRM 4.71.24.3.1.1, Special Instructions for Category B Cases That Are Determined to Be "Sensitive Cases" , contain the special procedures for addressing whistleblower (WB) claims involving sensitive cases.

  2. The EP WB Subject Matter Expert (SME) determines whether a referral is a "sensitive case" based on facts and circumstances. Situations and issues the EP WB SME must consider include cases:

    1. Involving high profile individuals, companies, or issues that will draw media attention.

    2. Involving an Indian Tribal Government or State or Local Government where someone alleges financial wrongdoing.

    3. Likely to attract Congressional attention.

    4. Containing evidence or allegations of financial transactions with individuals or organizations with known or suspected terrorist connection.

    5. Where a referral informant indicates an intent to elevate the issue to Senior IRS Managers or Executives.

    6. With other factors indicating Sensitive Case Committee review for reasons of fairness and integrity.

  3. The EP WB SME does not automatically deem EPTA cases as sensitive. The EP WB SME will discuss the referral with the EPTA Champion prior to making any decision.

  4. When a referral is labeled "sensitive" , the EP WB SME advises the immediate supervisor. The immediate supervisor must concur with the EP WB SME on the decision.

  5. The Sensitive Case Committee will meet to evaluate the referral. The Sensitive Case Committee includes:

    1. The EP WB SME

    2. Three senior EP Managers

    3. Other employees deemed appropriate to evaluate the case

  6. Sensitive Case Committee members must remove themselves from evaluating a case if the case would be worked in their Area or group.

  7. The Sensitive Case Committee will convene within 30 days of receipt of the referral to reach a consensus to examine or survey the sensitive case.

  8. The Sensitive Case Committee will prepare a memorandum to document the decision and the reasons for the decision.