4.75.15 Closing Letters and Audit Reports

Manual Transmittal

July 18, 2017

Purpose

(1) This transmits revised IRM 4.75.15, Exempt Organizations Examination Procedures, Closing Letters and Audit Reports.

Material Changes

(1) Incorporated the contents of Interim Guidance Memorandum TEGE-04-0216-0003, PATH (Protecting Americans from Tax Hikes Act of 2015) P.L. 114-113 - Impact on Revocations and Modifications of Exempt Status into this IRM.

(2) Updated to meet the requirements of P.L. 111-274 (H.R. 946), the Plain Writing Act of 2010. The Act states writing must be clear, concise, well-organized, and follow other best practices appropriate to the subject or field and intended audience.

(3) Closing Letter 5452 replaces obsolete Letter 3593 and Letter 3594.

(4) Newly created Letter 5452-A, No Change Audit Closing Letter - Split Interest and Non Exempt Charitable Trust has been added to this IRM.

(5) Revised Letter 5177, No Change Closing Letter 990-N has been incorporated in this IRM.

(6) Revised Letter 3609, No Change Advisory - Exempt Organizations has been incorporated in this IRM.

(7) Deleted all references to Form 6018-A. Form has been made obsolete as a result of the PATH Act.

(8) Removed all references to “projects” as cases are no longer assigned under a project.

(9) Removed all references to "CSCI" , "EOCA" , and "EPR" units.

(10) Updated general guidance regarding the Fast Track Settlement process and reorganized this section.

(11) IRM 4.75.15.1, revised to incorporate Service-wide Memorandum, Heightened Awareness, Sensitivity, and Understanding of Internal Controls, dated September 14, 2016.

(12) IRM 4.75.15.3, revised to remove Grade 11 agents from signing letters bearing the Director’s signature block.

(13) IRM 4.75.15.7, renamed "Change Cases - Proposing Adjustments" for perspective when viewing the Table of Contents. Previously named "Proposing Adjustments."

(14) IRM 4.75.15.7.4, deleted Form 6018-A, obsoleted. Inserted contents from IRM 4.75.15.7.5, Forms 4549, 4549-A, 4549-B, and 4549-E.

(15) IRM 4.75.15.7.5, moved contents to IRM 4.75.15.7.4, and inserted contents from IRM 4.75.15.7.6, Form 4621 and Form 4621-A.

(16) IRM 4.75.15.7.6, moved contents to IRM 4.75.15.7.5, and inserted contents from IRM 4.75.15.7.7, Form 4883.

(17) IRM 4.75.15.7.7, moved contents to IRM 4.75.15.7.6, and inserted new content, Installment Agreements

(18) IRM 4.75.15.7.8, added new instructions for, Partially Agreed Cases.

(19) IRM 4.75.15.8, renamed to "Types of Status and Tax Changes" for perspective when viewing Table of Contents. Previously named "Types of Issues."

(20) IRM 4.75.15.8.1, revised Revocations for clarification. Added a reports table.

(21) IRM 4.75.15.8.2, removed Modification of Exempt Status due to PATH ACT. Inserted and revised Reclassification of Foundation Status from IRM 4.75.15.8.3. Added a reports table.

(22) IRM 4.75.15.8.3, moved Reclassification of Foundation Status content to IRM 4.75.15.8.2. Inserted and revised Disqualifications from IRM 4.75.15.8.4. Added instructions for IRC 501(c)(12) and IRC 501(c)(15) disqualifications. Added a reports table.

(23) IRM 4.75.15.8.4, moved Disqualification of Status 36 Organizations content to IRM 4.75.15.8.3. Inserted and revised UBIT and EO Income Tax content from IRM 4.75.15.8.5. Added a reports table.

(24) IRM 4.75.15.8.5, moved UBIT content to IRM 4.75.15.8.4. Inserted and revised Employment tax content from IRM 4.75.15.8.6. SB/SE letters will be used. Added links to reports tables.

(25) IRM 4.75.15.8.6, moved Employment tax content to IRM 4.75.15.8.5. Inserted and revised Private Foundation Excise Taxes from IRM 4.75.15.8.7. Moved tax chart to Exhibit 4.75.15-14. Added a reports table.

(26) IRM 4.75.15.8.7, moved Private Foundation Excise Taxes to IRM 4.75.15.8.6. Inserted and revised Non-Private Foundation Excise Taxes from IRM 4.75.15.8.8. Moved tax chart to Exhibit 4.75.15-15.

(27) IRM 4.75.15.8.8, moved Non-Private Foundation Excise Taxes to IRM 4.75.15.8.7. Inserted and revised Nonexempt Charitable Trusts from IRM 4.75.15.8.9. Added a reports table.

(28) IRM 4.75.15.8.9, revised to move Nonexempt Charitable Trusts to IRM 4.75.15.8.8. Inserted Inactive Organizations from IRM 4.75.15.8.10.

(29) IRM 4.75.15.8.10, revised to move Inactive Organizations to IRM 4.75.15.8.9. Inserted new content for Inadequate Records, moved from IRM 4.75.16.5.6 and all sub-subsections thereto. Inadequate records report to taxpayer performed by audit groups - no longer subject to mandatory review.

(30) Revised Exhibit 4.75.15-1, Closing Letters for No Change Cases. Clarified and added letters used in the no-change process.

(31) Revised Exhibit 4.75.15-2, Formal Reports for Claims and Abatements. Clarified reports, and added final closing letters for agreed and unagreed cases.

(32) Revised Exhibit 4.75.15-3, Formal Reports for Change Cases. Clarified reports, and added final closing letters for agreed and unagreed cases.

(33) Revised Exhibit 4.75.15-5, Form 4621, Exempt Organizations - Report of Examination (Proposed Status Changes).

(34) Revised Exhibit 4.75.15-6, Form 4883, Exempt Organizations Tax Audit Changes.

(35) Exhibit 4.75.15-10, removed Form 6018-A, obsoleted by PATH Act. Inserted revised Form 6018 Instructions from Exhibit 4.75.15-11.

(36) Exhibit 4.75.15-11, moved Form 6018 Instructions content to Exhibit 4.75.15-10. Inserted Guidelines for Issuance of Letters from Exhibit 4.75.15-12.

(37) Exhibit 4.75.15-12, moved Guidelines for Issuance of Letters content to Exhibit 4.75.15-11. Inserted Incomplete Protest Returned to Taxpayer - Suggested Language.

(38) Exhibit 4.75.15-13, removed sample rebuttal letter, Letter 5326 published. Inserted Form 2807 sample for inadequate records reporting from IRM 4.75.16.5.6.

(39) Exhibit 4.75.15-14, removed 30-day letter based on TAM, obsolete - Appeal rights allowable. Inserted tax chart from IRM 4.75.15.8.6.

(40) Exhibit 4.75.15-15, removed 30-day letter based on TAM, obsolete - Appeal rights allowable. Inserted tax chart from IRM 4.75.15.8.7.

(41) Exhibit 4.75.15-16, removed 30-day letter based on TAM, obsolete - Appeal rights allowable.

(42) Exhibit 4.75.15-17, removed 30-day letter based on TAM, obsolete - Appeal rights allowable.

Effect on Other Documents

This supersedes IRM 4.75.15, Closing Letters and Report of Examination dated March 31, 2014.

Audience

Tax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(07-18-2017)

Margaret Von Lienen
Director, Exempt Organizations
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM focuses on issuing audit reports and the proper use of audit-related letters for EO agents. It also provides a comprehensive list of EO audit results for which reports and letters are issued.

  2. Audience: The procedures in this manual apply to Exempt Organizations Examination employees in the following series:

    • GS-512

    • GS-526

    • GS-987

  3. Policy Owner: Director, Exempt Organizations.

  4. Program Owner: Exempt Organizations.

Background

  1. Prior to November 1, 2004, EO agents were required to issue preliminary or initial proposed audit reports on cases resulting in a change of tax or status, in order to solicit a taxpayer’s agreement.

    1. If the case was agreed, agents could generally issue an agreed change closing letter and close the case to the EO Closing Unit.

    2. If the case was unagreed, the agent closed the case to Mandatory Review, where Mandatory Review was responsible for issuing the formal proposed audit report and 30-day letter, prepared in advance by the agent. Mandatory Review also held the case in suspense pending the taxpayer’s response.

  2. However, effective November 1, 2004, EO Examinations transferred the process of issuing 30-day letters and reports to the audit groups, as well as suspending them in the group. The concept of the initial audit report generally remained the same, except that it became an optional process in light of the shift of the 30-day letter process to the groups.

  3. Effective December 18, 2015, the PATH Act requires all revocations be afforded declaratory judgment rights, other than those automatically revoked by reason of IRC 6033(j). Thus, all audited revocations of IRC section 501(c) or (d) organizations, and disqualifications, will follow the same procedures and processes for IRC 7428 purposes as those previously reserved only for IRC section 501(c)(3) organizations.

Authority

  1. Policy Statement 4-119, states the primary objective of the EO audit program is regulatory, emphasis on continued qualification of exempt organizations. See IRM 1.2.13.1.36, Policy Statement 4-119 (Formerly P-7-20).

  2. IRC 7602 gives agents the authority to:

    1. Examine any books, papers, records or other data necessary to complete an audit.

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

    3. Issue summons for information necessary to complete an audit.

    4. Inquire into any offense connected with the administration or enforcement of the Internal Revenue laws.

  3. Agents and managers are also responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3).

Responsibilities

  1. During an audit, agents are responsible for:

    1. Following a workflow process.

    2. Preparing initial and formal audit reports.

    3. Determining whether a response from a taxpayer is a complete protest to Appeals.

    4. Writing a formal rebuttal to a complete protest.

    5. Considering the Fast Track Settlement (FTS) process.

  2. Agents are also responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3).

Program Controls

  1. Agents should consult the Related Sources listed in IRM 4.75.15.1.6 to ensure accurate case processing and consistent application of the law.

Acronyms

  1. The table lists commonly used acronyms and their definitions.

    Acronym Definition
    AIMS Audit Information Management System
    CSP Classification Settlement Program
    DO Delegation Order
    EIN Employer Identification Number
    EO Exempt Organizations
    EPR Examination Programs and Review
    FADL Final Adverse Determination Letter
    FICA Federal Insurance Compensations Act
    FTS Fast Track Settlement
    FTS AO Fast Track Settlement Appeals Official
    FUTA Federal Unemployment Tax
    GCM General Counsel Memoranda
    HS High Security
    IRC Internal Revenue Code
    IRM Internal Revenue Manual
    IRS Internal Revenue Service
    LB&I Large Business and International
    NECT Non Exempt Charitable Trust
    NMF AIMS Non-Master File
    NDWC Notice of Determination of Worker Classification
    NOLD Net Operating Loss Deduction
    PF Private Foundation
    PLR Private Letter Ruling
    POF Private Operating Foundation
    RAR Revenue Agent Report
    RCCMS Reporting Compliance Case management System
    RRTA Railroad Retirement Tax Act
    SB/SE Small Business and Self Employed
    SFR Substitute For Return
    TAM Technical Advice Memorandum
    TE/GE Tax Exempt and Government Entities
    UBIT Unrelated Business Income Tax
    WC Worker Classification
    WH Withholding

Related Sources

  1. Related sources that provide guidance on these IRM procedures:

    • IRM 1.2.13, Servicewide Policies and Authorities, Policy Statements for the Examining Process.

    • IRM 1.2.43, Servicewide Policies and Authorities, Delegations of Authority for Examining Process.

    • IRM 1.2.46, Servicewide Policies and Authorities, Delegation of Authorities for the Rulings and Agreements Process.

    • IRM 1.4.6, Resource Guide for Managers, Managers Security Handbook.

    • IRM 4.8.9, Technical Services, Statutory Notices of Deficiency.

    • IRM 4.10.8, Examination of Returns, Report Writing.

    • IRM 4.23.10, Employment Tax, Report Writing Guide for Employment Tax Examinations.

    • IRM 4.23.13, Employment Tax, Adjusted Returns, Abatements and Claims.

    • IRM 4.24.10, Appeals Referral Procedure.

    • IRM 4.75.13, Issue Development and Conclusion.

    • IRM 4.75.16, Case Closing Procedures.

    • IRM 4.75.21, EO Special Examination Procedures.

    • IRM 4.75.22, EO Delinquent, Amended and Substitute for Return Procedures.

    • IRC 4.75.25, Closing Agreements

    • IRM 4.75.28, EO Discrepancy Adjustments.

    • IRM 4.75.31, Conversion of Returns Upon Revocation of Exemption.

    • IRM 4.75.32, Exempt Organizations Examination Procedures, Procedures for Disposition of IRC 501(p)Cases.

    • IRM 4.76.7, Exempt Organizations Examination Guidelines - Church Tax Inquiries and Examinations - IRC 7611

    • IRM 7.27.12, IRC 6033(e)(2) -Proxy Tax on Lobbying and Political Expenditures.

    • For a list of special situations in closing an audit, see IRM 4.75.16.5.

  2. Tax and Information return forms:

    • Form 843, Claim For Refund and Request for Abatement

    • Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

    • Form 941, Employer's Quarterly Federal Tax Return

    • Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund

    • Form 944, Employer’s Annual Federal Tax Return

    • Form 944-X, Adjusted Employer's ANNUAL Federal Tax Return or Claim for Refund

    • Form 945, Annual Return of Withheld Federal Income Tax

    • Form 945-X, Adjusted ANNUAL Return of Withheld Federal Income Tax or Claim for Refund

    • Form 990, Return of Organization Exempt From Income Tax

    • Form 990-BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Person

    • Form 990-EZ, Short Form Return of Organization Exempt From Income Tax

    • Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ

    • Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation

    • Form 990-T, Exempt Organization Business Income Tax Return

    • Form 4720, (MFT 50), Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC

    • Form 4720-A, (MFT 66), Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the IRC

    • Form 1065, U.S. Return of Partnership Income

    • Form 1120, U.S. Corporation Income Tax Return

    • Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations

    • Form 1120-X, Amended U.S. Corporation Tax Return

    • Form 1041, U.S. Income Tax Return for Estates and Trusts

    • Form 5227, Split-Interest Trust Information Return

    • Form 8849, Claim for Refund of Excise Taxes

  3. Waiver and acceptance forms (agreement forms):

    • Form 6018, Consent to Proposed Action

    • Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment

    • Form 870-E, Waiver of Restriction on Assessments and Collection of Deficiency and Acceptance of Overassessment

    • Form 2297, Waiver of Statutory Notification of Claim Disallowance

    • Form 3363, Acceptance of Proposed Disallowance of Claim for Refund or Credit

    • Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment

    • Form 2504-E, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment

    • Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 statement)

    • Form 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases

    • Form 4549, Income Tax Examination Changes

    • Form 4549-E, Income Tax Discrepancy Adjustments

    • Form 5384, Excise Tax Examination Changes and Consent to Assessment & Collection

  4. Basic report forms:

    • Form 886-A, Explanation of Items

    • Form 4621, Exempt Organizations - Report of Examination (Proposed Tax Changes)

    • Form 4621-A, Exempt Organizations - Report of Examination (Proposed Status Changes)

    • Form 4549, Income Tax Examination Changes

    • Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed)

    • Form 4549-E, Income Tax Discrepancy Adjustments

    • Form 5384, Excise Tax Examination Changes and Consent to Assessment & Collection

    • Form 5385, Excise Tax Examination Changes

    • Form 4666, Summary of Employment Tax Examination.

    • Form 4667, Examination Changes - Federal Unemployment Tax

    • Form 4668, Employment Tax Examination Changes Report

    • Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G.

    • Form 4883, Exempt Organizations Excise Tax Audit Changes

    Note:

    The "audit report" includes the "Substitute for Return Package" described in IRM 4.75.22.7.1.

  5. Administrative Processing Forms:

    • Form 3198-A, TE/GE Special Handling Notice

    • Form 5599, TE/GE Examined Closing Record

    • Form 5666, TE/GE Referral Information Report

    • Form 5772, EO Workpaper Summary

    • Form 5773, EO Workpaper Summary Continuation Sheet

    • Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties

  6. Audit Final Closing Letters - No Change and No-Change Advisory.

    • Letter 3609, No change advisory for organizations described under IRC 501(c), 501(d), 527 or IRC 4947

    • Letter 3609-P, No change advisory - focused audit on political campaign intervention by organizations described in IRC 501(c)(3)

    • Letter 4102, No change advisory for status 36 organization for specified tax year(s)

    • Letter 5177, No change for a Form 990-N filer

    • Letter 5452, No change for tax-exempt organizations described under IRC 501(c), 501(d) or 527

    • Letter 5452-A, No change for IRC 4947(a)(1) or 4947(a)(2) trust (Form 5227 Audit)

    • Letter 3622, No change (EO income tax - UBIT, Proxy Tax, IRC 527, Form 1120, Form 1041)

    • Letter 5332, No change (any tax) after considering reply to a previously issued 30-day letter

    • Letter 5334, No change (any tax) after inspecting secured delinquent tax return

    • Letter 3592, No change (Chapter 41 or 42 excise tax)

    • Letter 3623, No change (Miscellaneous, gaming excise tax)

    • Letter 3381, No change (Employment tax)

    • Letter 4840, No change (Employment tax), except Unreported Tips

    • Letter 3264, Pre-notice for Employer Share of Tax due on Unreported Tips

  7. Audit Agreed Final Closing Letters - Tax Deficiencies

    • Letter 3607, Agreed tax deficiency (income tax, Chapter 41 or 42 excise tax, and gaming excise tax)

    • Letter 3382, Agreed tax deficiency (employment tax)

  8. Audit Final Closing Letters - Claims or Abatements

    • Letter 570, Claim allowed in full (employment tax)

    • Letter 693, Abatement request allowed in full, or disallowed in full or in part (income tax). Appeal by paying tax and filing claim.

    • Letter 905, Claim disallowed in part (any tax). Statutory Notice of Claim Disallowance

    • Letter 906, Claim disallowed in full (any tax). Statutory Notice of Claim Disallowance

    • Letter 917, Claim disallowed in full (any tax) - Taxpayer fails to show merits for reconsideration of claim.

    • Letter 924, Abatement not considered (excise and employment tax).

    • Letter 3601, Claim allowed in full (any tax except employment tax)

    • Letter 2511, Claim disallowed in part, or any disallowances with adjustment - Agreed

    • Letter 2738, Abatement request allowed in full (any tax except employment tax)

    • Letter 2841-A, Claim disallowed in full (any tax) - Agreed.

    • Letter 5154, Abatement request allowed in full, or disallowed in full or in part (employment tax). Appeal by paying tax and filing claim.

    • Exhibit 4.75.37-8, IRC 4962 abatement request disallowed in full after improper request. Appeal by paying tax and filing claim.

    • Exhibit 4.75.37-6, Agreed IRC 4962 abatement request disallowed in full or in part

  9. 30-day Letters - Proposed Status Changes

    • Letter 3618, Proposed revocation of IRC 501(c) or (d) tax-exempt status, or disqualification of self-declaring organizations.

    • Letter 3620, Proposed change in foundation or public charity status

    • Letter 4700, Proposed disqualification of IRC 501(c)(12) and 501(c)(15) organization for specified tax years.

  10. 30-day Letters - Proposed Tax Deficiencies

    • Letter 950, Proposed tax deficiency (income tax) for revoked or disqualified organizations

    • Letter 950-C, Proposed tax deficiency (employment tax - worker classification)

    • Letter 950-D, Proposed tax deficiency (employment tax)

    • Letter 950-E, Proposed tax deficiency (miscellaneous excise tax, such as gaming)

    • Letter 3603, Proposed tax deficiency (income tax) for discrepancy adjustments - 2nd formal letter

    • Letter 3605, Proposed tax deficiency (income tax) for discrepancy adjustments - 1st formal letter

    • Letter 3614, Proposed tax deficiency (Chapter 41 and 42 excise tax)

    • Letter 3619, Proposed tax deficiency (income tax) for discrepancy adjustments - 2nd Formal Letter, Tax Recomputed

    • Letter 3621, Proposed tax deficiency (income tax - UBIT, IRC 527, IRC 4947 Trusts, Taxable PFs)

  11. 30-day Letters - Proposed Disallowances of Claim or Abatement

    • Letter 3602, Proposed disallowance of claim in full or in part (any tax) - Notice of Claim Disallowance to follow after no reply

    • Letter 3602-B, Proposed disallowance of claim in full or in part, with additional tax (any tax) - Notice of Claim Disallowance to follow after no reply

    • Letter 5376, Proposed disallowance of claim in full or in part, with or without audit adjustment (employment tax)- Final letter after no reply

    • Letter 5182, Proposed disallowance of abatement request in full (employment tax) after audit reconsideration - Final letter after no reply

    • Letter 5183, Proposed disallowance of abatement request in part (employment tax) after audit reconsideration - Final letter after no reply

    • Exhibit 4.75.37-5, Proposed disallowance of IRC 4962 abatement request in full - Final letter after no reply

    • Exhibit 4.75.37-7, Proposed disallowance of IRC 4962 abatement request in part - Final letter after no reply

    • Exhibit 4.75.37-9, Proposed disallowance of abatement request in full (any tax) after audit reconsideration - Final letter after no reply

    • Exhibit 4.75.37-10, Proposed disallowance of abatement request in part (any tax) after audit reconsideration - Final letter after no reply

Terminology

  1. 30-day Letter – The official formal letter, serving as a transmittal for the formal report (RAR), that notifies a taxpayer of a proposed audit adjustment ("change" ) in tax, penalty or status, or of disallowance of a claim or request for abatement. The 30-day letter gives the taxpayer an opportunity to protest to Appeals if they don’t agree. The 30-day letter is required for all cases subject to declaratory judgment under IRC 7428 (agreed or not), and for all other proposed changes subject to appeal and unagreed. See Treas. Regs. 601.201(n)(6) for status changes; and IRC 7522(b)(3), IRC 7430(c)(2)(B), IRC 6603(d)(3)(B) and Treas. Regs. 601.105(d) for tax changes.

  2. Case – A case consists of the primary return for one year plus other returns involving interrelated interests or transactions that require concurrent audit. Other returns include returns subsequent and prior periods to the primary return period of the taxpayer, as well as returns for related taxpayers for the primary year, and subsequent and prior years.

  3. Closing Letter or Final Closing Letter – The final letter to a taxpayer under audit notifying them of the final audit results and the closing of the audit. Final Closing letters take the following forms:

    • No change or no-change advisory letter

    • Agreed tax change closing letter (preceded by issuing an initial or formal report)

    • Agreed disallowance of claim or abatement closing letter (preceded by issuing an initial or formal report)

    • Termination letter

    • Any 90-day letter (preceded by issuing an initial or formal report)

  4. Deficiency Procedures – The process of preparing, approving, issuing and holding a 90-day statutory notice of deficiency of tax in suspense. See Subchapter B of chapter 63 (including IRC 6211 to IRC 6216) of the Internal Revenue Code. With certain exceptions, EO Examinations must follow deficiency procedures before an audit assessment can be made. Deficiency procedures are generally preceded by a 30-day letter process at the group level, and an appeals process.

  5. Disqualification – A loss of tax-exempt status other than by revocation, for specified tax years for the following types of organizations:

    • Organizations that self-declared their tax-exempt status by filing an EO annual information return for specified tax years

    • IRC 501(c)(12) or (c)(15) organizations that failed their respective 85 percent member income test or gross receipts test for specified tax years

    • 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

  6. Draft Report – An agent’s optional tool or workpaper used to facilitate agreement on the facts, law and a taxpayer’s position. A draft report could take the form of a bulleted outline of key points. A draft report is a workpaper and isn't an official report and is not used as a basis for soliciting and securing a signed agreement.

  7. Formal Report or Formal Proposal – Consists of a 30-day letter and RAR, issued for all declaratory judgment cases under IRC 7428, and for all other audited change cases (or claim or abatement disallowances) that are unagreed.

  8. Imminent statute return – a return with 90 days or less remaining until the statute expiration date.

  9. Initial Report or Initial Proposal – Agent's optional preliminary report consisting of an Information Document Request (IDR) or similar transmittal and a summary RAR. This report requests an agreement to:

    1. Change in tax

    2. Status change

    3. Disallow a claim or request for abatement

    4. Correction in certain IRC Chapter 42 excise taxes

    Note:

    Don’t issue initial reports for:

    1. Church cases subject to IRC 7611.

    2. Declaratory judgment cases under IRC 7428. A formal report is still required even if the taxpayer agrees.

  10. Primary Returns – The annual information return under EO jurisdiction. This is the return around which other returns revolve. The primary return also serves as the return of record for statute purposes for certain related tax returns, such as Form 990-T. Primary returns include:

    • Form 990

    • Form 990-EZ

    • Form 990-PF

    • Form 990-BL

    • Form 5227

    • Form 1065

    Note:

    While not a return, Form 990-N is treated as a primary return for disposal code and principal issue code (PIC) purposes. Form 990-N is a non-return unit (NRU).

  11. Related Returns – Any return of the same taxpayer, without regard to audit jurisdiction. Discrepancy adjustment returns and Forms 4720-A filed by related persons are treated as related returns.

  12. Revenue Agents Report (RAR) – Your report proposing a change in tax, status or claim disallowance, which is also known as the "Audit Report." Every RAR for the following actions should include:

    Tax Issue: 30-Day Letter Agreement (Waiver) Form Report Form
    Status changes Letter 3618, or
    Letter 3620, or
    Letter 4700
    Form 6018 Form 4621-A
    Form 886-A
    Chapter 41 or 42 excise tax changes (or IRC 507(c) tax) Letter 3614 Form 860-E Form 4621
    Form 4883
    Form 886-A
    Income tax changes including UBIT (or Proxy Tax) - Formal Report Letter 3621 Form 870 Form 4549-A
    Form 886-A
    Employment tax changes Letter 950-C or
    Letter 950-D
    Form 2504, or
    Form 2504-S, or
    Form 2504-WC
    Form 4666
    Form 4668
    Form 4668-B
    Form 4667
    Form 886-A
    Gaming excise tax changes - Formal Reports Letter 950-E Form 2504-E Form 5385
    Form 886-A
    Disallowance of Claims and Abatements See table at Exhibit 4.75.15-2 See table at Exhibit 4.75.15-2 See table at Exhibit 4.75.15-2

    You may rescind an RAR and issue a corrected one. Discrepancy adjustments aren't "audits" . See IRM 4.75.28, EO Discrepancy Adjustments, for Form 4549-E, Income Tax Discrepancy Adjustments, use and the discrepancy adjustment process.

Signing and Issuing Letters

  1. The lowest level officials authorized to (1) place their own signature and "for" the EO Examination Director’s name on letters bearing the EO Exams Director’s signature block, or (2) use the EO Exams Director’s stamp are:

    1. Group managers

    2. Grade 12 reviewers

    Note:

    Signature stamps are high security (HS) items, and must be secured by the group manager. See IRM 1.4.6-2, Protectable Items.

  2. For correspondence rules in EO Exams, See Exhibit 4.75.15-11. Determine the appropriate address to include in the heading:

    If the letter is... Then use this address at the heading...
    Audit closing letters (not 30-day letters) issued by the audit group.
    MC 4900 DAL, 1100 Commerce St.,
    Dallas, TX 75242
    30-day letters issued by the audit group Agent’s mailing address
    90-day letters and other audit closing letters issued by Mandatory Review. MC 4920 DAL, 1100 Commerce St.,
    Dallas, TX 75242
    90-day letters or statutory notice of claim disallowance - with an imminent statute date Area Manager’s address
    All other correspondence Sender's mailing address
  3. The table below applies the EO Exam correspondence rules in Exhibit 4.75.15-11.

    Type of letter Heading Address Signature block Lowest Authority to Sign
    No audit after contact letters Agent’s address Director, EO Exams Group Manager
    No-change or advisory closing letters MC 4900 DAL Director, EO Exams Group Manager
    30-day letters
    See list at IRM 4.75.15.1.6
    Agent’s address Director, EO Exams Group Manager
    Rebuttal Letters
    (not part of a report)
    Letter 5326
    Agent’s address Agent Agent
    Agreed tax change closing letters

    MC 4900 DAL Director, EO Exams Group Manager
    Claim or abatement -allowance in full closing letters MC 4900 DAL Director, EO Exams Group Manager
    Claim or abatement -disallowance in full or in part closing letters - Agreed MC 4900 DAL Director, EO Exams Group Manager
    90-day letters - FADL Mandatory Review MC 4920 DAL Director, EO Exams Manager, Mandatory Review
    90-day letters - FADL
    Imminent Statute
    Area Office Director, EO Exams Manager, Mandatory Review
    (Area Office responsible for issuing and mailing)
    90-day letters
    • Stat Notice
    • NDWC
    Mandatory Review MC 4920 DAL Director, EO Exams Grade 12 reviewer
    90-day letters
    • Stat Notice
    • NDWC
    Imminent Statute
    Area Office Director, EO Exams Area Manager
    Statutory notices of claim disallowance, (Letters Letter 905 and Letter 906) - Unagreed Mandatory Review MC 4920 DAL Director, EO Exams Grade 12 reviewer
    Statutory notices of claim disallowance, (Letter 905 and Letter 906) - Unagreed
    Imminent Statute
    Area Office Director, EO Exams Area Manager
    Inadequate Records Notice, Letter 4095 MC 4900 DAL Director, EO Exams Group Manager
    Termination letters
    Exhibit 4.75.16-15
    Exhibit 4.75.16-16
    Mandatory Review MC 4920 DAL Director, EO Exams Grade 12 reviewer
    All other letters
    Generally Sender’s address
    Generally Sender Generally Sender
  4. A list of EO audit letters is provided at the intranet website titled Guidelines for Issuance of Letters.

  5. Don’t use nonstandard letters for official audit letters, unless:

    • An official letter is not available for the unique audit circumstance.

    • The group manager approves its use.

    • You or the group manager notifies Mandatory Review at *TEGE EO Review Staff.

  6. If you must use a nonstandard letter:

    • Use existing official letters as a guide for adopting language for the nonstandard letter.

    • Notify Mandatory Review’s mailbox at *TEGE EO Review Staff if you will use a nonstandard letter.

    • State in your email why you need to use a nonstandard letter.

    • If you prepared a draft nonstandard letter, attach the draft to the email to allow for pre-issuance review.

    • If a draft letter is not available, you can request Mandatory Review furnish you a letter.

  7. You are not required to print letters to be issued by Mandatory Review. Enter the letter number you want issued on Form 5772, and in the Mandatory Review section of Form 3198-A.

Types of Audit Results

  1. Close each audited return under EO jurisdiction using one of the audit results listed below.

    • No change

    • No change with advisory

    • No change with advisory, Form 5666 required

    • No change with advisory, Form 5666 required - Inadequate Records Notice

    • 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 (see IRM 4.75.25)

    • Termination of tax-exempt status (see IRM 4.75.16.5.10)

    • Change in tax

    • Allowance of a claim in full (see Exhibit 4.75.15-2)

    • Allowance of a claim in full - Surveyed Claim (while not an audit, it is closed using Form 5599)

    • Disallowance of a claim in full or in part (see Exhibit 4.75.15-2)

    • Disallowance of a claim in full or in part, plus additional tax or penalty (see Exhibit 4.75.15-2)

    • Withdrawal of claim

    • Allowance of an abatement request in full (see Exhibit 4.75.15-2

    • Disallowance of an abatement request in full or in part (see Exhibit 4.75.15-2

    • Disallowance of an abatement request in full or in part, plus additional tax or penalty (see Exhibit 4.75.15-2)

    • 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:

    Note:

    Advisories can include reference to secured delinquent returns, changes to related returns, miscellaneous civil penalties imposed and non-compliant issues of the organization.

  2. No Change – An audit resulting in no change to exempt status, foundation status, or tax liability, and there are no issues for which a written advisory is warranted.

  3. No Change With Advisory – An audit resulting in no change to exempt status, but has other issues for which a written advisory is warranted in an addendum to the closing letter. EO Examinations sends advisory letters only when auditing primary returns. Generally, a written advisory is appropriate when there are:

    1. Some aspect of an organization's activities or operations, if enlarged or ongoing, may jeopardize the organization's exempt status, such as a proposed expansion of an unrelated business income producing activity that could become a primary purpose for an IRC 501(c)(3) organization.

    2. Changes to tax addressed in separate reports.

    3. Tax change issues that are below tolerances.

    4. Identified delinquencies, imposition of penalties, and whether reasonable cause was established.

    5. Other compliance issues (not including status or tax change issues) which are appropriate to call to the attention of the organization.

    Example:

    (1) An organization agrees to an employment tax report where the organization failed to report bonuses paid to employees. Assuming the organization continues to qualify for tax-exempt status, close the Form 990 audit with an advisory item to the taxpayer to refer to a separate audit report on the agreed tax change.

    Example:

    (2) Include an advisory item to a IRC 501(c)(7) organization’s that public patronage of club facilities is at x percent of gross receipts, and if enlarged or ongoing, may jeopardize the organization's exempt status.

    Example:

    (3) Include advisories in the addendum for other compliance issues that didn't merit an adjustment but are appropriate to call to the attention to the organization, such as gift cards given to employees (a possible de minimis adjustment).

  4. Change Cases – Cases in which the audit 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 audit results are subject to review, such as changes to exempt status and foundation status. The signing of the 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 4.10.8.4, Excepted Agreed Cases.

    Example:

    You propose a revocation on a Form 990 audit 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 audit is excepted-agreed.

    Example:

    You propose a revocation on a Form 990 audit that is unagreed, but the organization agreed to additional unrelated business income tax 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 audit 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 audit as an alternative issue in a revocation RAR, whether the alternative Form 990-T issue was agreed or unagreed. See also IRM 4.75.31.9, Conversion of Returns Upon Revocation of Exemption, 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 unrelated business income tax 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.

  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. See IRM 4.75.15.1.6(3) for a list of waiver forms. 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. All unagreed with protest cases are subject to Mandatory Review. Unagreed without protest cases are also subject to Mandatory Review, except:

    • Non-worker classification employment tax adjustments

    • Gaming excise tax adjustments

    • Disallowance of abatement requests.

  9. 100 Percent Paperless Closings are allowed for the following disposal codes and RCCMS closing codes entered on the audit closing record (Form 5599) and RCCMS respectively:

    AIMS Disposal Code RCCMS Closing Code

    No Change
    • 02 - No Change

    • 53 - No Change to Related Return



    107
    302

    Regulatory/Revenue Protection Change
    • 01 - Regulatory/Revenue Protection (other than claims disallowed in full, source code 30, 31, and 32)

    • 19 - Amendment Secured



    210

    201
    Tax or Status Change
    • 03 - Agreed Tax or Penalty Change

    • 04 - Change to Related Return

    • 05 - Delinquent Related Return Secured

    • 06 - Delinquent Return Secured

    • 08 - Written Advisory - Form 5666 Required

    • 13 - Referrals to Other Operating Divisions

    • 52 - Written Advisory - No Form 5666 Required



    102
    205
    207
    208
    213
    501
    214
    Surveys
    • 31 - Surveyed Before Assignment

    • 32 - Surveyed After Assignment

    • 34 - Claims Allowed in Full (Surveyed)

    • 36 - Surveyed After Initial Contact



    910
    908
    103
    909
    In addition, AIMS allows a paperless closure for electronically filed returns (Filing Location Code 93). However, note that the "return requisition indicator" used by AMDISA will be incorrect and line 9 of page 2 will show "ELECTRONIC RETURN REQUESTED." Even with this incorrect indicator, the electronically filed return can be closed paperless as long as the case meets the other paperless criteria

    Penalty cases controlled only in RCCMS can also close paperless.

    See IRM 4.75.16.9.1, Paperless Closures for paperless closure procedures and exceptions.

No Change

  1. Close your case as a no change if there are no issues requiring a:

    • Change in exempt status.

    • Reclassification of foundation status.

    • Assessment of tax or penalty (income, employment, and excise).

    • An written advisory is not required.

  2. No change cases require the following conclusions:

    • The organization's activities are consistent with the purposes for which exemption was granted.

    • The foundation status remains unchanged (IRC 501 (c)(3) and IRC 4947 (a)(1) trusts only)

    • All significant return information is complete and correct.

    • You accept the applicable return as filed.

  3. Pure no change letters include the following:

    • Letter 5177, No change for a Form 990-N filer

    • Letter 5452, No change for tax-exempt organizations for a Form 990, 990-PF, 1065 filer

    • Letter 5452-A, No change for IRC 4947(a)(1) or 4947(a)(2) trust (Form 5227 Audit)

    • Letter 3622, No change (EO income tax) - UBIT, Proxy Tax, IRC 527, Form 1120, Form 1120-POL, Form 1041

    • Letter 5332, No change (any tax) after considering reply to a previously issued 30-day letter

    • Letter 5334, No change (any tax) after inspecting secured delinquent tax return

    • Letter 3592, No change (Chapter 41 or 42 excise tax)

    • Letter 3623, No change (Miscellaneous, gaming excise tax)

    • Letter 3381, No change (Employment tax)

    • Letter 4840, No change (Employment tax), except Unreported Tips

    • Letter 3264, Pre-notice for Employer Share of Tax due on Unreported Tips

    Note:

    See table at Exhibit 4.75.15-1, Closing Letters for No Change Cases.

  4. Group managers approve, sign and issue no change letters.

  5. See IRM 4.75.16, for further guidance on the closing procedures.

Written Advisory

  1. If an audit of a primary return results in no change to tax-exempt status (granted or self-declared), but there are issues for which a written advisory is appropriate:

    1. Prepare a no change advisory letter for the primary returns under audit.

    2. Prepare an addendum, that includes the advisory items.

    Note:

    In the case of auditing an IRC 501(c)(3) organization’s Form 990-series return or notice that results in a no-change to exempt status, but nevertheless results in a proposal to change the foundation or public charity status, you can issue an advisory Letter 3609, but you must choose Selectable Paragraph 2 of the letter if you are proposing to change the organization from a 990 filer to a 990-PF filer in your report of examination in IRM 4.75.15.8.2, Reclassification of Foundation Status. You must also include an advisory item in the addendum to Letter 3609 that makes reference to a separate report for a proposed change in foundation status. Issuing Letter 3609 does not make the foundation re-classification issue final. You are only advising the organization of a separate report proposing a change in status that may or may not be sustained.

  2. No change advisory letters include the following:

    • Letter 3609, No change advisory for organizations described under IRC 501(c), IRC 501(d), IRC 527(a) or IRC 4947

    • Letter 3609-P, No change advisory - focused audit on political campaign intervention by organizations described in IRC 501(c)(3)

    • Letter 4102, No change advisory for status 36 organization for specified tax year(s)

    Note:

    See also the table at Exhibit 4.75.15-1, Closing Letters for No Change Cases.

  3. Group managers approve, sign, and issue no change advisory letters.

  4. Prepare Form 5666 if you have an advisory item that discloses some aspect of an organization’s activities or operations, which if enlarged or ongoing, may jeopardize the organization’s exempt status.

  5. Significant weaknesses in an organization’s internal controls may indicate an increased risk of diverted funds for personal interests, which could result in loss of exempt status. If you find this, but the audit otherwise results in a no-change, consider issuing a written advisory.

  6. If an organization eligible to file Form 990-N refuses or is unable to file Form 990-N (or a primary return), or files an incomplete or inaccurate primary return, issue a written advisory. The advisory must state that failing to file a Form 990-N or a complete Form 990 for three consecutive tax years jeopardizes the organization's tax-exempt status. Cite IRC 6033(j) in the advisory.

  7. Include the following in each advisory paragraph regarding delinquent returns secured:

    1. Identify the delinquent return.

    2. Cite the law that requires the delinquent return.

    3. State whether we secured and accepted the delinquent return as filed.

    4. State whether we will impose delinquency penalties, or whether the taxpayer established reasonable cause.

    5. Cite the law that authorizes the penalty.

    6. If you impose a penalty, state "Please be sure to file your return when due to avoid a penalty in the future."

    7. If the taxpayer established reasonable cause, state, "There may be a penalty if your return isn't filed when due for the same reason in a future year."

  8. Include the following, whichever applies, in each advisory paragraph regarding refusal to file a delinquent return, or an adjustment on a related return and a separate report for the tax.

    1. A substitute for return under IRC 6020(b) was prepared for the nonfiled tax return, and is reflected in a separate report.

    2. An adjustment to tax reported on a related return (state the return) is reflected in a separate report.

    3. An adjustment to tax reported on a secured delinquent return is reflected in a separate report.

    4. State whether the proposed tax was agreed, partially agreed, or unagreed, with or without protest.

  9. Include the following in each advisory paragraph regarding issues other than delinquent returns:

    1. Identify the noncompliant issue.

    2. Cite the law that requires compliance.

    3. Whether the taxpayer corrected the noncompliant issue.

    4. Whether we will impose a penalty, or whether the taxpayer established reasonable cause.

    5. Cite the law that authorizes the penalty.

    6. Whether the noncompliant issue jeopardizes tax-exempt status if it is expanded or enlarged, make a statement to that effect.

  10. See Exhibit 4.75.15-1, Closing Letters for No Change Cases, for the appropriate advisory letters.

  11. Group managers approve and issue no change letters.

  12. Use the following disposal codes for the closing record for primary returns under audit, Form 5599 and RCCMS for written advisories, unless a higher priority disposal code applies:

    • Disposal code 52 (214) to close a no change advisory case

    • Disposal code 08 (213) and prepare Form 5666 for a future audit if an activity, if expanded or enlarged, could jeopardize exempt status

  13. See IRM 4.75.16, Case Closing Procedures, for further guidance.

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 are required to prepare an examination report or "revenue agent’s report" or (RAR) for proposed adjustments. You can prepare an initial report or a formal report. See IRM 4.75.15.9 and IRM 4.75.15.10 respectively. Initial reports don’t apply to declaratory judgment cases.

  3. The transmittal letter for the RAR solicits agreement to the proposal. For formal 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 4.75.15-2 and Exhibit 4.75.15-3 for the many variations.

  5. You must distinguish an examination report from a final closing letter that officially closes the audit. Final closing letters issued by group managers after proposed adjustments are listed in IRM 4.75.15.1.6(7) and (8).

    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 employment taxes.

    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 adjustments 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 audit prior to preparing any RAR. Address your issues in the RAR in the order of significance.

    Example:

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

    See Exhibit 4.75.15-7 for the completion instructions.
    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

    See Exhibit 4.75.15-8 for the completion instructions.
    Form 2297

    Use for every claim disallowance.
    Waiver of Statutory Notification of Claim Disallowance

    See IRM 4.10.8.9.4.1 for the completion instructions.
    Form 2504

    Use to secure agreement on employment tax adjustments, involving non IRC 7436 issues.
    Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment

    See IRM 4.23.10–5 for the completion instructions.
    Form 2504-E

    Use to secure agreement on gaming excise taxes.
    Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (Excise Tax)

    See IRM 4.24.10 for additional information.
    Form 2504-S

    Use to secure agreement on employment tax adjustments when the audit didn't include an audit of any worker classification issue.
    Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including Section 530 statement)

    See IRM 4.23.10-6 for the completion instructions.
    Form 2504-WC

    Use to secure agreement on employment tax adjustments relating to IRC 7436 issues of worker classification and Section 530.
    Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases

    See IRM 4.23.10-7 for the completion instructions.
    Form 3363

    Use for every claim disallowance.
    Acceptance of Proposed Disallowance of Claim for Refund or Credit

    See IRM 4.10.8.9.5.1 for the completion instructions.
    Form 4549

    Use with initial report for agreed income tax cases.
    Income Tax Examination Changes

    See Exhibit 4.75.15-9 for the completion instructions.
    Form 4549-E

    Use to secure agreement in discrepancy adjustment cases.
    Income Tax Discrepancy Adjustments

    Refer to Exhibit 4.75.15-9 for the completion instructions for Form 4549. The instructions are substantially the same.
    Form 5384
    Use:
    • To secure agreement on excise tax cases.

    • When auditing Forms 720, 720-X, 2290, 730, 11-C, 8849 and any other excise tax form.


    Excise Tax Examination Changes and Consent to Assessment & Collection

    See IRM 4.24.10-1 for the completion instructions.
    Form 6018

    Use for IRC 7428 declaratory judgment cases.
    Consent to Proposed Action

    See Exhibit 4.75.15-10 for the completion instructions.
  9. Report forms summarizing the adjustments:

    Form Number/Purpose Title
    Form 886-A
    Use for:
    • Unagreed cases.

    • Revocation cases.

    • Reclassification of foundation status cases.

    • Reclassification of operating foundation status cases.

    Explanation of Items

    See IRM 4.75.15.7.1 for a further explanation.
    Form 4549–A

    Use to explain unagreed income tax change cases.
    Income Tax Examination Changes (Unagreed and Excepted Agreed)

    See Exhibit 4.75.15-9 for the completion instructions for Form 4549. The instructions are substantially the same.
    Form 4549-B

    Use as a continuation sheet for Form 4549 or Form 4549-A.
    Income Tax Examination Changes

    See IRM 4.75.15.7.4 for an explanation of Form 4549–B.
    Form 4621

    Use to summarize excise tax adjustments under IRC:
    • Chapter 41, Chapter 42.

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

    Exempt Organizations - Report of Examination (Proposed Tax Changes)

    See IRM 4.75.15.7.5 for an explanation and the completion instructions.
    See Exhibit 4.75.15-4 for an explanation and the completion instructions.
    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 4.75.15.7.5 for an explanation and the completion instructions. See also Exhibit 4.75.15-5.
    Form 4666
    • Use as a cover and reference sheet.

    • Summarizes FICA, RRTA, income tax withholding and FUTA adjustments.

    Summary of Employment Tax Examination

    See IRM 4.23.10-1 for the completion instructions.
    Form 4667

    Use to summarize the FUTA adjustments.
    Examination Changes - Federal Unemployment Tax

    See IRM 4.23.10-2 for the completion instructions.
    Form 4668

    Use to reflect the additional tax or overassessments for FICA, RRTA, and income tax withholding.
    Employment Tax Examination Changes Report

    See IRM 4.23.10-3 for the completion instructions.
    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 Forms 1099 and W-2G

    See IRM 4.23.10-4 for the completion instructions.
    Form 4883
    Use for:
    • Excise tax adjustments under IRC Chapters 41 and 42.

    • IRC 170(f)(10)(F).

    Exempt Organizations Excise Tax Audit Changes

    See Exhibit 4.75.15-6 for the completion instructions.
    Form 5385
    Use:
    • As a excise tax report for unagreed cases.

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


    Excise Tax Examination Changes

    See IRM 4.24.10-1 for the completion instructions.

Form 886-A

  1. Form 886-A, Explanation of Items, is mandatory for:

    1. Unagreed cases.

    2. Agreed revocation cases.

    3. Agreed reclassification of foundation status cases.

    4. Agreed modification of operating foundation status cases.

    5. Other agreed issues where the explanation doesn’t fit in the space provided on the forms listed in IRM 4.75.15.7(5).

  2. Use Form 886-A to explain audit changes. Prepare it as an attachment to the waiver/agreement or the basic report forms described in IRM 4.75.15.7.

  3. Form 886-A consists of six elements:

    • Issues

    • Facts

    • Law

    • Taxpayer's Position

    • Government's Position

    • Conclusion

Issues
  1. The issue section lists the questions that the report intends to answer. This section informs the reader about the issues or proposed changes.

  2. State each issue clearly and precisely.

  3. RARs may contain one or more issues, including alternative issues.

  4. State alternative issues as options in the event that Mandatory Review, Appeals, or Counsel doesn’t uphold the primary issues. See IRM 4.75.15.7.1.7, Alternative Position.

  5. 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:

    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?

    Example:

    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?

  6. The advantage tiered issue statements is that the report addresses each aspect of the case and build a conclusion. The concept is similar to a syllogism: If A = B and B = C, then A = C. The advantages include:

    • Avoiding missing required elements.

    • Building upon earlier statements.

    • Clarifying the issues.

    • Dividing the issue into parts.

    • Ease of reading.

    • Less complicated.

Facts
  1. 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.

  2. The fact section contains the facts identified during the audit. 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.

  3. Things to consider when writing the facts:

    1. Is this fact supported by testimony or a document?

    2. Is the statement neutral or does it show bias?

    3. Have I attributed reasons for an action?

    4. Are the calculations mine or the taxpayer’s?

    5. Have I reported just the facts?

    6. Was the statement written in a factual manner?

    7. Will my statement of fact be disputed?

  4. Facts include:

    1. Items written by the taxpayer or representative that don't include the taxpayer's arguments.

    2. Any third party records referencing the taxpayer.

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

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

    5. 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.

Law
  1. 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.

  2. IRM 4.75.13, Issue Development and Conclusion, explains the types of law you can cite and how to cite it.

  3. Don’t cite the following types of documents:

    1. Private Letter Rulings (PLR).

    2. Technical Advice Memoranda (TAM).

    3. General Counsel Memoranda (GCM).

      Exception:

      Cite it if the ruling/memo is for your case.

  4. To use a PLR, TAM or GCM in a case:

    1. Modify the issue statements to be similar.

    2. Identify differences between the fact patterns.

    3. Cite the law cited in the document.

    4. Apply the analysis in the government’s position.

    5. Incorporate its conclusion into the conclusion.

  5. You don’t need to recite the law in full. Research the revenue rulings, revenue procedures, private letter rulings, tech advice memos, the field service advice, and general counsel memos 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.

    Example:

    IRS Letter Ruling 201049046 (Sep. 15, 2010) states "Section 501(c)(3) of the Code provides for the exemption from federal income tax of corporations organized and operated exclusively for charitable and other exempt purposes." Copy and paste the brief quotation into the law section. Don't cite the ruling itself.

Taxpayer's Position
  1. The taxpayer's position consists of any statements made by the taxpayer or representative with respect to the issues.

  2. For initial reports, state the taxpayer’s position, if known, in narrative form, including the legal authority, if any, that the taxpayer uses as the basis for their position. If unknown, type "The taxpayer's position on the issues is unknown."

  3. Subsequent reports must include the text of any replies. If the taxpayer provided a written position statement, include the entire statement in this section if the written statement is brief. Otherwise, summarize the statement and include the entire document in the audit report as an exhibit.

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

  2. In the government's position, prepare and present:

    1. A separate argument for each issue.

    2. An opinion as to the facts.

    3. Any tax computations.

    4. Interpretations of the law with respect to the issues.

    5. The suggested outcome.

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

  3. When preparing the report:

    1. Copy and paste the issue statements into the start of the government’s position.

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

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

    Example:

    See TAM 200243057 for an example of an IRC 4958 case, as presented over the course of 17 issues. TAM’s are not citable as legal precedent.

Conclusion
  1. The conclusion is a brief restatement of the IRS's position.

  2. 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.

Alternative Position
  1. Consider whether to develop an alternative position.

  2. If proposing revocation and the Form 990-T, Exempt Organization Business Income Tax Return, is also open for audit, develop the alternative position for the Form 990-T. See IRM 4.75.31.13, Effect on Form 990-T and Other EO Tax Examinations.

  3. In all other revocation situations, indicate in your workpapers that you considered alternative positions, such as UBIT.

  4. Present the alternative position at the end of Form 886-A 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.

Form 870 and Form 870-E

  1. Issue Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, in a formal 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 Chapter 42 of the Internal Revenue Code.

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

  4. Correction of Erroneous Reports - If you find an error in a report already issued to a taxpayer:

    1. Prepare a corrected report and write "Corrected Report" at the top of Form 870 or Form 870–E.

    2. If the adjustment is in favor of the Government, the taxpayer must sign the corrected report for an agreed closure.

    3. If the adjustment is in favor of the taxpayer, the taxpayer doesn’t need to sign the corrected report.

    4. Provide the original and corrected report to the taxpayer.

    5. Place copies of both reports in the case file.

    6. If the taxpayer disagrees with the corrected report, apply unagreed case procedures.

  5. See Exhibit 4.75.15-7 for Form 870 and Exhibit 4.75.15-8 for Form 870-E preparation instructions.

  6. See Exhibit 4.75.15-8 for Form 870-E preparation instructions.

Form 6018

  1. Issue Form 6018, Consent to Proposed Action, for any change in the exemption or other status of the organization.

    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 private foundation 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 private foundation to a public charity status. See IRC 507.

    Note:

    A reclassification of

  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 private foundation, use one Form 6018.

  5. Under no circumstances will 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.

  7. See Exhibit 4.75.15-10 for Form 6018 preparation instructions.

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. Normally, use the form for the initial report only, and 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 audited. In such cases, notify the taxpayer of, or secure his agreement to any adjustments, which affect subsequent year returns of the taxpayer.

    Example:

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

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

  6. Correction of Erroneous Reports - If you find an error in a report already issued to a taxpayer:

    1. Prepare a corrected report and write "Corrected Report" at the top of Form 4549 or Form 4549-A.

    2. In the "Other Information" section of the corrected report, insert the comment: "This report supersedes report dated (enter applicable date)."

    3. If the adjustment is in favor of the Government, the taxpayer must sign the corrected report for an agreed closure.

    4. If the adjustment is in favor of the taxpayer, the taxpayer doesn’t need to sign the corrected report.

    5. Provide the original and corrected report to the taxpayer.

    6. Place copies of both reports in the case file.

    7. If the taxpayer disagrees with the corrected report, apply unagreed case procedures.

  7. Form 4549-B, Income Tax Examination Changes, is a continuation sheet for Form 4549 and Form 4549-A. Use it when you have more adjustments than there are lines on Form 4549 and Form 4549-A.

  8. Form 4549-E, Income Tax Discrepancy Adjustments, is used to explain income tax changes for discrepancy adjustments. The preparation of Form 4549–E is substantially the same as the preparation of Form 4549. Refer to Exhibit 4.75.15-9 for those instructions.

  9. Include a schedule with the applicable Form 4549 to show the tax computations.

  10. See Exhibit 4.75.15-9 for Form 4549 or Form 4549-A preparation instructions.

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 Chapter 41 and Chapter 42 of the IRC.

    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. Refer to Exhibit 4.75.15-4 for Form 4621 preparation instructions.

  4. 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 private foundations seeking to convert to publicly supported organizations. Private foundations 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 private foundation, use one Form 4621-A. The RAR can address both issues.

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

  6. Refer to Exhibit 4.75.15-5 for Form 4621-A preparation instructions.

Form 4883

  1. Use Form 4883, Exempt Organizations Excise Tax Audit Changes (Chapter 41, Chapter 42 and Section 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 4955 tax on political expenditures of IRC 501(c)(3) organizations Form 4720
    IRC 4958 tax on excess benefit transactions Form 4720
    IRC 507(c) termination tax for private foundations A letter to the Manager, Exempt Organizations 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:

    • The private foundation or other exempt organization.

    • Disqualified persons.

    • Self-dealers.

    • Organization managers.

    • Foundation managers.

  3. Don’t use Form 4883 for gaming excise taxes. See IRM 4.24.10, Appeals Referral Procedures, for report writing procedures in gaming excise tax cases.

  4. See Exhibit 4.75.15-6 for Form 4883 preparation instructions.

Installment Agreements

  1. If the taxpayer makes a request for an installment agreement. For procedures Refer to IRM 4.75.28.4.4, Installment Agreement Procedures.

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:

    • Form 3198-A, annotated "Partial Assessment Requested" and in the Other Instructions section, "Return via fax when completed."

    • Form 5599, Place a check in Box B, Partial Agreement, and enter the letter “F” in P1-6 CC AMCLS. See IRM 4.5.2.3.1.2 for more instructions on completing Form 5599 for the partial assessment requested.

    • 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 3621 for UBIT and other EO income taxes).

  6. In the case of excise and employment taxes, use the appropriate report forms corresponding to Form 4549-A and Form 870 used for income taxes. See report forms in Exhibit 4.75.15-3.

  7. Final disposition of the case will require:

    1. A second Form 5599 and will follow normal closing procedures. See IRM 4.5.2.3.1.2(8) for additional instructions.

    2. A second Form 3198-A for the case file indicating "Partial Agreement Case - Agreed Tax Previously Assessed."

Types of Status and Tax Changes

  1. Audits can result in several types of adjustments, including but not limited to:

    1. Revocations (declaratory judgment case)

    2. Disqualifications (declaratory judgment case)

    3. Reclassifications of Foundation Status (declaratory judgment case)

    4. Modifications of Operating Foundation Status (declaratory judgment case)

    5. Change in Income Taxes - Unrelated Business Income Tax (UBIT) or Political Organization Income Tax under IRC 527 (b).

    6. Change in Income Taxes - Discrepancy Adjustments

    7. Change in Income Taxes - Converted Returns

    8. Change in Proxy Taxes

    9. Change in Chapter 41 or 42 Excise Taxes

    10. Change in Gaming Taxes

    11. Change in Employment Taxes

  2. See IRM 4.75.16.5.1, Declaratory Judgment Cases.

  3. See IRM 4.24.10, Appeals Referral Procedures, for gaming taxes.

  4. See IRM 4.75.28, EO Discrepancy Adjustments, for discrepancy adjustments.

  5. See IRM 4.75.31, Conversion of Returns.

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 4.75.16.5.2.

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

    Audit 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 reports only, issued by group
    • Letter 3618, 30-day letter
    • Form 6018, at Line 1
    • Form 4621-A
    • Form 886-A
    • Pub 892
    • Pub 3498
    Final Closing Letter issued by Mandatory Review or Appeals
    • 90-day Final Adverse Determination Letter (FADL)
    Revocations -
    • All other 501(c) or (d)


    for specified tax years
    Formal 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 Final Adverse Determination Letter (FADL)
  3. If an organization fails to qualify for tax-exempt status, send the 30-day proposed revocation letter and revenue agent report (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 4.75.15.10(10).

  4. For IRC 501(c)(3) revocations only, follow the instructions for IRC 6104(c) notification of certain States in IRM 4.75.21.10.2.1.

  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 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 final adverse determination letter 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 4.75.15.12 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 audit.

  8. Refer to the following references:

    • See also Exhibit 4.75.15-3 for the various report forms and letters.

    • Refer to IRM 4.75.15.10, for more details on the formal report process.

    • See IRM 4.75.13.8.1 for an explanation of revocations and effective dates.

    • See IRM 4.75.13.8.5, Effective date in IRC 7805(b) Relief Cases.

    • See IRM 4.75.31.2 for revocation procedures in the context of converted returns and bringing an organization current on tax obligations for the affected tax years.

    • See IRM 4.75.32, Declaratory Judgment Cases and the Administrative Record.

    • See IRM 4.75.15.8.10.3, 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 disposal code applies:

    1. Disposal Code 09 (211) for agreed revocations

    2. Disposal Code 07 (601) for unagreed revocations with protest.

    3. Disposal Code 55 (605) for unagreed revocations without protest

    4. Disposal Code 15 (602) for unagreed revocations of church

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. 2017--2 (updated annually).

    Note:

    In the case of auditing an IRC 501(c)(3) organization’s Form 990-series return or notice that results in a no-change to exempt status, but nevertheless results in a proposal to change the foundation or public charity status, you can issue an advisory Letter 3609, but you must choose Selectable Paragraph 2 of the letter if you are proposing to change the organization from a 990 filer to a 990-PF filer in your report of examination. You must also include an advisory item in the addendum to Letter 3609 that makes reference to a separate report for a proposed change in foundation status. You are only advising the organization in Letter 3609 of a separate report proposing a change in status that may or may not be sustained.

  3. A reclassification of foundation status is subject to declaratory judgment under IRC 7428. Rev. Proc. 2017-5, section 5.02 (updated annually). It includes:

    • Reclassification from one type of publicly supported organization to another type.

    • Reclassification from a publicly supported organization to a private foundation.

    • 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 audit, obtain approval from the group manager before expanding the audit. If the audit is not expanded to the prior tax years, the effective date of foundation reclassification is the first day of the first tax year under audit. See IRM 4.75.13.8.5, Effective date in IRC 7805(b) Relief Cases.

  5. In the case of reclassifying a IRC 170(b)(1)(A)(vi) or 509(a)(2) organization to a private foundation, 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 private foundation status (such as IRC 509(a)(3)).

  6. In the case of reclassifying a IRC 170(b)(1)(A)(vi) or 509(a)(2) organization to a private foundation, 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 private foundation 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 private foundation for all purposes.

  7. Reclassifying a public charity to a private foundation constitutes a conversion of Form 990 to a tax return (Form 990-PF). Conversions are covered by IRM 4.75.31. Basic instructions on reclassifying a publicly supported organization to a private foundation are as follows:

    • Prepare a formal audit report for the foundation reclassification issue in the Form 990 audit. See paragraph (8).

    • Either solicit Form 990-PF if the foundation reclassification is agreed, or prepare an SFR reporting IRC 4940 tax initially established on NMF for a Form 990-PF adjustment. See instructions at IRM 4.75.31.3 for filed converted returns, and IRM 4.75.31.4 for SFR 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 Form 4720-A must be imposed, follow report procedures in IRM 4.75.15.8.6(3).

    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 provided in IRM 4.75.31.4. This process is generally the same for converted Forms 1120 or 1041, replacing Form 990-PF for Forms 1120 /1041 wherever it occurs, and replacing "foundation reclassification" for "revocation" wherever mentioned. Don’t refer any private foundation, exempt or taxable, to SB/SE.

  8. Use the following letters and forms when preparing a formal report for reclassifying a foundation or public charity status:

    Audit 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 Apepals
    • 90-day Final Adverse Determination Letter (FADL)
  9. If the organization’s foundation status must be changed, send a 30-day letter (Letter 3620) and revenue agent report (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 4.75.15.10(10).

  10. 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 final adverse determination letter if Form 6018 is signed.

  11. 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 4.75.15.12 for preparing a rebuttal.

  12. 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, although you can issue a Letter 3609 informing the organization that it continues to maintain its exempt status and to refer to the separate report on the foundation reclassification issue.

  13. If you are examining a non-operating foundation contending to be an operating foundation on Form 990-PF, and..

    Private Operating Foundations
    If the EO: Then:
    Qualifies as an operating foundation for the tax year (and will continue to so qualify)
    • Issue an advisory to 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, issue an advisory that failing to file a complete and accurate Form 990-PF jeopardizes the organization's tax-exempt status, and could result in delinquency penalties.

    • Prepare Form 5666 for a future audit. See IRM 4.75.22.5 for processing amended returns.

    Reminder:

    Consider the existence of fraud before soliciting any return. See IRM 4.75.35.

  14. Refer to the following references:

    • See also Exhibit 4.75.15-3,for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.75.15.10, for more details on the formal report process.

    • See IRM 4.75.13.8.4, Issue Development and Conclusion for additional information on reclassifications

    • See IRM 4.75.13.8.5, Effective date in IRC 7805(b) Relief Cases.

    • See IRM 4.75.31.2, Conversion of Returns, Proposed Adverse Status Change

    • See IRM 4.75.32, Declaratory Judgment Cases and the Administrative Record.

  15. 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. Disposal Code 17 (203) for agreed reclassifications of foundation status

    2. Disposal Code 07 (601) for unagreed reclassifications of foundation status if protested

    3. Disposal Code 10 (604) for unagreed reclassifications of foundation status without protest.

    4. Disposal Code 15 (602) for unagreed reclassifications of foundation status of a church

Disqualifications

  1. 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 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. 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.

  3. A status 36 organization is an organization 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), and

    • Not having received a favorable ruling or determination letter granting tax-exempt status.

  4. 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.

  5. Use the following letters and forms when preparing a formal report for disqualifications:

    Audit 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 Final Adverse Determination Letter (FADL)
    Disqualifications -
    • IRC 501(c)(12)
    • IRC 501(c)(15)
    for specified tax years
    Formal reports only, issued by the group.
    • Letter 4700, 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 Final Adverse Determination Letter (FADL)
  6. 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 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 4.75.15.10(10).

  7. 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 final adverse determination letter if Form 6018 is signed.

  8. 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 4.75.15.12 for preparing a rebuttal.

  9. 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 audit.

  10. Refer to the following references:

    • See Exhibit 4.75.15-3 for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.75.15.10, for more details on the formal report process.

    • See IRM 4.75.13.8.2, Disqualification of Tax-Exempt Status

    • See IRM 4.75.16.5.9, Status 36 Cases for specific procedures.

    • See IRM 4.75.31.2 for disqualification procedures in the context of converted returns and bringing an organization current on tax obligations for the affected tax years.

    • See IRM 4.75.32, Declaratory Judgment Cases and the Administrative Record.

    • See IRM 4.76.7, Exempt Organizations Examination Guidelines - Church Tax Inquiries and Examinations - IRC 7611.

  11. 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. Disposal Code 13 (501) for agreed disqualifications if you are referring the organization to SB/SE or LB&I (no converted return process).

    2. Disposal Code 04 (205) or 05 (207) for agreed disqualifications if you are enforcing income taxes through a converted tax return process.

    3. Disposal Code 07 (601) for unagreed disqualifications if protested.

    4. Disposal Code 10 (604) for unagreed disqualifications without protest.

    5. Disposal Code 15 (602) for unagreed disqualification of a church not recognized as tax-exempt (church without a ruling or determination letter).

Unrelated Business Income Tax (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 4.75.22 for delinquent return procedures. See IRM 4.75.15.5 for no change advisory 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 unrelated business income tax or any other income tax required of Exempt Organizations and IRC 4947 trusts:

    Audit Result Type of Report Report Forms and Letters
    Change to EO Income Taxes - Exempt Organizations, taxable private foundations, 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 reports only), or
    • Letter 3621, 30-day letter

    • Form 4549, for initial reports only
    • Form 870, for formal reports only
    • Form 4549-A, for formal 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 3607, and
    • Copy of Signed Waiver Form
    or
    • Letter 5332, or
    • Letter 5334
    (issued by the group)
    Unagreed Closing Letter
    • 90-Day Statutory Notice of Deficiency, (issued by Mandatory Review or Appeals)
    Change in Income Taxes - Converted Tax Returns
    • Form 1120
    • Form 1041
    Report
    • Letter 950, 30-day letter
    • Form 870
    • Form 4549-A
    • Form 886-A
    • Pub 3498
    • Pub 594
    (issued by the group)
    Agreed Closing Letter
    • Letter 3607, and
    • Copy of Signed Waiver Form
    (issued by the group)
    Unagreed Closing Letter
    • 90-Day Statutory Notice of Deficiency, (issued by Mandatory Review or Appeals)
    Change in Income Taxes - Discrepancy Adjustments
    • Form 1040
    • Form 1120
    Report
    • Letter 3605, 30-day letter, 1st Formal report,
    then if necessary:
    • Letter 3603, 30-day letter, 2nd Formal report, or
    • Letter 3619, 30-day letter, 2nd Formal report

    • Form 4549-E, with any letter above
    • Form 886-A, with any letter above
    (issued by the group)
    Agreed Closing Letter
    • Letter 3607, and
    • Copy of Signed Waiver Form
    (issued by the group)
    Unagreed Closing Letter
    • 90-Day Statutory Notice of Deficiency, (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 3621) 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 4.75.15.10(10).

  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 3607. Close the case to 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 4.75.15.12 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 statutory notice of deficiency (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 audit, issue a separate advisory letter to the exempt organization that makes reference to the RAR for the tax change.

  13. Refer also to the tables in the following exhibits:

    • See Exhibit 4.75.15-2 for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.75.15-3 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 4.75.15.9 for more details on the initial report process.

    • Refer to IRM 4.75.15.10 for more details on the formal report process.

    • See also IRM 4.75.28, EO Discrepancy Adjustments.

    • See also IRM 4.75.31, Conversion of Returns Upon Revocation of Exemption.

  14. Close all agreed tax changes to the EO Closing Unit, and 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. Disposal Code 03 (102) for agreed tax changes.

    2. Disposal Code 07 (601) for unagreed tax changes if protested.

    3. Disposal Code 10 (604) for unagreed tax changes without protest.

Employment Taxes

  1. In general, follow IRM 4.23.10, Report Writing Guide for Employment Tax Examinations.

  2. Refer also to the tables in the following exhibits:

    • See Exhibit 4.75.15-1 for a list of no-change and advisory closing letters.

    • See Exhibit 4.75.15-2 for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.75.15-3 for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.75.15.9 for more details on the initial report process.

    • Refer to IRM 4.75.15.10 for more details on the formal report process.

  3. Close all agreed tax changes and unagreed tax changes without protest (non-worker classification only) to the EO Closing Unit. Close all other 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. Disposal Code 03 (102) for agreed tax changes.

    2. Disposal Code 07 (601) for unagreed tax changes if protested.

    3. Disposal Code 10 (604) for unagreed tax changes without protest.

    4. Disposal Code 01 (21) for any tax period accepted as filed as a result of a CSP offer. See IRM 4.75.16.5.3.

Private Foundation Excise Taxes

  1. Private foundations report their Chapter 42 excise taxes on Form 4720 (MFT 50). Disqualified persons use Form 4720 (MFT 66), also commonly referred to by name 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 4.75.15-14, 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

    Audit 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, 30-day letter

    • 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 3607, and
    • Copy of Signed Waiver Form
    (issued by the group)
    Unagreed Closing Letter
    • 90-Day Statutory Notice of Deficiency, (issued by Mandatory Review or Appeals)
  4. If you identify a Chapter 42 excise taxable event (other thanIRC 4940 or IRC 4948), send a Thorne letter requesting the foundation or disqualified person to fully correct the acts or failure to act before you prepare a formal report. See an example of a Thorne letter at IRM Exhibit 4.76.4-16. Consult with Area Counsel 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-Eand 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 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 audit 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 year(s)

    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 4883.

  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 4.75.15.7.2 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 4.75.15.10(10).

  13. Follow the instructions for IRC 6104(c) notification of certain States in IRM 4.75.21.10.3.

  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 3607. Close the case to 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 4.75.15.12 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 statutory notice of deficiency (90-day letter) if they agree with your adjustment.

  19. If in connection with a tax change, you have a primary return (or e-Postcard) also under audit, issue a separate advisory letter to the private foundation 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 4.75.15-2 for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.75.15-3 for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.75.15.9 for more details on the initial report process.

    • Refer to IRM 4.75.15.10 for more details on the formal report process.

    • See IRM 4.75.21.10.3, 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. Disposal Code 03 (102) for agreed tax changes.

    2. Disposal Code 07 (601) for unagreed tax changes if protested.

    3. Disposal Code 10 (604) for unagreed tax changes without protest.

Non-Private Foundation Excise Taxes

  1. IRC Chapters 41 and 42 imposes several excise taxes on entities other than private foundations. The IRC imposes some of these taxes on specified exempt organizations and some on their disqualified persons and organization managers. See Exhibit 4.75.15-15, 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

    Audit 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, 30-day letter

    • 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 3607, and
    • Copy of Signed Waiver Form
    (issued by the group)
    Unagreed Closing Letter
    • 90-Day Statutory Notice of Deficiency, (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. See an example of a Thorne letter at IRM Exhibit 4.76.4-16. Consult with Area Counsel 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-Eand, 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 audit 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 year(s)

    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-E for excise tax adjustments. See IRM 4.75.15.7.2 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 3607. Close the case to 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 4.75.15.12 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 statutory notice of deficiency (90-day letter) if they agree with your adjustment.

  17. If in connection with a tax change, you have a primary return (or e-Postcard) also under audit, issue a separate advisory letter 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 4.75.15-2 for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.75.15-3 for a list of the formal 30-day letters, report forms, and closing letters in general.

    • Refer to IRM 4.75.15.9 for more details on the initial report process.

    • Refer to IRM 4.75.15.10 for more details on the formal report process.

    • See IRM 4.75.21.10.3, 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. Disposal Code 03 (102) for agreed tax changes.

    2. Disposal Code 07 (601) for unagreed tax changes if protested.

    3. Disposal Code 10 (604) for unagreed tax changes without protest.

Nonexempt Charitable Trusts

  1. Refer to Rev. Proc. 83-32, 1983-1 C.B. 723, for the various filing requirements of both NECTs and split-interest trusts.

  2. Nonexempt charitable trusts (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. If you are auditing any IRC 4947 trust (Form 990, Form 990-PF or Form 5227), and the audit results in a no change, issue Letter 5452-A for the audit of that return. See Exhibit 4.75.15-1 for a list of no-change and advisory closing letters.

    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 5452-A pure no change, or

    • Letter 3609 advisory (either without a selectable paragraph, or with selectable paragraph 3)
  5. If you are auditing Form 990, Form 990-PF or Form 5227, and the audit results in written advisory, issue Letter 3609 (either without a selectable paragraph, or with selectable paragraph 3) for the audit of that return if you determine the trust has:

    1. Engaged in acts that could subject the trust to a Chapter 42 excise tax.

    2. Failed to provide the information required by IRC 6033.

    3. Filed an incomplete return.

    4. Failed to fully disclose its various income sources.

      Example:

      A trust combines dissimilar types of income, and reports the aggregate as a single amount on the return.

    5. Secured a delinquent Form 1041 or Form 4720, accepted as filed, with our without establishment of reasonable cause.

    6. Secured a delinquent Form 1041 or Form 4720, and you have further adjusted the tax in a separate audit report.

    7. Secured other information returns, with or without establishment of reasonable cause.

    8. Prepared a substitute for return Form 1041 or Form 4720, with adjustments reported in a separate audit report for those returns.

    9. Noted some other compliance problem which doesn't cause a tax change for the trust but should be called to the trustee’s attention, such as self-dealing.

  6. 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 private foundation 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).

  7. 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 4.75.15.8.4. 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 audit of a Form 1041 results in no change to income tax, prepare Letter 3622 for the audit 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 of the Code 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 4.75.15.8.4 for Form 1041 adjustments.

  8. If an NECT doesn't meet the requirements for IRC 509(a)(3) as a supporting organization, reclassify the NECT to a private foundation. Follow the instructions in IRM 4.75.15.8.2.

    • 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 private foundations for Chapter 42 purposes.

  9. If you identify a Chapter 42 taxable event, based on Rev. Proc. 83-32, follow the instructions in IRM 4.75.15.8.6.

  10. Split-interest trusts are:

    • Not subject to IRC 4942 tax.

    • Limited in the application of IRC 4943 and 4944 tax by IRC 4947(b)(3).

    • Limited in the application of IRC 507(a) by IRC 4947(b)(4).

  11. For the disposal codes used for foundation reclassifications, see IRM 4.75.15.8.2(16).

  12. 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. Disposal Code 03 (102) for agreed tax changes.

    2. Disposal Code 07 (601) for unagreed tax changes if protested.

    3. Disposal Code 10 (604) for unagreed tax changes without protest.

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 audits. In that event, see survey procedures for IRC 6033(j) automatically revoked organizations at IRM 4.75.16.5.2, Auto Revocations Under IRC 6033(j).

  3. If an inactive organization (not subject to auto-revocation) properly terminated before the completion of the audit or can’t be located, it may be recognized as terminated if it meets the criteria in IRM 4.75.16.5.10, Terminations, or is described in Examples 1 and 3 of IRM Exhibit 4.75.16–17, Closing Procedures for Unable to Locate Situations. Terminations are subject to Mandatory Review.

  4. If an inactive organization has not properly terminated (or is unable-to-locate in Examples 2, 4, 5, and 6 of IRM Exhibit 4.75.16-17), you may do one of the following:

    • Issue an advisory (with preparation of Form 5666 for future year audit) that a lack of operations could result in revocation of tax-exempt status and/or reclassification to a private foundation, 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 private foundation.

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. Treasury Regulation Section 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."

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 audit 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 group manage.

    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 audit similar to an advisory on Letter 3609. 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 group manager 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 Form 5464, 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 Form 5464, 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 Form 5464the 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 the Large Business and International (LB&I) Operating Division. Use the Specialist Referral System (SRS) to obtain the assistance of a Computer Audit Specialist.

  9. If you and your group manager agree that an Inadequate Records Notice is appropriate, take the following steps:

    1. Prepare Form 2807. See example at Exhibit 4.75.15-13.

    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 group manager.

      Reminder:

      Document all managerial discussions.

    9. Print the attachments listed in paragraph (2) and enclose with Letter 4095. Paperclip them to Form 2807.

    10. Place a copy of Letter 4095 and its attachments where closing letters would go according to case file assembly instructions.

    11. 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. See instructions at Exhibit 4.75.15-8.

      Note:

      Recommend a follow-up audit on Form 5666 for no less than two years subsequent to the year of the current audit.

    12. Place Form 5666 on the left hand-inside of the case file folder.

    13. Issue Letter 4095 and its attachments to the taxpayer.

    14. Form 5599. Use DC 08 (213), Written Advisory - Form 5666 Required. Close the case to the EO Closing Unit.

Inadequate Records - Follow Up After Issuance of Inadequate Records Notice
  1. You may be assigned a follow up audit 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 audit procedures with regard to the scope of the audit.

  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

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 agent, may result in revocation of tax-exempt status because the organization is not 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 audit.

  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 group manager to determine whether to propose revocation of tax-exempt status.

  6. If you and your group manager 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 group manager may consider requesting advice from Area Counsel during the development of a revocation issue based on a failure to maintain or provide records.

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 does not execute Form 2807and the case is unagreed, inform the taxpayer of the opportunity to discuss the matter at an Appeals conference.

Miscellaneous Civil Penalties

  1. Tracking of miscellaneous civil penalties is controlled through RCCMS as MFT 99 and not through AIMS.

  2. Generally the penalties listed on Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, are the penalties contemplated in this subsection.

  3. For instructions on creating a penalty case file and a RCCMS record, see IRM 4.75.22.

  4. Issue an advisory if imposing miscellaneous civil penalties against a tax-exempt organization or if not imposing the penalty due to reasonable cause.

  5. Miscellaneous civil penalties are generally not subject to deficiency procedures, and are therefore not subject to appeals before making an assessment. See instructions to Form 8278. For information on whether a certain penalty requires deficiency procedures, see IRM 20.1, Penalty Handbook. Also, refer to the Office of Servicewide Penalties (OSP) at http://sbseservicewide.web.irs.gov/penalty/default.aspx

  6. Close a penalty case file and a RCCMS record to EO Closing Unit at anytime during the audit after fully developing the penalty. If basing the penalty on an issue subject to Mandatory Review, close the penalty case file to Mandatory Review with the remainder of the case file.

Initial Audit Reports

  1. Refer to the background behind initial audit reports at IRM 4.75.15.1.1.

  2. An initial report is a preliminary summary report proposing a change in tax or status and soliciting an agreement. Initial 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 statutory notice of deficiency or immediate assessment if a taxpayer fails to reply.

    • Are not used for declaratory judgment cases, and church audits. You can use a draft report tool instead if appropriate. See IRM 4.75.15.2 for a definition of draft report.

    • 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 report issued to the taxpayer that can be thought of as an initial report, but it is actually a formal report because it is followed by a statutory notice of deficiency if there is no reply to the 30-day letter.

  3. For non-declaratory judgment cases, you can bypass an initial report process and resort directly to a formal report process if:

    • You are not certain the taxpayer understands the proposed changes.

    • You reasonably expect the taxpayer will disagree with the changes.

    • Other reason at the discretion of the agent or the group manager.

    Note:

    In some larger cases, you can present an issue to the taxpayer using Form 5701, and then prepare an initial or formal 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 Fast Track Settlement may be more appropriate in order to settle one or more unagreed issues. See IRM 4.75.15.13.

  4. The taxpayer's reply or non-reply to an initial report determines whether you have an agreed or unagreed case moving forward.

    1. If the initial report is agreed, issue a final agreed change closing letter with the group manager’s signature, and close the case to the EO Closing Unit.

    2. If the initial report is unagreed, issue a 30-day letter and formal audit report, update AIMS to status 13 while in 30-day suspense. Hold in suspense pending the taxpayer’s reply.

  5. The initial 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 Fast Track Settlement for an unagreed issue.

    7. Is optional, and may be bypassed for a formal report.

  6. For the initial 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 report doesn't constitute an official 30-day letter.

  7. 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.

  8. Give the initial 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"

  9. If a taxpayer has verbally indicated they will agree to a proposed tax adjustment, an initial 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.

  10. If preparing Form 886-A, type:

    1. "This is an initial report" on the first page of the Form 886–A.

    2. "Initial report" in the header of the Form 886–A.

  11. Use the spelling and grammar checker.

  12. Refer to the tables listing various reports and letters that can be included in an initial report.:

    • See Exhibit 4.75.15-2 for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.75.15-3 for a list of the formal 30-day letters, report forms, and closing letters in general.

  13. 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 report.

  14. If the taxpayer signs the agreement, process as follows:

    If the issue is... Then...
    An agreed worker reclassification.
    • Process any payments received. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Close to EO Closing Unit as agreed with DC 03 (RCCMS - 102).

    • If the EO signed a classification settlement program 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(3). 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. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Verify correction, if applicable.

    • Issue Letter 3607 with a copy of the signed agreement.
      Close to EO Closing Unit as agreed with DC 03 (RCCMS - 102).

    Chapter 42 excise tax adjustment without correction.
    • Process any payments received. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • 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. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Issue separate formal audit reports for each unagreed issue.

    • Management may split cases by type of tax, closing unagreed issues to Mandatory Review and closing agreed issues to EO Closing Unit.

    Note:

    If issuing one or more Letters 3607, with no other issues, prepare and issue Letter 3609 as the closing letter for the primary return (or e-Postcard) audit. In the addendum, reference the agreed adjustment as being "issued under separate cover."

  15. If the taxpayer disagrees with the initial report (and doesn't request a Fast Track Settlement), 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 4.75.15-1, Closing Letters for No Change Cases.
    Changes the conclusion, resulting in a modified adjustment. Consider Fast Track Settlement for the unagreed issue. See IRM 4.75.15.13. Otherwise, modify the report, and issue a formal RAR. See IRM 4.75.15.10.
    Doesn't change the conclusion. Consider Fast Track Settlement for the unagreed issue. See IRM 4.75.15.13. Otherwise issue the formal RAR. See IRM 4.75.15.10.
  16. If no one replies to the initial report, issue a "Formal RAR" via certified mail to the taxpayer and any representative(s). See IRM 4.75.15.10.

Formal Audit Reports

  1. The formal report is the official written report you issue to a taxpayer that presents your findings regarding a change in tax, status or claim disallowance. A formal report is unnecessary if you issued the optional initial report and the taxpayer agreed.

    Note:

    All cases subject to declaratory judgment under IRC 7428, require a formal report,

  2. Don’t issue a report to a taxpayer prior to discussing findings and proposed issues with the taxpayer. Exceptions to this rule are for the following:

    1. No-show / no-response appointments.

    2. Uncooperative taxpayers.

    3. When additional records are provided for your consideration.

  3. The RAR provides more details as to facts, law and argument than the initial report. The formal report:

    1. Combines a 30-day letter with an RAR.

    2. Transmits the RAR to the taxpayer via either a 30-day letter.

    3. Eliminates consideration for a Fast Track Settlement (unless properly rescinded).

    4. Requires managerial approval prior to issuance.

    5. Requires issuance via certified (domestic) or registered (international) mail.

    Caution:

    Generally, don't issue a 30-day letter to the taxpayer unless the manager tried to resolve the controversies and reach an agreement.

    Note:

    Area Counsel must approve a formal report and closing letter for a church for issues covered under IRC 7611 before Mandatory Review issues it within the two-year audit period. Submit a proposed adverse determination to Mandatory Review at least 120 days before the two-year period expires.

  4. After issuing an initial report, create a formal report by modifying the initial report based on any taxpayer responses. These modifications can include, but aren't limited to:

    • Corrections of facts stated.

    • Changes in expense allocations.

    • Additions or subtractions of items (income, expenses, reclassified workers).

    • Additions of legal references.

    • Recomputations of taxes.

    • Additions to the taxpayer's position.

    • Revisions of the government's position to rebut the taxpayer's position.

    Reminder:

    Eliminate any references to initial reports in the Form 886-A, Explanation of Items, and other documents.

  5. Issue the report with the appropriate letter and its enclosures.

    • See Exhibit 4.75.15-2 for a list of the formal 30-day letters, report forms, and closing letters for claims and abatements.

    • See Exhibit 4.75.15-3 for a list of the formal 30-day letters, report forms, and closing letters in general.

  6. After waiting 30 days, determine if:

    • The taxpayer agreed to the adjustment.

    • The taxpayer submitted a formal protest.

    • The taxpayer failed to reply to the formal report.

      Note:

      At the manager’s discretion you may wait up to an additional week after the 30 day deadline, to allow mailing time, before taking action.

  7. If the taxpayer agrees with a formal report, process as follows:

    If the issue is... Then...
    Subject to declaratory judgment rights under IRC 7428. Close to Mandatory Review as:
    • Revocation - agreed with disposal code (DC) 09 (RCCMS - 211).

    • Change in foundation status - agreed with DC 17 (RCCMS - 203).

    An agreed worker reclassification.
    • Process any payments received. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Close to EO Closing Unit as agreed with DC 03 (RCCMS - 102).

    • If the taxpayer signed a classification settlement program, close the quarters where making assessments using DC 03 (RCCMS - 102).

    • Close all other periods using DC 01 (RCCMS - 210). Refer to IRM 4.23.6.15.2(3), CSP Examination Reports.

    • 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. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Verify correction, if applicable.

    • Issue Letter 3382 for employment taxes.

    • Issue Letter 3607 with a copy of the signed agreement forms for all other taxes.

    • Close to EO Closing Unit as agreed with DC 03 (RCCMS - 102).

    Chapter 42 excise tax adjustment without correction.
    • Process any payments received. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Close to Mandatory Review as unagreed without protest with DC 10 (RCCMS - 604).

    Subject to multiple issues listed above.
    • Process any payments received. See IRM 4.75.22.4.1, Payment Processing, for instructions.

    • Close to Mandatory Review, if applicable.

    • Otherwise, verify correction, if applicable, process any payments received, and close to EO Closing Unit.

    Note:

    If you issue one or more Letters 3607 and there are no other issues, prepare and issue Letter 3609 as the closing letter for the annual information return (or e-Postcard) audit. The addendum must make reference to the agreed adjustment under a separate audit report.

  8. If the taxpayer protests a formal report, review the reply and proceed as follows:

    If the additional information provided... Then...
    Changes your conclusion, resulting in a no change.
    • Rescind the report.

    • Close as a no change.

    • See Exhibit 4.75.15-1, Closing Letters for No-Change Cases, for the appropriate closing letter to be issued.

    Changes your conclusion, resulting in a modified adjustment.
    • Change the report and issue the revised formal RAR, unless rescinding the report and considering a Fast Track Settlement (FTS) for the unagreed issue.

    • See IRM 4.75.15.13.


    Note: A new 30-day letter for a tax change is unnecessary if there are no new issues and the revised report is favorable to the taxpayer.
    Doesn't change your conclusion, and constitutes a formal protest to Appeals.
    • Prepare a rebuttal to the protest.

    • Issue the rebuttal to the taxpayer.

    • Close to Mandatory Review using DC 07, Unagreed-Protest to Appeals (RCCMS - 601).

    • See IRM 4.75.15.12, Rebuttals to Formal Protests, for procedures on how to prepare a rebuttal.

    Doesn’t change your conclusion, and doesn't constitute a valid formal protest to Appeals.
    • Prepare and send a drafted letter to the taxpayer. Give 10 days to respond.

    • See Exhibit 4.75.15-12 for sample language.

    Doesn’t change your conclusion, and the taxpayer filed a petition to Tax Court. Send an individually designed letter, approved by the group manager, notifying the taxpayer that the petition is premature, and they have the option of filing a formal protest. Give 10 days to respond.

    Caution:

    If still within the 30-day period of the formal letter when you receive the incomplete protest, the taxpayer has the remainder of the 30 days and the additional 10 days in which to reply with the formal protest (a total of 40 days from the date of the formal 30-day letter).

  9. If you receive a response to the drafted letter, refer to the above table as to how to proceed. Don’t send more than two drafted follow up letters to the taxpayer. If you don’t receive a formal protest after the second letter, close to Mandatory Review as unagreed without protest.

  10. If the taxpayer fails to reply to a formal report, and:

    You sent the RAR... 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 group manager's information in the contact section. The group manager 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 group manager has discretion over issuance of the letter.

    Exception:

    Close employment tax cases (other than worker classification issues) and gaming excise tax cases to EO Closing Unit, unless otherwise subject to Mandatory Review.

Valid Formal Protest

  1. A formal protest comes only in response to the certified 30-day letter. Responses to the initial report don't include formal protests, as the initial report doesn't convey appeal rights.

  2. Verify that a valid formal protest contains the required elements as outlined in Pub 3498, The Examination Process (or Pub 892, How to Appeal an IRS Decision on Tax Exempt Status):

    1. The taxpayer's name, address, and a daytime telephone number.

    2. A statement that the taxpayer wants to appeal the findings to the Appeals Office.

    3. A copy of the letter showing the proposed changes and findings (or the date and symbols from the letter).

    4. The tax periods or years involved.

    5. A list of the changes that are unagreed and reasons for disagreement.

    6. The facts supporting the taxpayer's position on any unagreed issues.

    7. The law or authority, if any, on which the taxpayer is relying.

    8. The taxpayer's signature under penalties of perjury.

  3. The jurat statement is "Under the penalties of perjury, I declare that I examined the facts stated in this protest, including any accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete." If the statement is modified or missing, Appeals doesn't recognize the protest as a formal protest.

  4. If the representative prepared and signed the protest, the representative must substitute a declaration stating:

    1. That he or she submitted the protest and accompanying documents.

    2. Whether he or she knows personally that the facts stated in the protest and accompanying documents are true and correct.

      Note:

      If the declaration is missing, or the representative submitted the jurat statement instead, notify the representative of this requirement.

  5. For all situations where the formal protest contains the jurat statement (or substitute declaration), but not all of the required elements, consult Mandatory Review to determine whether the protest can be forwarded to Appeals.

  6. Return incomplete protests to the taxpayer using a drafted letter. Send a copy to the representatives via Letter 3597.

Rebuttals to Formal Protests

  1. The rebuttal letter is the last opportunity to counter a taxpayer's arguments before Mandatory Review forwards the returns to Appeals. Issue a rebuttal letter if you receive a protest from the taxpayer and you determine the information doesn't alter your original position. Section 2.03(4)(c) of Rev. Proc. 2012-18.

  2. A proper rebuttal addresses each disputed fact, argument of law, and the position of the taxpayer. The rebuttal only addresses the protest. Don’t introduce new issues not raised by the taxpayer. If necessary, issue a revised formal report.

  3. To prepare a rebuttal:

    1. Write the rebuttal on Form 886-A, Explanation of Items.

    2. Address the rebuttal to the taxpayer, not Appeals.

    3. Issue Letter 5326 Rebuttal Letter - EO Examinations.

    4. Use Letter 3597 if sending a copy to the representative.

  4. The following table outlines how to address common issues raised in protests:

    If the protest... And... Then...
    Identifies a fact as erroneous The protest over the fact is correct Agree with the correction.
    Identifies a fact as erroneous The protest over the fact is wrong Confirm the validity of the original fact.
    Challenges the facts The challenge constitutes a difference of opinion Dispute the opinion and restate the applicable portion of the government's position.
    Identifies legal references not previously cited The citations are applicable Address the citations and identify any differences in application of the law.
    Identifies legal references not previously cited The citations aren't applicable Explain why the law cited isn't applicable.
    Challenges the legal interpretation Their analysis is flawed Clarify the law and point out the error in the analysis.
    Challenges the legal interpretation Their analysis is correct Agree with the interpretation.
  5. Some protests include negative comments as to the professional conduct of the audit. Don’t address these comments. The taxpayer has the option of holding a conference with the manager, and the manager may address these assertions in the conference.

Fast Track Settlement

  1. TE/GE and Appeals jointly administers FTS, an alternative dispute resolution program designed to help taxpayers settle disputes at the audit group level. An appeals officer trained in mediation serves as an impartial third party to resolve unagreed TE/GE issues by:

    1. Facilitating settlement negotiations.

    2. Using mediation techniques and sometimes settlement authority.

  2. The goal of TE/GE FTS is to resolve the issue within 60 days. The benefits of TE/GE FTS include less time, expense, and burden on both the taxpayer and the government.

  3. You or the taxpayer may consider the Fast Track Settlement (FTS) process at any time after you fully develop a disputed issue but before you issue a formal report (30-day letter and RAR). FTS may be allowed in specific situations when the taxpayer provides new information after the 30-day letter is mailed. In all situations, FTS must be initiated before the mailing of the 90-day letter.

    Example:

    The taxpayer provides new information during the appeals process which warrants the Appeals officer sending the case back to the field. FTS can still be used because IRS hasn’t issued the 90-day letter.

  4. Announcement 2008-105 originally announced FTS for EO cases. Announcement 2012–34 makes the program permanent. This Announcement contains procedures as well as the types of issues that are eligible for FTS.

  5. Find additional information regarding this program in Pub 5092, Fast Track Settlement A Process Resolution of Tax Exempt and Government Entities (TE/GE) Tax Issues, and at http://appeals.web.irs.gov/tech_services/adr/fasttrack.htm.

Characteristics of Fast Track Settlement

  1. FTS resolves factual and legal issues.

  2. FTS enables the taxpayer to work with the EO agent, the EO group manager, and the Office of Appeals.

    1. All three parties (audit group, taxpayer, and Appeals) are active participants in the process.

    2. All three must agree before a proposed resolution can be put in place.

  3. Both parties must commit to settling the issues involved.

  4. The prohibition against ex parte communications (Public Law 105-206, Section 1001(a)) between Appeals Officers and other IRS employees doesn't apply to the FTS process. See Rev. Proc. 2012-18, Section 2.05. Appeals personnel:

    • Ease agreement between the taxpayer and EO.

    • Don’t act in their traditional Appeals settlement role.

  5. If the parties fail to resolve any issue in FTS, the taxpayer retains the right to protest the issue through the traditional Appeals process.

Eligibility for Fast Track Settlement

  1. For EO, FTS can only resolve unagreed issues in the following types of audits:

    1. Form 990 series information returns (or Form 990-N) with exemption, foundation or qualification issues

    2. Forms 4720 and 4720-A

    3. Forms 990-T.

    4. Forms 1040 or 1120 discrepancy adjustments

    5. Employment taxes, including worker classification issues not resolved through Classification Settlement Program (CSP).

  2. FTS is generally unavailable for the following EO cases:

    1. Correspondence exam cases.

    2. Campus cases (formerly known as Service Centers). These cases aren't eligible for FTS as there is no decision-maker available to attend the session.

    3. Cases where the taxpayer fails to respond to IRS communications and didn’t previously submit documentation for consideration.

    4. Listed transactions cases or abusive tax avoidance transactions (ATAT) cases.

    5. Cases in which Appeals has no jurisdiction (e.g., IRC 6700 penalty cases).

    6. Cases involving potential for civil or criminal fraud.

    7. Issues designated for litigation.

    8. Issues under consideration for designation for litigation.

    9. Issues identified in a Chief Counsel Notice, or equivalent publication, as excluded from the FTS process.

    10. "Whipsaw" issues (i.e., issues for which resolution with respect to one party might result in inconsistent treatment in the absence of the participation of another party).

    11. Issues that can be resolved through other established settlement initiatives, comparable to those described in Rev. Proc. 2006-27.

    12. Cases where the taxpayer raises issues/arguments that clearly have no merit or legal sufficiency on their face.

    13. Cases involving the failure or refusal to comply with the tax laws because of moral, religious, political, constitutional, conscientious, or similar grounds. See Treas. Reg. 601.106(b).

    14. Tax Equity & Fiscal Responsibility Act (TEFRA) partnership cases.

    15. Cases specifically excluded from FTS, by the IRS Commissioner, Chief Counsel or by a Director in EO.

    16. Selected initiatives as determined by the individual Directors on an annual basis.

  3. In revocation cases, the issue of a retroactive effective date of revocation isn't eligible for FTS. IRC 7805(b) governs relief from retroactive application of adverse determination, which requires a request for a technical advice memorandum. See Rev. Proc. 2017-2 (updated annually).

Fast Track Duties and Responsibilities

  1. As the auditing agent you:

    1. Have a full understanding of the FTS program, process and eligibility requirements.

    2. Offer FTS for all eligible unagreed cases.

    3. Discuss FTS with the taxpayer/representative.

    4. Answer all questions of the taxpayer/representative pertaining to FTS.

    5. Fully develop each unagreed issue.

    6. Prepare to address the taxpayer's arguments during the FTS session with facts and citable precedent.

    7. Keep the group manager or their designee, updated on the status of the FTS case.

  2. The EO group manager or designee:

    1. Coordinates preparation and submission of the application package.

    2. Notifies the taxpayer of acceptance into or rejection from the FTS program.

    3. Participates in the FTS session on behalf of the government.

    4. Has primary responsibility for accepting or rejecting any settlement proposal that arises as a result of the FTS.

  3. The Appeals Team Manager responsible for TE/GE programs serves as the Appeals FTS Program Manager and may consult with the EO group manager.

  4. Taxpayers interested in participating in FTS or having questions about the program and its suitability for their cases, should contact you or your group manager to discuss resolution of an issue for the periods currently under audit.

Fast Track Application Process

  1. To apply for the FTS program, the taxpayer submits a completed Form 14017, Application for Fast Track Settlement.

    Note:

    To participate in FTS, the taxpayer must consent, pursuant to IRC 6103(c), to the disclosure of the taxpayer's returns and return information pertaining to the issues being considered in the FTS process to those persons named on Form 14017.

  2. Write up all unagreed issues in a RAR format. Use Form 5701 for this purpose. Add Form 886-A if more room is needed.

  3. The taxpayer must prepare a full written response explaining their position on each issue.

  4. Assemble the FTS Submission Package:

    • Form 14017

    • Form 5701 and RAR

    • The taxpayer’s written response

    • Your rebuttal

  5. Submit the FTS Submission Package to your group manager for signature on Form 14017.

  6. Secure e-mail the FTS Submission Package to the area manager.

    • The area manager approves the FTS Submission Package by signing Form 14017 as the approving operating division official.

  7. Secure e-mail the FTS Submission Package approved by your area manager to the Appeals Program Manager using the mailbox *AP TEGE FTS.

    • The Appeals Program Manager (or designee) contacts the EO group manager to inform them of the decision made regarding acceptance or rejection in FTS.

  8. If accepted, the Appeals Program Manager (or designee) assigns an FTS Appeals Officer who acts as the FTS Appeals Official (FTS AO) to help resolve the case.

  9. If the case isn't accepted for inclusion in FTS:

    1. Notify the taxpayer accordingly.

    2. Discuss other dispute resolution opportunities with the taxpayer, including closing agreement or 30-day letter procedures and the taxpayer's normal Appeal rights.

      Note:

      The decision not to accept a case into the FTS program isn't subject to administrative appeal or judicial review.

Initial Process for Cases Accepted in FTS

  1. If the case is accepted in FTS, the FTS AO:

    1. Contacts the EO group manager (or EO agent) and the taxpayer to set up an FTS session to discuss case resolution.

    2. Holds the FTS session at the date and location agreed to by both parties.

    3. Meets with the taxpayer, the EO group manager (or designee) and the agent at the FTS session.

    4. Serves as a neutral party at the FTS session.

    5. Doesn’t perform in a traditional Appeals role, but uses dispute resolution techniques to facilitate settlement between the parties.

  2. The taxpayer doesn’t need to have a representative to participate in the FTS process, but if they do, this individual must have a power of attorney from the taxpayer (Form 2848, Power of Attorney and Declaration of Representative).

  3. The FTS AO may ask you and the taxpayer to limit the number of participants at the FTS session to facilitate the process.

  4. Before the FTS session, the FTS AO advises the participants of the procedures and establish ground rules.

  5. Generally, the FTS AO considers only those issues outlined in the FTS Report, except by mutual agreement of the parties.

Fast Track Settlement Session

  1. Both parties retain the right to withdraw throughout the entire FTS process. A party wishing to withdraw should provide written notice to the FTS AO and the other parties.

  2. The FTS session may include joint sessions with all parties, separate meetings, or both as determined appropriate in the sole judgment of the FTS AO.

  3. The FTS AO may modify the rules and procedures during the FTS session to adapt to changes in circumstances.

  4. The FTS session may include other individuals with decision making authority and information and expertise necessary to help the parties during the settlement process.

    Note:

    IRS employees, the taxpayer, and the people invited to participate by the IRS or the taxpayer mustn’t voluntarily disclose information about any communication made during the FTS session, except as provided by statute.

  5. During the FTS AO prepares the FTS Session Agenda and the FTS Session Report and provides both parties with copies.

    1. The FTS Agenda guides the communication in the FTS session, sets the order of issue discussion, and poses questions to clarify the issues.

    2. The FTS Report includes a list of all issues approved for the FTS program, a description of the issues, the amounts in dispute, conference dates, a plan of action for the FTS session and other information useful to the process as determined by the parties and the FTS AO.

      Note:

      The FTS AO updates the FTS Report after the FTS session with the developments of the session.

  6. Generally, the FTS AO considers only those issues outlined in the FTS Report, except by mutual agreement of the parties.

  7. If the taxpayer presents information during the FTS session that wasn’t previously presented during the audit, the FTS AO adjusts the targeted completion date to give the appropriate IRS officials time to evaluate the information.

  8. During the FTS session, the FTS AO may propose settlement terms for any or all issues, and may consider settlement terms proposed by either party.

  9. If the parties resolve any disputed issue at the conclusion of the FTS session:

    1. The parties and the FTS AO sign the FTS Report acknowledging acceptance of the terms of settlement for purposes of preparing computations.

    2. You process the case under normal case processing procedures.

  10. The signature of the parties on the FTS Report doesn’t:

    • Constitute a final settlement.

    • Waive restrictions on assessment.

    • Terminate consents to extend periods of limitation.

    • Start the running of any periods of limitation.

    • Constitute agreement to close the case.

Fast Track Settlement Conclusion

  1. If the taxpayer accepts the FTS AO’s settlement proposal, but the EO group manager rejects it, the EO area manager must review the settlement proposal and either concur in writing with the rejection or accept the settlement proposal on behalf of EO.

    1. If the area manager accepts the settlement proposal, process the case in accordance with the proposal.

    2. If the area manager concurs with the group manager’s rejection of the settlement proposal, and an acceptable alternative settlement cannot be reached, the issue closes out of the FTS program as unagreed.

  2. Include any resolution of an issue (or disagreement) through the FTS process for specified tax periods in your workpapers. Appropriately index the resolution in the Form 5773 to support your conclusions.

  3. A resolution by the parties through the FTS process won’t bind the parties for taxable periods or issues not covered by the FTS agreement, unless addressed expressly in a closing agreement reached as part of the FTS process.

  4. If the parties can’t reach an agreement, process the case under normal “unagreed” procedures.

    Note:

    If the parties fail to resolve any issue in FTS, the taxpayer retains the option of requesting that the issue be heard through the traditional Appeals process.

  5. If applicable, the IRS will report a proposed resolution reached as a result of EO FTS to the Joint Committee on Taxation in accordance with IRC 6405.

    • The IRS may reconsider a proposed settlement, as reflected in a signed FTS Session Report, upon receipt of comments on the proposed settlement from the Joint Committee on Taxation.

    • If the taxpayer declines to agree with any changes by the IRS upon reconsideration, close the case unagreed, and the taxpayer will retain all the usual rights to request Appeals consideration of any unagreed issues.

Closing Letters for No Change Cases

No Changes and Advisories
TYPE OF RESULT & RETURN: CLOSING LETTER
No Change to Status,
IRC 501(c) or (d) Exempt Organizations
IRC 527 Exempt Organizations
  • Form 990

  • Form 990-EZ

  • Form 990-PF

  • Form 990-BL

  • Form 1065

  • Letter 5452 pure no change, or

  • Letter 3609 advisory, or

  • Letter 3609-P advisory, or

  • Letter 4102 advisory for Status 36 organizations

No Change to Status
  • Form 990-N

  • Letter 5177 pure no change, or

  • Letter 3609 advisory, or

  • Letter 3609-P advisory

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 5452-A pure no change, or

  • Letter 3609 advisory (either without a selectable paragraph, or with selectable paragraph 3)

No Change to EO Income Taxes for
IRC 501(c), or
IRC 4947(a)(1) or IRC 4947(a)(2) Trusts
  • Form 990-T, also proxy tax

  • Form 1041

  • Form 1041-A

  • Form 1120

  • Form 1120-POL

  • Letter 3622 pure no change, or

  • Letter 5332, No tax liability after a response to proposal of tax, or

  • Letter 5334, No tax liability after delinquent income tax return secured and accepted as filed, with or without penalties

No Change to Income Taxes - Converted Returns - No tax liability after response to proposal of tax, or delinquent income tax return secured and accepted as filed
  • Form 1041

  • Form 1120

  • Letter 5332, No tax liability after a response to proposal of tax, or

  • Letter 5334, No tax liability after delinquent income tax return secured and accepted as filed, with or without penalties

No Change to Income Taxes - Discrepancy Adjustment - No tax liability after response to proposal of tax
  • • Form 1040

  • • Form 1120

  • Letter 5332, No tax liability after a response to proposal of tax (replaces Letter 3604, obsoleted on 5/31/2017)

No Change to Chapter 41 or 42 Excise Taxes.
  • Form 4720

  • Form 4720-A

  • Letter 3592, or

  • Letter 5332, No tax liability after a response to proposal of tax, or

  • Letter 5334, No tax liability after delinquent income tax return secured and accepted as filed, with or without penalties

No Change to Miscellaneous Excise Taxes
  • Form 11–C

  • Form 730

  • Letter 3623, or

  • Letter 5332, No tax liability after a response to proposal of tax, or

  • Letter 5334, No tax liability after delinquent income tax return secured and accepted as filed, with or without penalties

No Change to Employment Taxes
  • Form 940

  • Form 941

  • Form 944

  • Form 945

  • Letter 3381, or

  • Letter 4840

  • Letter 3234enclosed with Letter 4840

  • Form 4666 enclosed with Letter 4840, or

  • Letter 5332, No tax liability after a response to proposal of tax, or

  • Letter 5334, No tax liability after delinquent income tax return secured and accepted as filed, with or without penalties

Note:

For multiple-year audits, don’t send a no change letter unless all years are no changed.

Reminder:

Send a copy of the report and closing letter using Letter 3597, Transmittal Letter for Power of Attorney, to the representative who is authorized to receive copies of the taxpayer correspondence via Form 2848 or Form 8821

Reports and Closing Letters for Claims and Abatements

(1) For general procedural instructions on claims and requests for abatement, see IRM 4.75.37.

(2) Where Fast Track Settlement is a viable option to an eligible taxpayer for unagreed issues, give the taxpayer Pub 5092, Fast Track Settlement A Process Resolution of Tax Exempt and Government Entities (TE/GE) Tax Issues, with the initial report.

(3) If a statute date is imminent and there is no time to send a standard 30-day letter, consider issuing a replacement transmittal letter for the report. Consult with Area Counsel concerning the content, format, and timing of issuing a letter that replaces a 30-day letter. Refer to http://www.irs.gov/uac/Contact-a-Local-Taxpayer-Advocate for the current list of Taxpayer Advocate offices. Generally:

  • Summarize in the letter why you can’t use a standard 30-day letter. See Sections 9.10 and 12.02 of Rev. Proc. 2017-5 (updated annually).

  • Ensure the replacement transmittal letter contains the standard Taxpayer Advocate paragraph.

  • A suspense date for the letter is not required.

  • The transmittal letter can direct the taxpayer toward availing themselves the opportunity for Appeals Office consideration, such as by promptly submitting a valid consent to extend the statute date.


Claims Allowed in Full
TYPE OF RESULT & RETURN: CLOSING LETTER
Income Taxes -
Claim Allowed in Full:
  • Form 990-T also proxy tax

  • Form 1120-X

  • Form 1120-POL

  • Form 1041

  • Letter 3601

  • Form 4549


No signatures are necessary on waiver forms if the claim is allowed in full specifically as requested by the taxpayer.
While allowing a claim in full, if there is an additional tax deficiency, issue the report for income taxes in Exhibit 4.75.15-3.
Chapter 41 and 42 Excise Taxes -
Claim Allowed in Full:
  • Form 990-PF

  • Form 990-BL

  • Form 4720

  • Form 4720-A

  • Form 843

  • Letter 3601

  • Form 4621

  • Form 4883


No signatures are necessary on waiver forms if the claim is allowed in full specifically as requested by the taxpayer.
While allowing the claim in full, if there is an additional tax deficiency, issue the report on Chapter 41 or 42 excise taxes in Exhibit 4.75.15-3.
Miscellaneous Excise Taxes -
Claim Allowed in Full:
  • Form 11-C

  • Form 730

  • Form 8849

  • Letter 3601

  • Form 5384


No signatures are necessary on waiver forms if the claim is allowed in full specifically as requested by the taxpayer.
While allowing a claim in full, if there is an additional tax deficiency, issue the report for miscellaneous excise taxes in Exhibit 4.75.15-3.
Employment Taxes -
Claims Allowed in Full
  • Form 940

  • Form 941-X

  • Form 944-X

  • Form 945-X


See IRM 4.23.13
  • Letter 570

  • Form 4666

  • Form 4667 if applicable

  • Form 4668 if applicable

  • Form 4668-B if applicable


No signatures are necessary on waiver forms if the claim is allowed in full specifically as requested by the taxpayer.
While allowing a claim in full, if there is an additional tax deficiency, issue the report for employment taxes in Exhibit 4.75.15-3.
Claims Disallowed in Full or in Part
Audit Result Type of Report Report Forms and Letters
Income Taxes
Claims Disallowed in Full,
Claims Disallowed in Part, or
Claims Disallowed with Additional Adjustment:
  • Form 990-T (also proxy tax)

  • Form 1120-X

  • Form 1120–POL

  • Form 1041

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (Initial reports only), or

  • Letter 3602, 30-day letter, or

  • Letter 3602-B, 30-day letter; use with additional adjustment

  • Form 2297 with any letter above

  • Form 3363 with any letter above

  • Form 4549 with initial report only

  • Form 870 with Letter 3602-B only

  • Form 4549-A with either Letter 3602 or Letter 3602-B only

  • Form 886-A with any letter above

Agreed Closing Letter (issued by group)
  • Letter 2841-A, For agreed closing of full disallowance of claim only (correct the signature block)

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363


or
  • Letter 2511, For agreed closing of partial disallowance of claim, or any disallowance with adjustment

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363

  • Copy of Signed Form 4549 or Form 870

Unagreed Closing Letter
  • Letter 905, Statutory Notice of Disallowance of Claim in Part, issued by Mandatory Review or Appeals, or

  • Letter 906, Statutory Notice of Disallowance of Claim in Full, issued by Mandatory Review or Appeals, or

  • Letter 917, Closing letter when taxpayer fails to show eligibility to reconsider claim, for Claim Reconsiderations only, issued by group.

Chapter 41 and 42 Excise Taxes
Claims Disallowed in Full,
Claims Disallowed in Part, or
Claims Disallowed with Additional Adjustment:
  • Form 4720

  • Form 4720-A

  • Form 990-PF

  • Form 990-BL

  • Form 843

Report (issued by group)
  • Draft transmittal letter, IDR, or Form 5701 (Initial reports only), or

  • Letter 3602, 30-day letter, or

  • Letter 3602-B, 30-day letter; use with additional adjustment

  • Form 2297 with any letter above

  • Form 3363 with any letter above

  • Form 870-E with initial report or Letter 3602-B only

  • Form 4621 with any letter above

  • Form 4883 with any letter above

  • Form 886-A with any letter above.

Agreed Closing Letter (issued by group)
  • Letter 2841-A, For agreed closing of full disallowance of claim only (correct the signature block)

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363


or
  • Letter 2511, For agreed closing of partial disallowance of claim, or any disallowances with adjustment

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363

  • Copy of Signed Form 870-E

Unagreed Closing Letter
  • Letter 905, Statutory Notice of Disallowance of Claim in Part, issued by Mandatory Review or Appeals, or

  • Letter 906, Statutory Notice of Disallowance of Claim in Full, issued by Mandatory Review or Appeals, or

  • Letter 917, Closing letter when taxpayer fails to show eligibility to reconsider claim, for Claim Reconsiderations only, issued by group.

Miscellaneous Excise Taxes
Claims Disallowed in Full,
Claims Disallowed in Part, or
Claims Disallowed with Additional Adjustment:
  • Form 11-C

  • Form 730

  • Form 8849

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (Initial reports only), or

  • Letter 3602, 30-day letter, or

  • Letter 3602-B, 30-day letter; use with additional adjustment

  • Form 2297 with any letter above

  • Form 3363 with any letter above

  • Form 5384 with initial reports only

  • Form 2504-E with Letter 3602-B only

  • Form 5385 with Letter 3602 or 3602-B only

  • Form 886-A with any letter above

Agreed Closing Letter (issued by group)
  • Letter 2841-A, For agreed closing of full disallowance of Claim (correct the signature block)

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363


or
  • Letter 2511, For agreed closing of partial disallowance of claim, or any disallowances with adjustment,

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363

  • Copy of Signed Form 870-E

Unagreed Closing Letter
  • Letter 905, Statutory Notice of Disallowance of Claim in Part, issued by Mandatory Review or Appeals, or

  • Letter 906, Statutory Notice of Disallowance of Claim in Full, issued by Mandatory Review or Appeals

  • Letter 917, Closing letter when taxpayer fails to show eligibility to reconsider claim, for Claim Reconsiderations only, issued by group.

Employment Taxes
Claims Disallowed in Full,
Claims Disallowed in Part, or
Claims Disallowed with Additional Adjustment:
  • Form 940

  • Form 941-X

  • Form 944-X

  • Form 945-X


See IRM 4.23.13
Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (Initial reports only), or

  • Letter 5376, 30-day letter, or

  • Letter 953, 30-day letter, Reconsideration of Disallowed Claims only

  • Form 2297 with any letter above

  • Form 3363 with any letter above

  • Form 2504 use appropriate version, for any disallowance with additional adjustments

  • Form 4666 with any letter above

  • Form 4667 with any letter above

  • Form 4668 with any letter above

  • Form 4668-B with any letter above

  • Form 886-A with any letter above

  • Pub 3498 with any letter above

  • Pub 594 with any letter above

  • Pub 5 with any letter above

Agreed Closing Letter (issued by group)
  • Letter 2841-A, Agreed Closing for Full Disallowance of Claim (correct the signature block)

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363


or
  • Letter 2511, Agreed Closing for Partial Disallowance of Claim, or any Claim with Adjustment.

  • Copy of Signed Form 2297

  • Copy of Signed Form 3363

  • Copy of Signed appropriate Form 2504 version if there are additional adjustments

Unagreed Closing Letter
  • Letter 905, Statutory Notice of Disallowance of Claim in Part, issued by Mandatory Review or Appeals, or

  • Letter 906, Statutory Notice of Disallowance of Claim in Full, issued by Mandatory Review or Appeals, or

  • Letter 917, Closing letter when taxpayer fails to show eligibility to reconsider claim, for Claim Reconsiderations only, issued by group.

Abatement Requests Allowed in Full
TYPE OF RESULT & RETURN: CLOSING LETTER
Income Taxes -
Requests for Abatement Allowed in Full:
  • Form 990-T also proxy tax

  • Form 1120-X

  • Form 1120-POL

  • Form 1041


See IRM 4.75.37.9, Informal Request for Abatement of Income Taxes
  • Letter 693, Audit Reconsiderations Only, check the 1st box for full abatement and enclose Letter 2738 to Letter 693, or

  • Letter 2738 by itself for NON-Audit reconsiderations

  • Form 4549, with either letter.

Chapter 41 and 42 Excise Taxes -
Requests for Abatement Allowed in Full:
  • Form 4720

  • Form 4720-A

  • Form 990-PF

  • Form 990-BL

  • Letter 693, Audit Reconsiderations Only, check the 1st box for full abatement and enclose Letter 2738 to Letter 693, or

  • Letter 2738 by itself for NON-Audit reconsiderations

  • Form 4621 with either letter.

  • Form 4883 with either letter.

Miscellaneous Excise Taxes -
Requests for Abatement Allowed in Full:
  • Form 11–C

  • Form 730

  • Letter 693, Audit Reconsiderations Only, check the 1st box for full abatement and enclose Letter 2738 to Letter 693, or

  • Letter 2738 by itself for NON-Audit reconsiderations

  • Form 5384 with either letter

Employment Taxes -
Requests for Abatement Allowed in Full:
  • Form 940

  • Form 941-X

  • Form 944-X

  • Form 945-X


See IRM 4.23.13
  • Letter 5154, check the 1st box

  • Letter 2738 enclosed

  • Form 4666

  • Form 4667

  • Form 4668,

  • Form 4668-B

  • Pub 5,

Abatement Requests Disallowed in Full or in Part
Audit Result Type of Report Report Forms and Letters
Income Taxes
Abatements Disallowed in Full
Abatements Disallowed in Part, or
Abatements Disallowed with Additional Adjustment:
  • Form 990-T, also proxy tax

  • Form 1120-X

  • Form 1120–POL

  • Form 1041


See IRM 4.75.37.9, Informal Request for Abatement of Income Taxes
Report (issued by group) Abatements Disallowed in Full or in Part Only

Note:

The IRC has no provision for filing income tax abatement requests. There is only a final closing letter for abatements disallowed in full or in part; no 30-day letter. IRC 6404(b).


Any Abatements with Additional Tax:
  • Drafted 30-day Letter similar to Letter 5182 or 5183, whichever applies, but used only for income tax.

  • Form 4549

  • Form 886-A

Agreed Closing Letter (issued by group) Any Abatements with Additional Tax
  • Letter 2511

  • Copy of Signed Form 4549

Unagreed Closing Letter Abatements Disallowed in Full or in Part Only:
  • Letter 693, Check 1st box for partial disallowance. Check the 2nd or 3rd box for full disallowance, Issued by the group.

  • Form 4549, no signature required.

  • Form 886-A


Any Abatement with Additional Tax::
  • 90-day Statutory Notice of Deficiency Issued by Mandatory Review or Appeals

Chapter 41 and 42 Excise Taxes
Abatements Disallowed in Full,
Abatements Disallowed in Part, or
Abatements Disallowed with Additional Adjustment:
  • Form 4720

  • Form 4720-A

  • Form 990-PF

  • Form 990-BL

Report (issued by group) All IRC 4962 Abatement of Chapter 42 Tax Only:
  • Ex 4.75.37-5, 30-day letter, Disallowed in Full, or

  • Ex 4.75.37-7, 30-day letter, Disallowed in Part

  • Form 870-E for either letter above

  • Form 4621 for either letter above

  • Form 4883 for either letter above

  • Form 886-A for either letter above


Non-4962 Abatements Disallowed in Full or in Part - NOT an Audit Reconsideration:
  • IRM 4.75.37-9, 30-day letter, Disallowed in Full or

  • IRM 4.75.37-10, 30-day letter, Disallowed in Part

  • Form 886-A with either letter


Non-4962 Abatements Disallowed in Full or in Part - Audit Reconsiderations Only:
  • N/A, No 30-day letter or report. Final closing letter only.


Any Abatement Additional Tax:
  • Drafted 30-day letter similar to Letter 5183, but used only for Chapter 41 or 42 Excise Tax.

  • Form 870-E

  • Form 4621

  • Form 4883

  • Form 886-A

Agreed Closing Letter (issued by group) All IRC 4962 Abatement of Chapter 42 Tax Only:
  • IRM 4.75.37-6

  • Copy of Signed Form 870-E


Non-4962 Abatements Disallowed in Full or in Part - NOT an Audit Reconsideration:
  • Letter 2511

  • Copy of Signed Form 870-E


Non-4962 Abatements Disallowed in Full or in Part - Audit Reconsiderations Only:
  • N/A, No 30-day letter or report. See unagreed closing letters.


Any Abatement - With Additional Tax:
  • Letter 2511

  • Copy of Signed Form 870-E

Unagreed Closing Letters All IRC 4962 Abatement of Chapter 42 Tax Only:
  • 30-day letter becomes final (unless Appealed), or

  • Ex 4.75.37-8, Closing Letter for improper IRC 4962 Abatement Request; issued by Group, or

  • Letter 924, if applicable, issued by Group, or

  • Letter 693, if applicable. Edit out 1st sentence of 2nd paragraph that mentions "income tax." Check the 3rd box, issued by Group


Non-4962 Abatements Disallowed in Full or in Part - NOT Audit Reconsideration:
  • 30-day letter becomes final (unless Appealed)


Non-4962 Abatements Disallowed in Full or in Part - Audit Reconsiderations Only:
  • Letter 693, Edit out 1st sentence of 2nd paragraph that mentions "income tax." Check the 1st box for Partial disallowance. Check the 2nd or 3rd box for Full disallowance; issued by Group.

  • Form 4621

  • Form 4883

  • Form 886-A


Non-4962 Abatement Not Considered:
  • Letter 924, issued by Group (Non-4962), or

  • Letter 693, Edit out 1st sentence of 2nd paragraph that mentions "income tax." Check the 3rd box, issued by Group


Any Abatement with Additional Tax:
  • 90-day Statutory Notice of Deficiency Issued by Mandatory Review or Appeals.

Miscellaneous Excise Taxes -
Abatements Disallowed in Full,
Abatements Disallowed in Part, or
Abatements Disallowed with Additional Adjustment:
  • Form 11-C

  • Form 730

Report (issued by group) Abatements Disallowed in Full or in Part - NOT an Audit Reconsideration:
  • Letter similar to Ex 4.75.37-9, 30-day letter, or

  • Letter similar to Ex 4.75.37-10, 30-day letter

  • Form 5384 with either letter above.

  • Form 886-A with either letter above.


Abatements Disallowed in Full or in Part - Audit Reconsiderations Only:
  • N/A, No 30-day letter or report. Final closing letter only.


Any Abatement with Additional Tax:
  • Drafted 30-day letter similar to Letter 5183, but used only for Miscellaneous Excise Tax.

  • Form 5384

  • Form 886-A

Agreed Closing Letter (issued by group) Abatements Disallowed in Full or in Part - NOT an Audit Reconsideration:
  • Letter 2511

  • Copy of signed Form 5384


Abatements Disallowed in Full or in Part - Audit Reconsiderations Only:
  • N/A, No 30-day letter or report. See unagreed closing letters.


Any Abatement with Additional Tax:
  • Letter 2511

  • Copy of Signed Form 5384

Unagreed Closing Letters Abatements Disallowed in Full or in Part - NOT an Audit Reconsideration:
  • 30-day letter, becomes final (unless Appealed)


Abatements Disallowed in Full or in Part - Audit Reconsiderations Only:
  • Drafted letter similar to Letter 693, but without the 1st sentence of the 2nd paragraph that mentions "income tax." Check the 1st box for partial disallowance. Check the 2nd or 3rd box for full disallowance.

  • Copy of Form 5384

  • Copy of Form 886-A


Any Abatement with Additional Tax:
  • 90-day Statutory Notice of Deficiency Issued by Mandatory Review or Appeals


Abatement Not Considered:
  • .Letter 924, or

  • Letter 693, but without 1st sentence of 2nd paragraph that mentions "income tax." Check the 3rd box.

Employment Taxes -
Abatements Disallowed in Full
Abatements Disallowed in Part, or
Abatements Disallowed with Additional Adjustment:
  • Form 940

  • Form 941-X

  • Form 944-X

  • Form 945-X


See IRM 4.23.13
Report (issued by group)
  • Letter 5182, 30-day letter, or

  • Letter 5183, 30-day letter

  • Form 2504, correct version, with Letter 5183 only
    • Form 4666, with Letter 5183 only

  • Form 4667, with Letter 5183 only

  • Form 4668, with Letter 5183 only

  • Form 4668-B, with Letter 5183 only

  • Form 886-A, with either letter above

  • Pub 5, with either letter above

  • Pub 594, with either letter above

Closing Letter
  • Letter 5154, Closing Letter when taxpayer fails to respond or provide sufficient information, or abatement not considered on its merits, or previous adjustment is reduced.

  • Copy of Signed Form 2504 if agreed

  • Copy of Form 4666

  • Copy of Form 4667

  • Copy of Form 4668

  • Copy of Form 4668-B

  • Pub 5

Note:

Generally requests for abatement that are not audit reconsiderations are not assigned to EO Exams. The Service Center generally requires the taxpayer to first pay the tax and file a claim.

Reminder:

Send a copy of the report and closing letter using Letter 3597, Transmittal Letter for Power of Attorney, to the representative who is authorized to receive copies of the taxpayer correspondence via Form 2848 or Form 8821

Reminder:

Form 886-A is mandatory for all unagreed issues, all declaratory judgment cases, and for agreed issues where the explanation can’t fit in the space provided on the basic report forms. Form 886-A is optional for all other situations. If you prepare a Form 886-A for an "initial report," generally the explanation will be in summary form unlike an explanation for a formal report. Indicate "Initial Report" on the top of Form 886-A.

Reminder:

* When a disqualified person, self dealer, manager, donor or donor advisor signs a Form 4720-A for the Chapter 42 tax liability, send each such person their own separate letter.

Reports and Closing Letters for Change Cases

(1) Where Fast Track Settlement is a viable option to an eligible taxpayer for unagreed issues, give the taxpayer Pub 5092, Fast Track Settlement A Process Resolution of Tax Exempt and Government Entities (TE/GE) Tax Issues, with the initial report.

(2) If a statute date is imminent and there is no time to send a standard 30-day letter, consider issuing a replacement transmittal letter for the report. Consult with Area Counsel concerning the content, format, and timing of issuing a letter that replaces a 30-day letter. Refer to http://www.irs.gov/uac/Contact-a-Local-Taxpayer-Advocate for the current list of Taxpayer Advocate offices. Generally:

  • Summarize in the letter why you can’t use a standard 30-day letter. See Sections 9.10 and 12.02 of Rev. Proc. 2017-5 (updated annually).

  • Ensure the replacement transmittal letter contains the standard Taxpayer Advocate paragraph.

  • A suspense date for the letter is not required.

  • The transmittal letter can direct the taxpayer toward availing themselves the opportunity for Appeals Office consideration, such as by promptly submitting a valid consent to extend the statute date.


Audit 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 reports only (issued by group)
  • Letter 3618, 30-day letter

  • Form 6018, at Line 1

  • Form 4621-A

  • Form 886-A

  • Pub 892

  • Pub 3498

Closing Letter
  • 90-day Final Adverse Determination Letter (FADL) issued by Mandatory Review or Appeals

Revocations -
  • All other 501(c) or (d)


for specified tax years
Formal 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

Closing Letter
  • 90-day Final Adverse Determination Letter (FADL) issued by Mandatory Review or Appeals

Disqualifications -
  • Status 36 Organizations


for specified tax years
Formal reports only (issued by group)
  • Letter 3618, 30-day letter

  • Form 6018, at Line 3

  • Form 4621-A

  • Form 886-A

  • Pub 892

  • Pub 3498

Closing Letter
  • 90-day Final Adverse Determination Letter (FADL) issued by Mandatory Review or Appeals

Disqualifications -
  • IRC 501(c)(12)

  • IRC 501(c)(15)


for specified tax years
Formal reports only (issued by group)
  • Letter 4700, 30-day letter

  • Form 6018, at Line 3

  • Form 4621-A

  • Form 886-A

  • Pub 892

  • Pub 3498

Closing Letter
  • 90-day Final Adverse Determination Letter (FADL) issued by Mandatory Review or Appeals

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

Closing Letter
  • 90-day Final Adverse Determination Letter (FADL) issued by Mandatory Review or Appeals

Non-declaratory Status Changes that are subject to appeal -
with an effective date

Example:

(1) EO no longer exempt from filing Form 990.

Example:

(2) Exempt Veterans Organization no longer described under IRC 170(c)(3).

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701(for Initial reports only), or

  • Drafted 30-day letter


  • Form 6018, at Line 10, with either letter above

  • Form 4621-A, with either letter above

  • Form 886-A, with either letter above

Agreed Closing Letter (issued by group)
  • Drafted letter, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • Drafted 30-day letter becomes final (unless appealed)

Change to EO Income Taxes - Exempt Organizations, taxable private foundations, IRC 527 organizations, or IRC 4947 Trusts:

  • Form 990-T also proxy tax

  • Form 1120

  • Form 1120–POL

  • Form 1041

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (for initial reports only), or

  • Letter 3621, 30-day letter


  • Form 4549, for initial reports only

  • Form 870, for formal reports only

  • Form 4549-A, for formal reports only

  • Form 886-A, with either letter above

  • Pub 3498, with either letter above

  • Pub 594, with either letter above

Agreed Closing Letter (issued by group)
  • Letter 3607, and

  • Copy of Signed Waiver Form


or
  • Letter 5332, or

  • Letter 5334

Unagreed Closing Letter
  • 90-Day Statutory Notice of Deficiency, issued by Mandatory Review or Appeals.

Change in Income Taxes - Converted Tax Returns
  • Form 1120

  • Form 1041

Report (issued by group)
  • Letter 950, 30-day letter

  • Form 870

  • Form 4549-A

  • Form 886-A

  • Pub 3498

  • Pub 594

Agreed Closing Letter (issued by group)
  • Letter 3607, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • 90-Day Statutory Notice of Deficiency, issued by Mandatory Review or Appeals

Change in Income Taxes - Discrepancy Adjustments
  • Form 1040

  • Form 1120

Report (issued by group)
  • Letter 3605, 30-day letter, 1st Formal report,


then if necessary:
  • Letter 3603, 30-day letter, 2nd Formal report, or

  • Letter 3619, 30-day letter, 2nd Formal report


  • Form 4549-E, with any letter above

  • Form 886-A, with any letter above

Agreed Closing Letter (issued by group)
  • Letter 3607, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • 90-Day Statutory Notice of Deficiency, issued by Mandatory Review or Appeals.

Change in Chapter 41 and 42 Excise Taxes
  • Form 4720

  • Form 4720-A

  • Form 990-PF

  • Form 990-BL

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (for Initial reports only), or

  • Letter 3614, 30-day letter


  • 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

Agreed Closing Letter (issued by group)
  • Letter 3607, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • 90-Day Statutory Notice of Deficiency, issued by Mandatory Review or Appeals.

Change in Miscellaneous Excise Taxes
  • Form 11–C

  • Form 730

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (for initial reports only), or

  • Letter 950-E, 30-day letter


  • Form 5384, for initial report only

  • Form 2504-E, for formal report only

  • Form 5385, for formal report only

  • Form 886-A, with any letter above

  • Pub 3498, with any letter above.

Agreed Closing Letter (issued by group)
  • Letter 3607, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • Letter 950-E 30-day letter becomes final (unless Appealed).

Change in Employment Taxes - Non-worker Classification
  • Form 940

  • Form 941

  • Form 944

  • Form 945

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (for Initial reports only), or

  • Letter 4121-E (Initial report only if mailed), or

  • Letter 950-D, 30-day letter


  • Form 2504 or Form 2504-S, with any letter above

  • Form 4666, with any letter above

  • Form 4667, with any letter above

  • Form 4668, with any letter above

  • Form 4668-B, with any letter above

  • Form 886-A, with any letter above

  • Pub 3498, with any letter above

Agreed Closing Letter (issued by group)
  • Letter 3382, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • Letter 950-D 30-day letter becomes final (unless Appealed).

Change in Employment Taxes- Worker Classification
  • Form 940

  • Form 941

  • Form 944

Report (issued by group)
  • Draft transmittal letter, IDR or Form 5701 (for Initial reports only), or

  • Letter 4121-E (Initial report letter only if mailed), or

  • Letter 950-C, 30-day letter


  • Form 2504-WC, with any letter above

  • Form 4666, with any letter above

  • Form 4668, with any letter above

  • Form 4667, with any letter above

  • Form 886-A, with any letter above

  • Pub 3498, with any letter above

  • Pub 1976, with any letter above

Agreed Closing Letter (issued by group)
  • Letter 3382, and

  • Copy of Signed Waiver Form

Unagreed Closing Letter
  • Letter 3523, 90-Day Notice of Determination of Worker Classification (NDWC), issued by Mandatory Review or Appeals.

Reminder:

Form 886-A is mandatory for all unagreed issues, all declaratory judgment cases, and for agreed issues where the explanation can’t fit in the space provided on the basic report forms. Form 886-A is optional for all other situations. If you prepare a Form 886-A for an "initial report," generally the explanation will be in summary form unlike an explanation for a formal report. Indicate "Initial Report" on the top of Form 886-A.

Reminder:

For unagreed issues where Fast Track Settlement is a viable option to an eligible taxpayer, provide Pub 5092, Fast Track Settlement A Process Resolution of Tax Exempt and Government Entities (TE/GE) Tax Issues, with the initial report.

Reminder:

* When a disqualified person, self dealer, manager, donor or donor advisor signs a Form 4720-A for the Chapter 42 tax liability, send each such person their own separate letter.

Form 4621 Instructions for Completion

Form 4621, Exempt Organizations - Report of Examination (Proposed Tax Changes), is a basic report form used for proposing a change in Chapter 41 or 42 excise taxes.

The specific instructions for completion are as follows:

Line # Information to be inserted
1. Form No. Enter the form number(s) of the returns covered by the audit.
2. Area Office Enter the applicable EO Area Office.
3. Date of Report Enter the date of the report.
4. Taxpayer Name and Address Enter the taxpayer's legal name and current address. If the name on the return is different from the legal name, enter both names as follows:
"Legal Name (Shown on the return as Name on the Return) "
5. Name and Address of Private Foundation or Other Exempt Organization For EO excise tax cases where the taxpayer is a disqualified person, self dealer, manager, donor or donor advisor with respect to an exempt organization, enter the legal name and address of the related exempt organization.
6. SSN or EIN (of taxpayer) Enter the EIN of the taxpayer, or if the taxpayer is an individual, enter the social security number.
7. Tax Periods Ended (of taxpayer) List each tax year audited in the following format:
Calendar Year - Show ending date (12/31/2012)
Fiscal Year - Show ending date (6/30/2012)
Short period - Show beginning and ending date (1/1/2012 - 9/30/2012)
52/53 Week Year - Show last day of year (5/25/2012)
8. PF or Other EO's EIN If the tax change is on a disqualified person, self dealer, manager, donor or donor advisor with respect to an exempt organization, enter the EIN of such related exempt organization. If the tax is on the exempt organization, leave blank. Example - If the tax was on a self dealer, arising out of an act of self-dealing with a private foundation, you would enter the EIN of the private foundation.
9. Tax Periods Ended If the taxpayer is a disqualified person, self dealer, manager, donor or donor advisor with respect to an exempt organization, then enter the audited tax years of such related exempt organization in the format described in item (7) above. If the taxpayer is the exempt organization, leave this item blank.
10. Report Preparer's Name Enter the EO agent's name.
11. Agreement Secured "X" the appropriate item to indicate whether a full agreement, no agreement, or a partial agreement was secured to the proposed tax changes.
12. Findings Discussed With Enter the name and title of the individual with whom the proposed tax adjustments were discussed.
13. Agreement Date Enter the date a valid waiver or agreement form was received by the IRS for the proposed adjustments.
14a. Summary of Proposed Adjustments Adjustments for different types of tax should be entered on separate lines so that the summary of proposed adjustments will reflect the specific IRC provision applicable to each adjustment. For this purpose, different taxes imposed by separate provisions within one IRC section (such as Chapter 42 initial taxes, and additional taxes) should be entered on separate lines, as well as taxes imposed by different IRC sections. For example, adjustments under the following provisions should each be entered on a separate line in columns (3) or (4) of item 14a: IRC 4942(a), IRC 4945(a)(1), IRC 4945(b)(1).
(1) Internal Revenue Code Section
Enter the specific IRC provision which describes the tax adjustment proposed, with different types of adjustments each entered on separate lines.
(2) Period Covered by Examination
Enter the tax year for the adjustment in the format described for item (7) above.
(3) Amount of Tax
Enter the amount of the proposed adjustment. For Chapter 42 excise tax adjustments, the adjustment to initial tax goes in column 3.
(4) Additional Tax
This column only applies to second level taxes such as the additional taxes of Chapter 42 of the IRC. If the report is a formal report, enter the amount of proposed adjustment to second level Chapter 42 taxes in column (4).
14(b) Penalty 1. Internal Revenue Code Section:
Enter the specific IRC provision which describes the penalty proposed, with different types of penalty adjustments each entered on separate lines. Examples: IRC 6684, IRC 6651(a)(1).
2 Amount:
Enter the amount of the proposed penalty.
15. Remarks If there will be no change to exempt status on an open primary return audit, the "remarks" section should state that a separate advisory letter will be issued regarding exempt status. If there will be a proposed change to exempt status, state that a separate report will be issued regarding the issue of exempt status.
On Initial Reports
: The adjustments (reasonably expected to be agreed) may be explained in the remarks section. If more space is required, the proposed adjustments should be explained on Form 886-A and the remarks section should include a statement to see attached Form 886-A for an explanation of the adjustments.
On Formal Reports: The proposed adjustments are explained on Form 886-A. Therefore the remarks section of Form 4621 should contain a statement to see attached Form 886-A for an explanation of the proposed adjustments. For two-tier excise taxes indicate the fact that there was no correction of the acts or failures to act giving rise to the initial tax, or there was inadequate correction as of the date of the report.
16. Attachments List the attachments which are included as part of the RAR to the taxpayer. These would include Form 4883, Form 886-A, Schedules, Exhibits.

Form 4621-A Instructions for Completion

Form 4621-A, Exempt Organizations - Report of Examination (Proposed Status Changes), is a basic report form used for proposing a loss of a recognized or self-declared exempt status, or of changes in foundation status or public charity status.

The specific instructions for completion are as follows:

Line # Information to be inserted
1. Form no. Enter the form number of the audited returns (Form 990, Form 990-PF, etc.).
2. Area Office Enter the applicable EO Area Office.
3. Date of Report Enter the date of the report.
4. Name and Address of Taxpayer Enter the taxpayer's legal name and current address. If the name on the return is different from the legal name, enter both names as follows: "Legal Name (Shown on the return as Name on the Return)."
5. EIN Enter the exempt organization's employer identification number.
6. Tax Periods Ending List each tax year audited in the following format:
Calendar Year - Show ending date (12/31/2012)

Fiscal Year - Show ending date (6/30/2012)

Short Period - Show beginning and ending date (1/1/2012- 9/30/2012)

52-53 Week Year - Show last day of taxable year (5/25/2012)
7. Report Preparer's Name Enter the EO agent's name.
8. Agreement Secured "X" Yes or No to indicate whether a signed Form 6018 was secured. Caution:
Form 6018 applies only to IRC 7428 declaratory judgment cases. Execution of a Form 6018 serves only to memorialize the intent of the taxpayer at the time of signing the Form 6018, not to protest the proposed action or seek a declaratory judgment. However, that memorialization of intent to agree isn't legally binding and declaratory judgment rights aren't waived. All proposed status changes on cases subject to declaratory judgment must be written up as "unagreed" , even if Form 6018 was executed.
9. Findings Discussed With Enter the name and title of the individual with whom the audit findings were discussed.
10. Agreement Date Enter the date a signed Form 6018 was received by the IRS.
11. Current Foundation Status Classification The purpose of this item is to identify the foundation status of the organization prior to any change in such status, which is proposed as a result of the audit. Enter a narrative description and IRC references which describe the organization's current (not proposed) foundation status classification. If the organization is a non IRC 501(c)(3) to which foundation status classification doesn't apply, enter Not Applicable. Examples include but aren't limited to:
  • Publicly supported organization under IRC 509(a)(1) and IRC 170(b)(1)(A)(vi)

  • An educational organization under IRC 509(a)(1) and IRC 170(b)(1)(A)(ii)

  • Publicly supported organization under IRC 509(a)(2)

  • Supporting organization under IRC 509(a)(3)

  • Private non-operating foundation under IRC 509(a)

  • Private operating foundation under IRC 4942(j)(3)

12. Nature of Proposed Status Change In all proposed status change cases, "X" the applicable line which describes the change being proposed in the organization's exempt status or foundation status, and enter the effective date of the proposed status change at the end of that line. Additionally, if the organization's exemption is being revoked, enter on the applicable line, the paragraph number of IRC 501(c) under which the organization was exempt.


If foundation status of an organization not described under IRC 509(a)(1) is being modified to an organization described in IRC 509(a)(1), enter the sentence number of IRC 170(b)(1)(A) under which it is proposed the organization be classified (for example IRC 170(b)(1)(A)(iii), IRC 170(b)(1)(A)(vi), etc.).

If foundation status of an organization described in IRC 509(a)(1) is being modified to a different classification under IRC 170(b)(1)(A) enter the sentence number of IRC 170(b)(1)(A) for the proposed new classification (for example IRC 170(b)(1)(A)(iii), IRC 170(b)(1)(A)(vi), etc.).

If foundation status is being modified to an organization described under IRC 509(a)(2), (3), or (4), enter the applicable paragraph number of section 509(a) to which the organization's status is being changed, on the applicable line.
13. Remarks On Initial Reports: The proposed status change (normally expected to be agreed) may be explained in the remarks section. If more space is required, the proposed adjustments should be explained on Form 886-A and the remarks section should include a statement to see attached Form 886-A for an explanation of the proposed changes.
On Formal Reports
: If the case is unagreed, or treated as unagreed because it is subject to declaratory judgment under IRC 7428, the results of the audit will be explained on Form 886-A. Accordingly, in such cases the remarks section should contain a statement to see Form 886-A for an explanation of the proposed status change.
Status 36 Organizations: See specialized instructions for disqualification at IRM 4.75.16-12, Status 36 Case Scenarios, at the Note in Scenario 1.
14. Attachments List the attachments which are included as part of the RAR to the taxpayer. These could include but aren't limited to: Form 886-A, Schedules, Exhibits.

Form 4883 Instructions for Completion

Form 4883, Exempt Organizations Excise Tax Audit Changes, is a basic report form used for changes in Chapter 41 or 42 excise taxes. The specific instructions for completion are as follows:

Note:

Sections of the forms not discussed are self-explanatory.

Item/Line # Information to be included
Name of Taxpayer Enter the taxpayer's legal name. If the name on the return is different from the legal name, enter both names as follows: "Legal Name (Shown on the return as Name on the Return)" .
EIN / SSN Enter the Employer Identification Number of the taxpayer, or SSN if the taxpayer is an individual.
Schedule or Exhibit Assign an Exhibit number to the Form 4883 and enter in this field. Because the Form 4883 would normally be the first item under the Form 4621 in the RAR, Form 4883 usually would be Exhibit 1. If there is more than one Form 4883, assign consecutive exhibit numbers to them.
Name of Exempt Organization (if different from taxpayer) If the taxpayer is a disqualified person, self dealer, organization manager, donor or donor advisor, enter the name of the related exempt organization. If the taxpayer is the exempt organization, enter "Not applicable."
Taxable Years Ended Enter the appropriate taxable year ending date in one of the three columns in the following format:
  • Calendar Year - Show ending date (12/31/2012)

  • Fiscal Year - Show ending date (6/30/2012)

  • Short Period - Show beginning and ending date (1/1/2012- 9/30/2012)

  • 52-53 Week Year - Show last day of taxable year (5/25/2012)

IRC Section for Proposed Adjustment Only one type of adjustment can be entered in a column for a particular tax year. If there is more than one type of adjustment for one year, separate columns must be used for each adjustment. More than one Form 4883 may be used if necessary. Enter in the applicable adjustment column (immediately below the tax year ending date) the IRC section reference for the proposed excise tax adjustment. Example: IRC 4945(a)(2), IRC 170(f)(10)(F), IRC 4958(a)(1).
1. Adjustments Enter a description of the adjustment. Examples: Under distribution of income, Taxable expenditure, Excess lobbying expenditure, Self-Dealing, and Excess benefit transaction.
2. Total adjustments Enter the total of adjustments for each tax year.
3. Amount reported on return or as previously adjusted Enter the final taxable amount computed by the taxpayer on the last processed return (Form 4720, Form 990-PF, or Form 990-BL) or as computed on a prior processed agent’s report if applicable.
4. Total amount as corrected Add the total adjustments per line (2) to the taxable amount per return or as previously adjusted per line 3. Enter the total on line 4.
5. Applicable tax rate percent Enter the applicable tax rate percent for the type of excise tax being adjusted. Where the type of tax is an excise tax for which there are two tiers, the initial tax rate is entered in this field. (Second level taxes are entered on Line 9.)
6. Initial tax liability as corrected Enter the corrected initial tax liability (Line 4 x Line 5).
7. Initial tax liability reported Enter initial tax as previously reported on return (Form 4720, Form 990-PF, or Form 990-BL) or as previously adjusted.
8. Increase or (decrease) in tax Enter increase or (decrease) in tax (Line 6 - Line 7).
9. Additional tax (minimum) In cases where required correction of acts giving rise to initial tax liability was not completed, enter the amount of second-level excise tax liability to be proposed. In situations where the amount of second-level tax liability will continue to accrue, enter the amount of second-level tax computed up to the date of the RAR. A schedule setting forth the computation of the second-level tax should be included as part of the RAR. This amount may stand alone in a separate column under the same tax period.
10. Penalties Code Section In the area to the left of the columns for dollar amounts, enter the IRC section for any applicable penalties. Examples - IRC 6651(a)(1), IRC 6684, etc. However, if more than one type of penalty applies, in the code section field enter "See below" and describe the penalty in the "Explanation of Adjustments" section. Include a statement in the "Explanation of" for the computation and code section for each penalty amount included on Line 10.
Explanation of Adjustments In agreed cases where the explanation of excise tax adjustments is brief, it can be entered in this area. If the case is unagreed or if the explanation is too lengthy for the available space on the form, the explanation should be entered on Form 886-A.

Form 870 Instructions for Completion

Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, is an agreement form used for changes in income taxes including unrelated business income tax. The specific instructions for completion are as follows:

Note:

Sections of the form not discussed are self-explanatory.

Item/Line # Information to be included
Date received Enter the date received. Also, the EO agent, or other person receiving Form 870 must initial in this block.
Name and address Enter the taxpayer's legal name and current address. If the name on the return is different from the legal name, enter both names as follows:
Legal Name (Shown on the return as Name on the Return)
Taxable Year Ended Enter each year on a separate line as follows:
  • Calendar Year - Show ending date (12/31/2012)

  • Fiscal Year - Show ending date (6/30/2012)

  • Short Period - Show beginning and ending date (1/1/2012- 9/30/2012)

  • 52-53 Week Year - Show last day of taxable year (5/25/2012)

Amount of tax Enter the increase or decrease in income tax (including UBIT), as agreed, on separate lines by years. This amount is generally the same as that shown on Form 4549-A. If the taxpayer agrees to the proposed tax but disagrees with the proposed penalty, the case is considered partially agreed. In partially agreed cases, a signature on this form and payment must be solicited for the agreed portion.
Penalties Enter the applicable penalties, as agreed, separately by years. The total of all penalties for each tax year should agree with the total penalties reported on Line 18 of Form 4549-A.
Signature of taxpayer See the instructions on the form.

Form 870-E Instructions for Completion

Form 870-E, Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment, is an agreement form used for Chapter 41 or 42 excise taxes. The specific instructions for completion are as follows:

Note:

Sections of the form not discussed are self-explanatory.

Item/Line # Information to be included
Date received Enter the date received. Also, the EO agent, or other person receiving Form 870-E, should initial in this block.
Name and address Enter the taxpayer's legal name and current address. If the name on the return is different from the legal name, enter both names as follows: "Legal Name (Shown on the return as Name on the Return) "
Taxable Year Ended Enter each year on a separate line as follows:
  • Calendar Year - Show ending date (12/31/2012)

  • Fiscal Year - Show ending date (6/30/2012)

  • Short Period - Show beginning and ending date (1/1/2012- 9/30/2012)

  • 52-53 Week Year - Show last day of taxable year (5/25/2012)

Code section Enter the applicable Code sections on separate lines for the tax and penalty to be assessed.
Amount of tax
Enter the increase or decrease in Chapter 41 or 42 excise tax, as agreed, on separate lines by years and by Code sections. This amount is generally the same as that shown on Form 4621 or Form 4883. If the taxpayer agrees to the proposed tax but disagrees with the proposed penalty, the case is considered partially agreed. In partially agreed cases, a Form 870-E and payment should be solicited for the agreed portion.
Penalty Enter the applicable penalties, as agreed, separately by years and by Code sections.
Signature of taxpayer See the instructions on the form.

Form 4549 and 4549-A Instructions for Completion

Form 4549, Income Tax Examination Changes, is a basic report form and agreement form for income taxes including unrelated business income tax, and is issued as part of an initial income tax report. Form 4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed), is a basic report form issued as part of a formal income tax report. The specific instructions for completion are as follows:

Note:

Sections of the form not discussed are self-explanatory.

Item/Line # Information to be included
Name and Address Enter the correct name and address of the taxpayer.
Person with Whom Audit Changes Were Discussed Enter the name of person with whom the audit changes were discussed. If the person holds a power of attorney or is a corporate officer, also enter title.
Period End Enter the taxable year for which the column applies as follows:
  • Calendar Year - Show ending date (12/31/2012)

  • Fiscal Year - Show ending date (6/30/2012)

  • Short Period - Show beginning and ending date (1/1/2012- 9/30/2012)

  • 52-53 Week Year -- Show last day of year (5/25/2012)

Adjustments to Income List adjustments. Place a bracket around the dollar amount if an adjustment is in the taxpayer's favor. If there are more than seven adjustments, write "See page ____" on line 1(a) and use Form 4549-B to list the adjustments.
Line 3: Taxable Income Per Return or as Previously Adjusted Enter the final figure computed by the taxpayer on the last processed return or as computed on a prior processed agent’s report if applicable. This will be zero, unless there is a TC 150 previously posted reporting taxable income. Refer to IDRS command code TXMOD. The amount on this line must agree with the TXMOD amount.
Line 4: Corrected Taxable Income Identify how the tax was computed (tax table, tax rate schedule, etc.) and the amount of tax. If additional tax applies, indicate on this line, and attach a schedule showing the computation of the corrected tax figure. Don’t include alternative minimum tax on this line.
Line 8: Less Credits This line should include only non-refundable credits. Don’t include credits such as earned income credits or withholding tax and excess FICA credits.
Line 10: Other Taxes Include recapture taxes, self-employment tax, alternative minimum tax, etc. Attach the appropriate forms detailing the computations.
Line 12: Total Tax Shown on Return or as Previously Adjusted Include tax per return plus any additional tax assessed as reflected on TXMOD.
Adjustment to EIC/Fuels Credit These refundable credits should be shown here as an adjustment (increase or decrease) to the credits originally reported on the return (or as previously adjusted). They are normally corrected based on adjustments to income. The calculation of these credits should be attached to the report.
Adjustments to Prepayment Credits Any changes to prepayment credits should be reflected on this line.
Penalties Identify penalties by IRC section and title. If the penalty cannot be currently computed, place an asterisk in the line amount field and describe the process of the calculation in the "Other Information" section. For substitute for returns, if there is no reasonable cause include the failure-to-file and failure-to-pay penalties.

Other examples and references for completing Form 4549 or Form 4549-A are as follows:

  • IRM 4.10.8-10, Sample Form 4549-A - Full Allowance of Tentative NOLD.

  • IRM 4.10.8-11, Sample Form 4549-A - Partial Allowance of Tentative NOLD.

  • IRM 4.10.8-12, Sample Form 4549-A - Full Disallowance of Tentative NOLD.

Form 6018 Instructions for Completion

Instructions for completion of Form 6018 are provided below.

Note:

This exhibit isn’t an exact duplicate of the form, but is only meant to assist in completing the correct items on the form.

Item/Line # Information to be included
Case Number Enter "N/A"
Date of Latest Determination Letter Enter the date of the latest determination or ruling letter pertaining to the organization’s exempt status. If the organization’s determination or ruling letter isn’t available, enter the month and year of the ruling date indicated on IDRS records.
EIN Employer Identification Number
Date of Proposed Adverse Action Letter Enter date, if applicable, otherwise leave blank.
Name and Address Enter the correct name and address of the organization.
Nature of Proposed Action Select the appropriate box.
Block 1. Check this box for revocations of IRC 501(c)(3), 501(c)(9) and 501(c)(17) organizations. Fill in the effective date of revocation.
Block 2. Check this box for revocations of all other IRC 501(c) or (d) organizations. Fill in the blank fields, including entering the affected tax years under audit.
Block 3. Check this box for (1) Status 36 disqualification cases, (2) IRC 501(c)(12) or IRC 501(c)(15) disqualification cases, or (3) for organizations treated as tax-exempt under section 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.
Blocks 4 through 9. Check the appropriate box for the change in foundation status, and fill in the blank fields.
Block 10. Check this box for non-declaratory judgment changes, but changes that are nevertheless subject to Appeal.

Example:

(1) EO no longer exempt from filing Form 990.


Example:

(2) Exempt Veterans Organization no longer described under IRC 170(c)(3).

Guidelines for Issuance of Letters

ADDRESS HEADING:

  • MS 4920 DAL, for all audit closing letters issued by Mandatory Review

  • MS 4900 DAL, for all other audit closing letters

    Note:

    Rebuttal letters aren't audit closing letters

  • Agent's mailing address, for 30-day letters

  • Area Office’s address, for 90-day letters with an imminent statute

  • Sender's mailing address, for all other letters

SIGNATURE BLOCK:

  • The "Director, Exempt Organizations Examinations" , or "Director, EO Examinations," for all 30-day letters

  • The "Director, Exempt Organizations Examinations" , or Director, EO Examinations, for all audit closing letters

  • The sender's signature block, for all other audit letters

PERSON TO CONTACT:

  • The agent's name, for letters issued by the audit group

  • The reviewer's name, for letters issued by Mandatory Review

For a current table that lists EO audit letters, including closing letters, refer to the intranet webpage at http://tege.web.irs.gov/article.asp?title=guidelines-issuance-letters&path=/my-job/1_revenue-agent/2_examination.

Note:

Mandatory Review will print the letters they issue. Write the letter number (or IRM exhibit number) at the heading of Form 5772 and in the Mandatory Review section of Form 3198-A, at check-box, "Prepare/Issue Letter:"

Incomplete Protest Returned to taxpayer - Suggested Language

Refer to IRM 4.75.15.10 for guidance.

This is suggested language to return an incomplete protest to the taxpayer. The agent should use their address in the heading of the letter and allow 10 days for the taxpayer to respond.

We are returning the protest you provided on MMDDYYYY as it didn't provide all the information as outlined in Publication 3498. The following items are missing and must be provided in order for the protest to be considered complete and forwarded to the Appeals Office: (agent prepares list of missing items).
Please furnish the required information within 10 days from the date of this letter. We are enclosing an addressed envelope for your convenience.
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.
Enclosures: Pub. 892, Pub. 5, Copy of Protest

Form 2807 Sample

Do not use this verbatim. Tailor your agreement to fit your issues.

Form 2807 DEPARTMENT OF THE TREASURY - INTERNAL REVENUE SERVICE
(Rev. July 1980) AGREEMENT TO MAINTAIN ADEQUATE BOOKS OF ACCOUNT AND RECORDS
During the examination of my Federal income tax return for the year(s) shown, consideration was given to the adequacy of the books of account and records I now maintain. As a result, I agree that, to be able to make a proper return of income in the future, I will maintain the specific books of account and records described below. YEAR(S)


12/31/2011
DESCRIPTION


Section 6001 of the Internal Revenue Code of 1986, as amended (the "Code"), 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. 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.


Section 6033 provides, in general, that every organization exempt under section 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 or 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.

We notified you on [date] that your books and records are not adequate to permit the Internal Revenue Service to determine the correctness of your Forms 990 and the extent of your unrelated business income tax liability. The amounts reported on your Form 990 do not agree with documents you have provided us. You did not maintain original source documents to support your transactions. Specifically, we can’t determine how and under what circumstances your funds were distributed. Also, we can’t confirm who your recipients were for charitable distributions, and whether they were charitable organizations or of a charitable class. Consequently, we can’t ascertain whether your assets are dedicated exclusively for charitable purposes in order to justify continued recognition of your tax-exempt status under section 501(c)(3) of the Code.

Your records also don’t permit us to confirm whether amounts you received are contributions or sales of goods and services. For some transactions we believe to be contributions, we can’t identify your sources for purposes of determining your proper foundation status, and ultimately your tax liability under Chapter 42 of the Code, if any. We found you liable for unrelated business income tax for the sale of widgets, but your records don’t permit us to determine the extent of your sales. You erroneously reported a substantial amount of your gross income from sales as contributions, and you didn’t report all of the amounts you received.

You are required to maintain the books and records listed below:
• Names, addresses and contact information for individual and corporate donors
• Copies of all acknowledgments of charitable contributions issued to donors

• Copies of contribution agreements and correspondence with donors
• Records of any goods or services provided to any donor
• Documentation pertaining to any in-kind donations received
• Taxpayer Identification Numbers of all recipients of grants from your organization
• Copies of determination letters issued by the IRS to the grant recipients, as applicable
• Documentation of how grants are/were used by the grant recipients
• Documentation of (internal) approval determinations for all grants made
• Documentation of all transactions for the provision of goods or services with all parties

• Documentation of sales (such as a sales journal), and copies of orders for widgets from customers.
SIGNATURE OF TAXPAYER (OR PARTNER)

ADDRESS DATE
SIGNATURE OF SPOUSE IF PRIMARILY RESPONSIBLE FOR KEEPING ALL OR PART OF NECESSARY RECORDS
ADDRESS DATE

Chapter 42 Excise Tax Reference Chart - Private Foundations

The chart below lists the excise taxes under IRC Chapter 42 applicable to private foundations. Each listed tax is described with its key attributes.

IRC Section Assessed Against Tax Rate Form Reported On 2nd Tier Tax Applicable
IRC 4940 Tax on Net Investment Income Private Foundation 2 percent of Net Investment Income
(1 percent if IRC 4940(e) is met).
See Note 1
Form 990-PF No
IRC 4941 Self Dealing Self-dealer 10 percent Form 4720-A 200 percent
Foundation Manager 5 percent
(Max $20,000 with respect to any one act)
50 percent
(Max $20,000 with respect to any one act)
IRC 4942 Distribution of Income Private Foundation 30 percent Form 4720 100 percent
IRC 4943 Excess Business Holdings Private Foundation 10 percent Form 4720 200 percent
IRC 4944 Jeopardizing Investments Private Foundation 10 percent Form 4720 25 percent
Foundation Manager 10 percent
(Max $10,000 with respect to any one investment)
Form 4720-A 5 percent
(Max $20,000 with respect to any one investment)
IRC 4945 Taxable Expenditures Private Foundation 20 percent Form 4720 100 percent
Foundation Manager 5 percent
(Max $10,000 with respect to any one taxable expenditure)
Form 4720-A 50 percent
(Max $20,000 with respect to any one taxable expenditure)
IRC 4948 Tax on Gross Investment Income of Foreign Private Foundations Private Foundation 4 percent of Gross Investment Income derived from U.S. Sources Form 990-PF No

Note 1- Exempt operating foundations described under IRC 4940(d)(2) are exempt from IRC 4940 tax. Taxable private foundations and IRC 4947(a)(1) trusts are taxed at a rate of 2 percent of the net investment income plus the tax that would be imposed under IRC 511 if the organization were exempt, less the income tax reported on Form 1041 or Form 1120.

Chapter 41 and 42 Excise Tax Reference Chart - Non-Private Foundations

The chart below lists the excise taxes under IRC Chapters 41 and 42 applicable to organizations that are not private foundations. Each listed tax is described with its key attributes.

IRC Section Assessed Against Tax Rate Form Reported On 2nd Tier Tax Applicable Additional Resources
IRC 170(f)(10)(F) Tax on Premiums Paid on Personal Benefit EO 100 percent Form 4720 No See Note 1
IRC 664(c)(2) Tax on Unrelated Business Taxable Income of Charitable Remainder Trusts Charitable Remainder Trust 100 percent Form 4720 No
Treas. Reg. 1.664-1(c)
IRC 4911 Tax on Excess Lobbying Expenditures EO 25 percent Form 4720 No -
IRC 4912 Tax on Disqualifying Lobbying Expenditures EO 5 percent Form 4720 No -
Organization Manager 5 percent Form 4720 -A
IRC 4951 Tax on Self Dealing (Black Lung Trusts) Self Dealer 10 percent Form 990-BL, Schedule A 100 percent -
Trustee 2.5 percent 50 percent
IRC 4952 Tax on Taxable Expenditures (Black Lung Trusts) Trust Fund 10 percent Form 990-BL, Schedule A 100 percent -
Trustee 2.5 percent 50 percent
IRC 4953 Tax on Excess Contributions (Black Lung Trusts) Contributor 5 percent Form 6069 (Make a referral on Form 5666 to LB&I or SB/SE) No -
IRC 4955 Tax on Political Expenditures of IRC 501(c)(3) Organizations EO 10 percent Form 4720 100 percent -
Organization Manager 2.5 percent
(Max $5,000 with respect to any one political expenditure)
Form 4720 -A 50 percent
(Max $10,000 with respect to any one political expenditure)
IRC 4958 Tax on Excess Benefit Transactions (EBT) Disqualified Person 25 percent Form 4720 200 percent
-
Organization Manager 10 percent
(Max $20,000 with respect to any one EBT)
Form 4720 -A No
IRC 4959 Tax on Hospital Organizations for Failure to Meet Requirements of IRC 501(r)(3) Hospital Organization $50,000 Form 4720 No Notice 2011-52
IRC 4965 Tax on Prohibited Tax Shelter Transaction (PTST) Tax-Exempt Entity
Highest Income Tax Rate on the Greater of Entity Net Income or 75 percent of Transaction Proceeds.
See Note 2
Form 4720
(The PTST is also reported on Form 8886-T)
No Notice 2007-18
Entity Manager $20,000 with respect to each approval or act Form 4720-A
IRC 4966 Tax on Taxable Distribution by a Sponsoring Organization with respect to a Donor Advised Fund Sponsoring Organization 20 percent Form 4720 No Notice 2007-21
Fund Manager 5 percent
(Max $10,000 with respect to any one taxable distribution)
Form 4720-A
IRC 4967 Tax on Prohibited Benefit to Donor, Donor Advisor or to Related Person Donor/ Donor Advisor/ Related Person 125 percent Form 4720 -A No Notice 2007-21
Fund Manager 10 percent
(Max $10,000 with respect to any one distribution)

Note 1: Personal benefit contracts are certain life insurance, annuity, or endowment contracts where any beneficiary, or certain person(s) related thereto, are the transferors to the exempt organization of such contract.

Note 2: If the tax-exempt entity knew the transaction was a prohibited tax shelter transaction, the tax rate is the greater of 100 percent of the entity net income or 75 percent of the transaction proceeds.