4.75.18 Special Review

Manual Transmittal

June 07, 2017

Purpose

(1) This transmits new IRM 4.75.18, Exempt Organizations Examination Procedures, Special Review.

Material Changes

(1) As of the publication of this manual, TE/GE is undergoing a restructure which will affect titles, authorities, and offices.

  • All references to The Examination Program and Review (EPR) and the authorities granted to the manager of that office will be changed, pending announcement for the authorized replacement.

  • All references to Examination Special Support (ESS) are changed to "EO Closing Unit," EGC 7997.

  • All references to "EO Classification-Referrals" are changed to "EO Referrals Group."

(2) Revised 4.75.18.1 to incorporate Service-wide Memorandum, Heightened Awareness, Sensitivity, and Understanding of Internal Controls, dated September 14, 2016.

(3) Deleted 4.75.18.2, Introduction.

(4) Revised and renumbered 4.75.18.3, Responsibilities of Special Review, to incorporate Restricted Interests case procedures.

(5) Revised and renumbered 4.75.18.7, Customer Satisfaction Through Improved Customer service.

(6) Revised and renumbered 4.75.18.8, EO Agent Training.

(7) Deleted 4.75.18.9, Reviewer’s Memorandum.

(8) Revised and renumbered 4.75.18.9.1, Reopening Memorandum.

(9) Deleted 4.75.18.9.2, Correction Memorandum.

(10) Deleted 4.75.18.9.3, Advisory Memorandum.

(11) Deleted 4.75.18.9.10, Open Case Reviews.

(12) 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.

Effect on Other Documents

This supersedes IRM 4.75.18, Exempt Organizations Examination Procedures, Special Review September 24, 2014.

Audience

TTax Exempt and Government Entities
Exempt Organizations
Examinations

Effective Date

(06-07-2017)

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

Program Scope and Objectives

  1. Purpose: This IRM section focuses on Exempt Organizations Special Review’s responsibilities in the implementation of quality measurement attributes for Exempt Organizations (EO) audits through the Tax Exempt Quality Measurement System (TEQMS), Customer Service/satisfaction and Training.

  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.

Authority

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

Responsibilities

  1. Special Review is charged with conducting quality reviews of audit cases and reporting, on a quarterly basis, the TEQMS results at the organizational level.

  2. Reviews provide the following benefits:

    1. Feedback to management regarding the quality of EO audits.

    2. Identify improvement opportunities in case quality.

    3. Improve customer service and satisfaction.

    4. Reduce the frequency of cases returned from EO Mandatory Review and Appeals for additional development.

    5. Improve the sustentation rate of EO audits in Appeals and Tax Court.

    6. Identify training/continuing professional education (CPE) needs.

    7. Increase consistency in audits.

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

Program Control

  1. Agents should consult the Related Sources listed in IRM 4.75.18.1.5 to insure accurate case processing and consistent application of the law.

Acronyms

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

    Acronyms Definitions
    AIMS Audit Information Management System
    ASED Assessment Statute Expiration Date
    CPE Continuing Professional Education
    EDCI Electronic Data Collection Instrument
    EO Exempt Organizations
    EP/EO Employee Plans/Exempt Organizations
    IRC Internal Revenue Code
    IRM Internal Revenue Manual
    IRS Internal Revenue Service
    MFT Master File Tax
    RAR Revenue Agent’s Report
    RCCMS Reporting Compliance Case Management
    TE/GE Tax Exempt/Government Entities
    TEQMS Tax Exempt Quality Measurement System

Related Sources

  1. The following are related sources that provide guidance on the procedures outlined in this IRM section:

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

    • IRM 4.75.13, Issue Development.

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

Responsibilities of EO Special Review

  1. Special Review staff’s main objective is to fairly, impartially, courteously, and professionally administer tax laws.

  2. Special Review’s role is to:

    1. Advise management of areas requiring attention.

    2. Recommend quality improvements wherever necessary.

  3. To accomplish these objectives, reviewers evaluate the managerial, technical and procedural aspects of audit cases to identify unfavorable trends and problem areas along with unique issues and novel techniques used by agents.

  4. Special Review reviewers are broken into 4 areas:

    1. TEQMS.

    2. Customer service/satisfaction.

    3. Training.

    4. Restricted Interest cases.

  5. TEQMS responsibilities include:

    1. Performing quality sample reviews of randomly selected EO audit cases.

    2. Compiling and analyzing quality review results.

    3. Providing statistical and narrative critiques on quality issues to all levels of management and employees.

    4. Participating in the consistency review process to ensure uniformity and consistency amongst reviewers.

  6. Customer service/satisfaction responsibilities include:

    1. Analyzing Customer Satisfaction Survey results from an independent, third party vendor.

    2. Providing statistical and narrative feedback on customer satisfaction to all levels of management and employees.

    3. Helping management to identify quality improvement and customer service opportunities to improve customer satisfaction.

  7. Training responsibilities include:

    1. Providing guidance to employees on emerging issues through newsletters, just-in-time training, and audit tools.

    2. Increasing consistency in audits.

  8. Helping with Restricted Interest cases:

    1. A Restricted Interest case is any case with a carryback of a net operating loss, capital loss or credit.

    2. Audits involving a restricted interest issue may require Form 2285, Concurrent Determinations of Deficiencies and Overassessments in Cases Involving Restricted Interest Provisions of the Internal Revenue Code. If so, the agent or manager must send a secure email to *TE/GE-EO-EPR Digest.

    3. A Special Reviewer is assigned to determine the accuracy of the carryback adjustment and the revenue agent’s report (RAR) and give instructions to the closing unit.

    4. The Reviewer completes Form 2285, when required and makes sure the proper case file documentation is included to correctly calculate the restricted interest.

    5. The agent:

      • Prepares Form 3198-A, TE/GE Special Handling Notice, as shown in IRM Exhibit 4.75.13-1, Restricted Interest Examples

      • Prepares Form 2285, if necessary.

      • Closes case to EO Closing Unit.

Explanation of TEQMS

  1. TEQMS measures the quality of case work through the use of quality attributes.

  2. Special Review uses 15 customer-focused quality attributes to evaluate and score audit case quality. The 15 attributes are summarized in three sections:

    1. Issue identification and resolution.

    2. Customer communication and timeliness.

    3. Other considerations.

  3. The first 6 attributes concern issue identification and corresponding resolution of these following material issues:

    1. Exemption issues which may result in changes to exempt status and/or foundation status.

    2. Income issues which may result in income and/or excise tax assessments.

    3. Employment issues which may result in employment tax assessments.

    4. Acts or failures to act which may result in excise tax assessments.

  4. The next 4 attributes consider the agent and manager customer communication and timeliness:

    1. Clear, concise and appropriate request(s) for information.

    2. Proper preparation of RAR and letters.

    3. Reasonable audit time spans.

    4. Regularly keeping the taxpayers / powers of attorney informed.

  5. The last 5 attributes consider other requirements in a quality audit:

    1. Protecting the statute of limitations.

    2. Protecting taxpayers’ rights and having no apparent improper disclosures.

    3. Properly completing the required check sheets, if applicable.

    4. Appropriately considering fraud.

    5. Appropriately considering penalties.

  6. Reviewers consider each attribute when they evaluate a case. The scoring is weighted to arrive at a possible total score of 100 percent whether or not each attribute applies to the audit.

  7. TEQMS Training Guide for EO Examinations (TEQMS Manual) explains an in-depth explanation on the attributes and rating system.

  8. When a reviewer rates an attribute "No" , they select a reason code to explain. Management uses reason codes as a tool to more objectively identify the root causes of failing attributes.

  9. The rating system also provides a narrative section for each attribute to provide additional clarification. Selecting "Other" as a reason code requires a narrative description.

TEQMS Case Selection

  1. All cases, including mandatory review cases that contain a Form 990, 990- PF, 990-EZ, 990-N, or 1120-POL make up the current population of EO Examinations’ cases subject to TEQMS review.

  2. TEQMS selection is based on MFT, activity codes, disposal codes and project codes.

  3. Surveyed cases aren't part of the population.

  4. All taxpayer returns, related returns and prior/subsequent year returns, count as one unit.

  5. The EO Examinations’ inventory system, which is currently the Reporting Compliance Case Management System (RCCMS), identifies the TEQMS sample audit cases. Annual programming updates to RCCMS add, subtract and modify the criteria RCCMS uses to randomly select cases.

  6. Annually, the Director, EO Examinations determines whether the sample is a National or Area sample.

  7. The sample size is statistically valid and sets to achieve a specified level of confidence within a set margin of error.

  8. The sample size may vary for each fiscal year as the work plan changes the population.

  9. Most cases subject to Special Review are closed cases, in which the audit group mails the final letter to the taxpayer and EO Closing Unit closes the case status 90 on AIMS.

  10. EO Closing Unit monitors closed TEQMS selected cases and sends the paper cases and RCCMS controls to Special Review for review.

  11. Selected cases in Mandatory Review remain open on AIMS and the statutes of limitations remain in effect. Special Review coordinates with Mandatory Review for these cases.

Electronic Data Collection Instrument

  1. Special Review embedded the TEQMS Electronic Data Collection Instrument (EDCI) in RCCMS as a database in question form. Reviewers answer EDCI questions on each sampled case. The EDCI contains administrative information on the reviewed case, the reviewer, and the quality attributes.

  2. Reviewers may cull a selected case from TEQMS if they determine that criteria for inclusion aren't met.

    Example:

    A group closes the case as a survey after assignment, or there is no audit of books and records, etc.

  3. Reviewer: when you finish your TEQMS review:

    1. Finish the EDCI.

    2. Close the case in RCCMS to provide controls to the system analyst.

    3. Complete Form 3210, Document Transmittal, to ship paper cases via traceable ground shipping, if required, to:

      1100 Commerce Street
      Mail Stop 4970DAL
      Dallas, TX 75242

  4. System Analyst: close the case file to the RCCMS library and Campus upon receipt.

  5. The TEQMS Manual has EDCI instructions.

Customer Satisfaction Through Improved Customer Service

  1. The IRS, as part of an agency-wide initiative, participate in a research study to monitor and improve EO Examinations customer satisfaction.

  2. The study’s objectives are to:

    1. Track customer satisfaction with the EO audit process over time.

    2. Identify which customer characteristics most influence satisfaction ratings.

    3. Identify improvement areas having the greatest impact on customer satisfaction.

  3. An independent third-party vendor conducts the survey via a written questionnaire, mailed to all taxpayers whose case closed during the assigned period. An officer or representative may complete the survey.

  4. The vendor receives the answered questionnaires, compiles the responses into a database and prepares a confidential report to the IRS.

  5. Special Review analyzes the reports by:

    1. Providing trend and static analysis to management.

    2. Highlighting strengths and weaknesses.

    3. Giving suggestions to improve performance.

Training

  1. Special Review trains employees via in-person and virtual sessions. We do this to improve audit quality by providing guidance on emerging issues, audit techniques, best practices and industry trends.

  2. Training sessions include just-in-time training, new hire on-the-job instruction sessions and CPE.

Reopening Memorandum

  1. Generally, Special Review doesn't return TEQMS cases to the group for further development. If a case warrants comment, the reviewer issues a reviewer’s memorandum to address significant failing issues.

  2. Reviewers may issue a Reopening Memorandum based upon the failings of the case

  3. A Reopening Memorandum may direct the field group to either:

    1. Reopen a previously audited and closed return/year.

    2. Open a related or prior/subsequent year return not picked up and audit, but should have been.

  4. A case merits reopening and return if it meets one of the following criteria:

    1. Clear indications that the organization doesn't meet exemption qualifications.

    2. The dollar threshold listed in IRM 4.75.31.5 (2), EO Enforcement Criteria.

    3. Evidence of fraud and/or malfeasance.

    4. Not processable (requires new agreement, mandatory checksheet, AIMS establishment).

    5. A favorable adjustment to the taxpayer.

    6. Not returning the case would be a serious administrative omission.

      Example:

      Serious criticism to IRS for tax law administration.

      Example:

      Set precedent that would be difficult to subsequently overcome.

      Example:

      Inconsistent treatment to similarly situated taxpayers.

  5. Reviewer Responsibilities:

    1. Determine the earliest statute date for each case.

    2. Use a red folder if the statute is less that 455 days.

      Note:

      The minimum ASED required on cases closed to Appeals is 365 days.

    3. Complete Form 5456, Reviewer’s Memorandum - EP/EO.

    4. Prepare Form 886-A, Explanation of Items and Form 4505, Reopening Memorandum, providing:

      • Sufficient detail of the facts and circumstances.

      • Errors and omissions by the agent.

      • Law and IRM citations.

      • Corrective action to perform.

    5. Complete and sign Form 5595, TEGE Update, to reopen the audit on AIMS and release RCCMS controls.

    6. Send the case file, all related forms, to Manager, Special Review.

  6. Special Review Manager’s Duties:

    1. Review case file.

    2. Confer with audit group’s Area Manager, on case reopening.

    3. If you agree with the reviewer’s recommendation, sign Form 4505 and Form 5456.

    4. Upload the approved case file, including all reviewer’s forms, into RCCMS.

  7. Group Manager’s Duties:

    1. Accept case file.

    2. Instruct agent to follow reviewer’s recommendations, listed on Form 886-A.

  8. Agent’s Duties:

    1. Follow recommendations.

    2. Prepare Form 5457, Response to Reviewer’s Memorandum - EP/EO and Form 886-A, detailing the steps taken to comply with reviewer’s recommendations.

    3. Close case to group manager.

  9. Group manager will return completed case to the designated reviewer.

    Reminder:

    Special Reviewers hold the same delegation authority as Mandatory Reviewers. Ship closed cases, that are returned by Special Review, normally subject to mandatory review, back to Special Review. Special Review issues final adverse determination letters, statutory notices of deficiency, notices of worker classification determination, and forwards reopen cases to Appeals.